Tax Audit Risk Among Reasons to Incorporate Side Business

CPA Michael Hanley, who specializes in working with small business, advises:

"The #1 most overlooked tip by people running side businesses is that they fail to setup a business entity because they still view their business as a little side business that they will incorporate when things take off."

Sole Proprietorships (the business structure you default to if you fail to setup a Corporation, LLC, etc) are subject to the highest audit risk out of all the business structures. The reason for this high audit risk is that all Sole Proprietorships report their business income and expenses on Schedule C (the second most highly audited form that you can attach to your tax return). By setting up an S Corporation, you become nine times less likely to be selected for a random IRS audit (audit risk decreases from 2.7% to .3%, making it very possible that you can go your entire life without ever being selected for an audit).

Setting up a Side Business Can Be Risky Unless You Do it Right, Mithcell York, About.com: Enterepreneurs