In which I list the pros and cons of becoming an LLC, and offer my advice. Remember: I am neither a lawyer nor a CPA, so you might want to consult both of them as well!
I should clarify what I mean by “the IRS counts all your LLC earnings as your income even though you can only take a distribution:” Let’s say you are a freelancer who incorporated as a single-member LLC and you earned $50,000 in freelance earnings. Let’s also say that you took $40,000 of those earnings as a distribution, which means that’s the money that went from your business bank account to your personal bank account and got put towards rent and food and stuff. The other $10K stayed in your business bank account and was either spent on business expenses or saved for future business expenses.
At the end of the year, the IRS will tax you on the entire $50K (minus expenses/deductions/etc. etc. etc.) even though you only paid yourself $40K. That’s what I mean by “it’s all your income,” even though you’re also supposed to keep your business income separate from your personal income.