I'm looking for help choosing the correct business entity for my business (LLC, S-Corp, or C-Corp). My co-founder and I have come up with a rough outline of an agreement on how to structure ownership, but I'd love to hear if others can see any issues with it.
We want to split the equity in the company 45% (partner 1), 35% (partner 2), and 20% (reserved for future employees.) For voting rights and dividend distributions (if any) the unallocated employee lot would be divided up 75% to partner 2 and 25% to partner 1 -- which means we start 50/50. If the company changes ownership through a buyout the unallocated employee lot would also be divided up 75% to partner 2 and 25% to partner 1.
Partner 2 will be operating the business for a salary, while Partner 1 currently has plans to just contribute as an advisor/board member. The business will likely be hiring 2-5 people over the next year, but we'd still have a healthy amount of earnings that I'm unsure how to pass along to the partners. The business' income will be 'spikey' so it'd be great to retain some of the earnings as working capital to pay partner 2 and the handful of employees. However, how can these earnings be distributed cheaply? From my reading (I'm new at this) an LLC would be pass through, but I'm not sure how difficult it is to setup the structure outline above nor the limitations on retained earnings. For the C-Corp, we'd have to find a way to put Partner1 on staff or deal with the double taxation of dividends (both partners and the corp will be in the top tax bracket.) For an S-Corp, I see that we can pass through earnings, but I'm unsure how hard it is to retain working capital.
Is an S-Corp the right thing for this situation? If it matters, Partner2 lives in and will be operating the business from Nevada while Partner1 lives in the much more costly locale of NYC.
Thanks for reading this far and any advice you can give a newbie entrepreneur!