I once taught a graduate tax class about choosing between an LLC and an S corporation. Probably for this reason, people frequently ask me about which entity form they should chose. Is an S corporation better than an LLC? they ask. What about a C corporation? others query.

Options such as S corporations, C corporations and LLCs can be the right choice in certain cases. But the lowly sole proprietorshipan entity you form automatically merely by starting businessis often best for tax reasons. And heres why:

The $500-to-$1000-A-Year Tax Benefit: Easy Returns

A sole proprietor reports his or her business profit to tax authorities on simple one- or two-page form called Schedule C. For many sole proprietorships, in fact, all the IRS requires is a crude listing of revenue and expenses. In comparison, a corporation tax return is at least eight pages in lengthand the return (typically either an 1120 or 1120S form) can it can be much larger if theres a bunch of complexity.

Corporate tax returns, by the way, practically force you to use full-blown accounting software such as QuickBooks.

Now, admittedly, the easy tax return may seem like a small point. But the extra work and complexity of a corporation return doesnt just mean more hours It probably means youll need to pay someone like me to do your return. That cost can be anywhere from a few hundred to a several thousand dollars annually in extra costscosts that are over and above what the return would cost if your business operated as a sole proprietorship.

The $1500-to-$2,000-Per-Kid-Per-Year Tax Benefit: Hiring Junior

Heres another often-missed tax-saver unique to sole proprietorships. A sole proprietor can hire his or her minor children and not pay any payroll taxes. Other employees and employees of corporations would trigger payroll taxestypically of at least 7.65% of wages paid.

In addition, the earned income of minor children typically isnt subject to federal income taxes if the child earns less than $5,000 a year because of the childs standard deduction.

If your minor kids help out in your business and the business is operated as a sole proprietorship, the family tax bill can drops by one to two thousand dollars annually for each child employed.

Heres how the math works: If you just keep your last $5,000 of sole proprietorship profit, youll very likely pay roughly 15% in self-employment taxes on the profits. So thats roughly $750 of tax. Youll probably also pay at least another $750 in income taxes and quite possibly another $1250 in income taxes on the profit you keep yourself.

If you pay your teenager that last $5,000 because theyre actually doing work for youthe payment needs to be reasonableneither the teenager nor the business nor the parent will pay any income or employment taxes. Total tax savings? $1500 to $2000 annually.

The $5,000-a-year Tax Benefit: Healthcare Reimbursement Arrangements

One other uniquely powerful tax benefit for sole proprietorships exists: Healthcare reimbursement arrangements, or HRAs. A healthcare reimbursement arrangement (also known as a IRC Section 105(b) plan) is an employer plan to reimburse employees for medical costs, including medical and dental insurance, deductibles, co-pay amounts, and any other legitimate healthcare expense.

Sole proprietors, partners in partnerships, and S corporation shareholder-employees cant participate in HRAs. But theres a loophole in the law: A sole proprietors spouse can be covered. And that coverage can include both the employee and the employees family. Even though the spouse-employees family includes the sole proprietor!

What this means is that if your proprietorship employs your spouse, the sole proprietorship can establish an HRA that reimburses all or some huge portion of employees family medical costs. The reimbursement is a business deduction for both income tax and self-employment tax purposes. That double deductibility often saves big taxes.

Lets say that your family pays $9,000 a year for health insurance and another $9,000 for uncovered medical expenses. Say a family member has an expensive long-term illness. Or simply that youve got teenagers with big orthodontia bills.

Because youre self-employed, you would get to use the $9,000 of health insurance costs as a business income tax deduction in most cases anyway. (Self-employed individuals can write off medical insurance if their business is profitable.) However, with an HRA, youll also be able to use the $9,000 of health insurance costs as a self-employment tax deduction. That saves you roughly $1350 annually.

In addition, youll be able to fully deduct the other $9,000 of uncovered healthcare costs as both an income tax deduction and as a self-employment tax deduction. This deductibility could easily save you another $1350 in self-employment taxes and then another $2250 in income taxes. Total savings: $4950 annually.

A quick caution: A HRA needs to be nondiscriminatory, so you would have to provide it to all employees. Many sole proprietors, therefore, might want to offer a full reimbursement plan only if family members were the only employees. You should confer with a tax advisor, probably, if you want to set one of these plans up.