LLC vs. S Corp

Here is a link to the Ca. Sec. of State website with brief summaries of entity types. This is just an overview:

http://www.sos.ca.gov/business/filings.htm

You are actually looking at two separate (but related) questions, here.

First, what sort of entity do you want to form - a corporation? LLC? Partnership? Sole proprietorship? Differences among these can include liability protection, form of governance, ability to sue in the name of the business, and the manner of division of assets upon dissolution.

Second, what sort of tax status do you want to elect? Subchapter "S" of the tax code represents an election that is made which allows the business to be taxed as if it were a partnership (pass-through taxation). This can allow your business to retain partnership-style pass-through taxation while still enjoying the advantages of incorporation.

Some entities really lend themselves well to certain tax status elections - for example, in some states, an LLC may automatically give you the equivalent of S-Corp status at the state taxation level, which means that it might make sense to elect S-Corp status for federal tax purposes.

You should consult with an accountant for better guidance on your particular fact pattern but you may find that you want to elect to form a LLC and elect S-Corp status (both).

The answer depends highly on the number of owners of the business you anticipate, and what their roles will be. If you are going to be the sole owner, either works well. Both are tax free, at least at the federal level. However, an S corporation has more formal management requirements. A corporation must have a board of directors, must conduct shareholder meetings, etc. If it is just you, these formalisms can seem pointless. However, failing to follow them can lead, in extreme cases, to the courts declaring your corporation a sham and allowing creditors to treat it as if you were a sole proprietor. An LLC can be run more like a sole proprietor or partnership, without many of these formal requirements.

On the other end of the spectrum, if you expect to have several owners a traditional corporate structure can be more appealing than an LLC. The formal structure can help keep too many cooks out of the kitchen. S corporations have shares, rather than memberships, which can keep ownership rights clear. The "S" election (which is only an income tax election, not a different type of corporation) can be more easily dropped if the company grows and a new ownership structure is desired.

Where you fall on this spectrum should have significant bearing to which entity you choose. Good luck!

The previous answers are on point. I would also suggest doing a search of blogs and a general Goggle search using S-scorp and LLC as variables - there's a whole bunch of stuff written on this which should be useful to you in making the decision. Attached is a posting from my blog which -- though focused on Ohio law rather than CA -- may help answer some questions.

A couple of things to check - I know in some states (and I think CA may be one of them) there is a frahchise tax for LLCs and not on S-corps so you need to check that out with a CA attorney.

Also if you're ultimately going to be looking for venture capital, an S-corp may be better because it's easier to convert to C-corp which is what they will probably want.

After you visit the Secretary of State, you should consult the California Franschise Tax Board ("FTB").
Here is the site link: http://www.ftb.ca.gov/

The FTB governs, enforces and collects corporate taxes for the state of CA. Start by clicking on the "Business" tab at the top, it will provide you with valuable information regarding entity definitions, helpful tips to avoid tax problems and essential tax forms.

I cannot even begin to stress the importance of consulting both a qualified attorney and a CPA before forming your business entity. Good luck.