which one is better to form and what are the differences. I already searched on google and no simple answer since both can have S form. Can someone please help me out here. I will be the only owner.I am interested in tax treatment and legal benefits if I am sued.
Much depends on what you mean by "being the only owner," as both of these forms will provide you limited liability.
Should you form a limited liability company (LLC), you are only liable up to the amount you contribute into the company, i.e. your payment for the membership shares. I gather that, as the sole owner, you would be managing the company. Should you choose to allow additional investors, you will still maintain management rights and will be liable only for your contribution. In terms of tax treatment, an LLC is treated like a partnership or sole proprietorship and you will be taxed on your pro-rata share of income earned by the company (based on the % ownership of the LLC). If the LLC agrees, however, you may distribute profits in any manner you wish. Hypothetically speaking, an LLC offers you much greater possible income with limited liability.
Should you decide to form an S corporation, similar rules apply. You will be limited to 75 domestic shareholders, but you will be liable only up to the contribution you put into the S corp and you will be taxed as if it were a partnership. One of the downsides to S corporations lies in if over 25% of gross income during a three year period is in "passive income," i.e. dividends, rental income, bond interest, the S corporation terminates and becomes a C corporation. S corporations are also prevented from having corporations, LLC's, or other "artificial" entities as investors, while LLC's have no such restriction. S corporations are also limited to distributing the profits and losses of the company in accordance to pro-rata ownership.
These basics aside, an LLC is given much more freedom in the tax code, is sheltered legally in the same fashion as a corporation, and is typically easier to form. Many small businesses set themselves up as LLC's due to the ease of formation and flexibility provided. As with an S corporation, the transition to C corporation is not terribly difficult.
If you are looking for further information, the IRS website offers information relating to the pros and cons of each of the different business entities.
http://www.irs.gov/businesses/small/article/0,,id=98277,00.html
http://www.irs.gov/businesses/small/article/0,,id=98263,00.html
May depend on which state you are in, as well as the specifics of your business. Either should provide legal coverage. Tax situation "depends. LLCs are a great way to get started - generally lower overhead. In California, you pay $800/year fee (called a "tax") every year, either way.
I highly recommend reading the relevant Nolo Press book(s).
thanks for the reply. I wanted to form a LLC but my tax accountant insisted on forming S corporation because of his experience. This was helpful