It can depend and IANAL buuuut I do have an LLC taxed as an S Corp, because you can dramatically reduce your tax burden. Essentially you buffer your money in your LLC and pay yourself a "reasonable salary". For example: maybe you earn $200k this year as a software contractor. You go to glassdoor and find that mean salary for software engineers is $96k/yr. You pay yourself $8k/mo (pre-tax), deducting payroll taxes and putting $1,650 (the max contribution) into a 401k. You also max out your 25% 401k business contribution at another $2k. Depending on state taxes, your total tax burden is something like 19%, after you've put $43,500 into retirement. If you didn't have an LLC, it'd be closer to 30% (or higher, ugh) with only $19,500 in retirement. In raw dollars, in this hypothetical you're down ~$24k.
Your business also gets tax breaks you don't, namely on (paying for your) health care, (paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services. Further, the cap on business 401k accounts is way, way higher [1]. The ability to sock away even more pre-tax money in a retirement account, and deduct your health insurance from your taxes is insane.
The biggest downsides, at least for me, have been the infra to get it all going. I have an accountant, a lawyer, a financial planner, and an army of online services that help me stay legal and paid up. That said, I'm still coming out ahead (e.g. they don't cost $24k/yr and you guessed it, startup costs are tax deductible), so the gains are there.
(I think paying taxes is patriotic, but I don't think it's reasonable to pay taxes on $200k of income for one year, and then only make $60k of income the next year. I also don't think it's reasonable for me to pay ~40% of my income in taxes while big corporations and the rich pay very little so....)
See below; this S-corp "reasonable salary" thing was called out to me as an audit flag by my accountant, and other people have stories of friends being audited. It's not worth it (and the ethics of it aren't great; most people can't work for S-corps they own, and can't avail themselves of this "favorable treatment".)
The 401k part is available to sole proprietors too. "Solo 401k" or SEP-IRA are the tools for the job. They're easy to set up and you can put up to that same limit ($45Kish?) away if you have enough income. And if you have a LOT of income ($200K+?) you can really turbocharge it with a defined-benefit plan, which lets you put away close to 50% of the consulting income for retirement.
Most of the other things you list are available to sole proprietors too: "(paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services"
I'm not sure about health care, are you sure there's no way to deduct it as a sole proprietor?
Yeah, that's fair (yeah you can also deduct health care premiums on Schedule C). I think the liability shield is really important though, and if you're not wild about the S corp administrative overhead you can choose to be taxed as a sole proprietor.
An LLC doesn't help you against your own actions though:
"forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business"
Yeah I mean, if you commit negligence or malpractice (which are serious, not like the client didn't like your work) you're liable, so you need insurance. And you can still go to jail for actual crimes. But the creditor/bankruptcy liability is nice and basically free.
Your business also gets tax breaks you don't, namely on (paying for your) health care, (paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services. Further, the cap on business 401k accounts is way, way higher [1]. The ability to sock away even more pre-tax money in a retirement account, and deduct your health insurance from your taxes is insane.
The biggest downsides, at least for me, have been the infra to get it all going. I have an accountant, a lawyer, a financial planner, and an army of online services that help me stay legal and paid up. That said, I'm still coming out ahead (e.g. they don't cost $24k/yr and you guessed it, startup costs are tax deductible), so the gains are there.
(I think paying taxes is patriotic, but I don't think it's reasonable to pay taxes on $200k of income for one year, and then only make $60k of income the next year. I also don't think it's reasonable for me to pay ~40% of my income in taxes while big corporations and the rich pay very little so....)
[1]: https://www.fidelity.com/learning-center/personal-finance/re...