How should I set up my business?

An LLC or S-corp. are both better than a partnership, because a partnership does not limit your liability: i.e. if your business is a partnership and incurs a debt, violates a contract, is sued, etc., you and your brother would be personally liable. An LLC or a S-corp. both provide substantial (but not absolute; there are exceptions) protection from most business debts or liabilities which you do not personally guaranty, making this a much safer way to conduct business.
Both S-corp.'s and LLCs which elect "partnership" tax treatment are "pass through" entitites that drop their profits or losses directly to your personal tax returns and avoid corporate double taxation, so there is nothing to select between them in that regard.
Generally, for a small business, an LLC is a slightly better choice: there are less formalities and paperwork involved, and it gives you more flexibility in how you apportion responsibility and economic participartion: e.g. if one of you will invest less money but do as much or more work, you can have both of you be equal, whereas in a s-corp., whomever invests more is in control.
As to tax implications: a very complex question, depending on the taxes of both your states, where the work is done, where sales are made, etc. You are advised to consult with a CPA or other tax professional in depth specifically about this issue. There is no general or generic answer we can provide.