C corp v S corp

You really don't have a choice if you are going to seek venture capital. A venture capitalist is going to want a piece of the business or a piece at some future point. As such, you will need to have more than one class of stock and/or a non-human shareholder (partnership or corporation or LLC). S corporations may not have either. S corporations are also limited to 100 shareholders.

Sometimes one is preferable, sometimes the other is.

As Alan notes, in a case like this it is unlikely an S-corp will be allowed. Though depending on the situation it might be of tax advantage for the investors to look into an LLC or limited partnership instead.

Alan & Stu make interesting points. When selecting the type of entity you need to consider several factors. In your case, a big issue is obtaining venture capital. So it isn't a matter of law that will limit your options, but rather your sources of funding.

If you have a venture capitalist in mind I would suggest that you speak with them about their preference in choice of entity. If you make the wrong choice now it could A) cause you to have to change entity type later. NOTE that this can be expensive depending on your original choices; B) derail your ability to get venture capital.

If you don't have a venture capitalist in mind I'd be tempted to form an LLC, at least initially. As these are treated a partnerships for tax purposes they are very flexible. This could be helpful if you need to convert to a corporation later on.

The best thing you can do, though, is to talk to an accountant, or M&A Attorney, in your area who is familiar with venture capitalists and seek their recommendation.

Good luck, Gene E. Utterback, EA, RFC, ABA