According to this Wall Street Journal article, sole proprietors filing Schedule C with their personal (1040) tax return to report business income are 10 times more likely to end up involved in the stress, annoyance, and time consumed with an IRS tax audit: IRS Statistics [Excel file] show that you are 10 times as likely to be audited as a Schedule C filer than if you incorporate your business and elect S corporation status. While it costs a bit of money to incorporate, the move affords you greater personal liability protection and reduces your chances of being audited. In deciding whether to change your business status, include both tax and non-tax factors. Note: Forming a limited liability company for one owner will not give you any audit protection, because the owner still files a Schedule C. "10 Ways To Avoid A Tax Audit," by Barbara Weltman, April 15, 2011
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