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Should I incorporate an LLC for an eBay business.

To incorporate or to not incorporate — that is the question.

There are a couple of things to consider with a corporate entity structure: liability, compliance, and cost.

The biggest advantage to having a corporation is that it reduces your liability by creating a legal distinction between you and your business. The idea is that if you ever get sued, only your business assets are exposed to risk, not your personal assets.

As a separate legal entity, there are more compliance issues to be aware of. A corporation needs to file its own business tax return every year (Form 1120), and many states and local governments have separate reporting rules you’ll need to be aware of as well.

Lastly, corporations tend to be the more expensive option. In addition to the extra filing and compliance fees, it’s also the only entity that has to deal with “double taxation.” Income generated in your corporation is taxed at corporate tax rates, and then again at individual tax rates when you take money out of the business.

For most small business owners, registering as a corporation is far too costly. They often choose to stay as an LLC or elect the hybrid model known as S corporations.

An S corporation gives you many of the same advantages of a corporation while circumventing the double taxation issue.

You do have to file a separate business return every year (Form 1120-S), but all business profits “flow through” to your personal return and are only taxed at your personal income tax rates.

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Sarah York, EA

Sarah is an Enrolled Agent with the IRS and has 6 years of tax and accounting experience. She's an avid hiker, animal lover, and self-proclaimed chocolate connoisseur.

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