Quick note: This guide is for education. Your facts matter and rules change. We will model California and federal outcomes before you file.
Contents
Overview
Choosing an entity is not a box to check. It affects how you are taxed, how you pay yourself, how you bring on investors, and how well your personal assets are protected. Most California owners compare three paths: LLC, S corporation (an election), and C corporation.
Tip
Start simple, then optimize. Many owners begin as an LLC for flexibility, then elect S corp when profits become steady after a market-rate salary.
Quick comparison table
| Feature | LLC | S corp | C corp |
|---|---|---|---|
| Liability shield | Yes - business debts generally stay with the business. | Yes. | Yes. |
| Federal taxation (default) | Pass-through (Schedule C for 1 owner, Form 1065 for 2+). | Pass-through (Form 1120-S with K-1s to owners). | Entity pays corporate tax, dividends taxed to owners. |
| How owners get paid | Owner draws; active members often owe self-employment tax on profits. | W-2 salary (must be reasonable) plus distributions. | W-2 salary for employee-owners; dividends possible. |
| California annual taxes | $800 annual tax plus LLC gross-receipts fee when CA-sourced income reaches set thresholds. | 1.5% of net income; $800 minimum franchise tax. | 8.84% of net income; $800 minimum franchise tax. |
| Owners and investors | Flexible members; classes set by operating agreement. | Up to 100 U.S. individual shareholders; one class of stock. | Unlimited shareholders, multiple classes; foreign and institutional OK. |
| Good fit when | You want simplicity and flexibility. | Profits are steady beyond a reasonable salary and you want to cut SE tax. | You plan to raise capital or retain earnings to scale. |
LLC (Limited Liability Company)
Why owners like it: Flexible ownership, simple maintenance, and liability protection. By default, a single-member LLC is disregarded for federal tax and reports on Schedule C. Multi-member LLCs file Form 1065. You can elect corporate or S corp taxation later if that helps.
California costs to know
- $800 annual LLC tax each year the LLC exists or does business in California.
- LLC gross-receipts fee on California-sourced income once you cross the state thresholds. This is on top of the $800 minimum.
When an LLC shines
- Solo freelancers and consultants who want liability protection without payroll complexity.
- Businesses with variable profits where S corp payroll would be burdensome.
- Owners who want flexible allocations via an operating agreement.
S corporation (an election you make)
An S corp is a tax status you elect for a qualifying corporation or eligible LLC. It keeps pass-through taxation but changes how owners are paid: you must pay yourself a reasonable W-2 salary. Remaining profit can be distributed without Social Security and Medicare tax, which can reduce overall employment taxes when profits are strong.
Key requirements
- Up to 100 shareholders; generally U.S. individuals and certain trusts.
- One class of stock (voting differences allowed).
- File IRS Form 2553 within 2 months and 15 days after the start of the tax year you want the status to begin. Late election relief may be available.
California treatment
California recognizes S corps and taxes S corp income at 1.5% with an $800 minimum. You will file Form 100S in California.
C corporation
Why choose it: You plan to raise capital, issue multiple classes of stock, offer equity incentives, or retain earnings for growth. C corps pay income tax at the entity level and shareholder dividends are taxed again at the personal level.
California treatment
The state corporate rate is 8.84% with an $800 minimum franchise tax. Model cash needs and dividend plans before choosing this route.
California fees and taxes to plan for
- Minimum franchise or annual tax: Most entities owe at least $800 per year once active.
- LLC gross-receipts fee: Applies to California-sourced income when you cross set thresholds. Separate from the $800.
- S corp entity tax: 1.5% of net income with the $800 minimum.
- C corp franchise tax: 8.84% of net income with the $800 minimum.
- Local taxes: Some cities have gross-receipts or payroll taxes. Check where you have nexus or employees.
Owner pay: salary, draws, and distributions
LLC (default tax)
- Owner draws, no W-2 required for the member.
- Active members usually pay self-employment tax on profits.
S corp
- Pay a reasonable W-2 salary for services.
- Excess profit may be distributed without FICA taxes.
Reasonable salary matters
Too low invites scrutiny, too high reduces savings. We benchmark a defensible range and set up payroll correctly.
Switching from LLC to S corp: the clean way
- Confirm eligibility and target start date.
- Adopt payroll and health plan policies for owner-employees.
- File IRS Form 2553 on time. Keep a copy with corporate records.
- Update accounting: track shareholder basis and distributions.
- File federal 1120-S and California 100S, plus payroll returns.
Decision framework
- Profit profile: After a market-rate salary, do you still have consistent profit? If yes, S corp often wins on employment taxes.
- Funding plan: Need outside investors or multiple stock classes? That points to a C corp.
- Admin appetite: S corps and C corps add payroll and separate returns. Prefer minimal admin? LLC default is lighter.
- California math: At higher California receipts, the LLC fee can tip the scales toward an S corp. Model both.
Want a side-by-side modeled for your numbers?
We compare LLC vs. S corp vs. C corp with your profit, payroll, and California fees so you choose confidently.
Book a free consultationFAQ
Can a single-member LLC elect S corp status?
Yes. An eligible LLC can file Form 2553 to be treated as an S corp for tax purposes while staying an LLC legally.
When is a C corp better?
If you plan to raise capital, need multiple classes of stock, or want to retain earnings, a C corp often fits better despite double taxation.
What happens if I miss the S corp election deadline?
Late election relief may be available. File as soon as possible and include the required statements to request relief.
Does California follow federal bonus depreciation?
No. California does not conform to federal bonus depreciation and has differences for Section 179. Plan for federal vs. state timing differences.