We just went through this decision process. Ended up doing S-Corp for the following reasons:
LLC vs S-Corp:
1. Membership interest vs. Stock: Shares of stock are easier to deal with than membership interests, from an investor and giving to employee perspective.
2. Taxes: Every dollar you take out of LLC is salary (and subject to payroll taxes). In an S-Corp, any money you take out of the business after paying yourself a "normal" salary is a distribution and free of payroll tax.
3. The costs to set-up are nearly the same if you're able to create the articles of incorporation, corporate by-laws, and initial meeting minutes yourself (required for S-Corp). Not that difficult with Google and a $17 book from Barnes & Noble.
4. Conversion to C-Corp if we raised VC money: Much easier to convert from S-Corp.
C-Corp vs. S-Corp:
1. Losses: We expect to incur losses in year 1. In a C-Corp, those can be carried forward to subsequent years in which you have a gain, but in an S-Corp, you can take them on your personal return in that year.
2. Double-taxation: If you only plan to pay a salary, then there is no double taxation, because that's deductible from the C-Corp, however, if you take a distribution, that would be taxed at both the corporate and personal level with the C-Corp (only at the personal level in S-Corp).
3. Investors: Will have to convert to C if we raised VC money, but that's not the plan in the near term, and its easy to switch if we need to.
4. A potential downside to the S-Corp for taxes is that the profits will be taxed at your marginal tax rate (because its all incremental income) as opposed to going through the levels of the progressive tax structure as it would in a C corp. If you only plan to pay yourself a normal salary, then C could be the way to go depending on how much you expect to make.