How Should I Incorporate My Small Business (Sole Proprietor)?
What's amazing to me is that you've gotten this far in the development of your business without incorporating! No question, the larger you grow the greater the risk to your personal assets and the more they will need protection. The formation options you listed each have pros and cons. The choice for what's best for your business also depends on your business goals. Here are some guidelines to help you think through the process.
Your first question is one of ownership: Who will own the company? Do you plan to own this business by yourself, or will you want to own it with others? Do you have any thoughts about bringing on investors to expand your business into a franchise? S Corp rules are more restrictive regarding who can be an owner. So, for example, if you had any thoughts of cousin Anthony from Italy owning this business with you, you couldn't do that under an S Corp (generally, only U.S. citizens and resident aliens can be owners). In addition, if you wanted to seek investment capital, an S Corp would not be a useful business entity form because of the restriction to having only one class of stock.
Your second question is one of cost: How much will this cost? In some states (like New York), the cost for forming LLCs is much greater than it is for forming a corporation. All other things being equal, you need to determine whether the extra fees you will pay in forming an LLC will outweigh other benefits that that form of business can provide -- such as flexibility in creating ownership classes (where you have multiple owners) and offering ownership incentives to employees.
Your third question is one of taxes: What tax rates can I expect to pay, and what tax advantages will I receive from each form? With a C Corporation, you can expect both the business to pay federal taxes on income and the shareholders to pay taxes on distributions. Because of their tax structure, S Corporations provide shareholders with more of a "pass-through," and do not require S Corporations to pay federal taxes on their income. LLCs are often taxed at the state level at a different rate from corporations, so you need to check with your tax advisor to see which rates apply to your state and city. In addition, there are differences between corporations and LLCs in the ability to deduct salaries (or draws) and get credit for Social Security withholding.
There's no formula for which form is best. For some businesses, the ability to attract investment capital may outweigh the other considerations. On the other hand, if your plans are to keep your business where it is, you may not need the "bells and whistles" that an LLC or a C Corporation can provide. The best way to make this decision is to confer with both legal and tax advisors who understand your business -- as well as the advantages and disadvantages of each form -- to make sure you find a solution that's truly right for you.
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