The two most important considerations when deciding the form of business entity are the tax considerations and laws governing the degree of personal liability an owner must assume for his business.
More details as extracted from the source:
Phase Two: Deciding the Form of the Business Entity.
Once one has an unshakable decision to start a business, the next step is to decide what type of business the entrepreneur should form. When setting up a business several choices are available. Many things should be considered when making the choices. Some of the most important considerations are the tax codes and laws governing the degree of personal liability an owner must assume for his business. For example a business can be set up as an unincorporated partnership, a proprietorship, or limited liability company ( LLC.) In all of these companies the tax responsibilities of the company pass through to the owner. A business can also be set up as a corporation, which has its own tax consequences, but limits personal liability of the owner. Additionally an "S" corporation may be set up which passes the tax liability through to the owners, but protects them from personal liabilities in other areas.
Many small business owners choose the corporate form of operation because of the protection it affords an owner's personal assets. LLCs also provide this protection.
In most cases a small business owner is better off to provide himself the liability protection of an "S"corporation or LLC, but allow the tax consequences to be passed through to the entrepreneur. This is because even very successful business will most likely operate at-a-loss for the first few years, and the benefits of that loss can be utilized by the business person. A business can always be changed to a taxable entity later, when profits are up and the benefits of the tax system can be better realized as a full corporation.
Other tax considerations also apply to the initial business. Some of the ...
Deciding the form of business entity