I was posing this question to an accountant friend of mine recently. The examples he wrote about helped me understand it better. Here is what he sent me:
"The main questions may be how much money you will be bringing in.
LLC can be either a sole proprietorship or a S corp. You can start as sole proprietor LLC and change to a Scorp at a later time.
-Sole proprietorship will be subject to self employment tax 15.3% (12.4 Social security, 2.9 medicare) of net business income (after expenses)
-S corp you will be an owner of a separate legal entity. This entity will have to pay you reasonable compensation and distributions.
the compensation is subject to self employment mentioned above but distributions will be treated as ordinary income(good thing). The question is how much money over and above what could/should be tagged as compensation is coming in. You have to pay yourself something reasonable. The other problem is you then have to file an s-corp tax return every year which produces a k-1 that goes to your 1040. This is an added time/ expense.
you make 50k doing 3 months work, reasonable salary for a motion artist doing your work is 60k so 15k for 3 months. Depending on how many expenses you have. lets say its 10k. So that leaves 50-15-10=25k. You would have 15 taxed at 15.3% + ordinary tax. then 25k taxed at ordinary tax only. then -expenses/time related to preparing s-corp return
higher expenses example 50k income-40k expenses= 10k income (reasonable salary = 15k) = 10k self employment income (no benefit over sole proprietor)
50k-10k expenses =40k taxed at 15.3% + ordinary tax
Higher expenses example 50k-40k expenses = 10k self employment income (same as s-corp above)
A single member llc which is the same as sole proprietorship for taxes but you get some limited liability. For taxes it will be disregarded and you would just fill out a schedule C.
The main purpose of the LLC is if you were worried about getting sued which I dont know how likely that is in your field, maybe copyrights or if you were taking out loans to do business.
Also it is often a good idea to open a separate bank account so it is clear what is business vs not.You can take profits out whenever but it shows business related deposits and expenses clearly."