Overview
Choosing an entity isn’t just checking a box—it affects how you’re taxed, how you pay yourself, how you bring on investors, and how well your personal assets are protected. Below is a practical guide to the three options most owners consider: LLC, S corporation (S‑corp), and C corporation (C‑corp).
Quick comparison
| 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 + K‑1s to owners). | Entity pays corporate income 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”) + distributions. | W‑2 salary for employee‑owners; dividends possible. |
| California annual taxes | $800 annual tax plus an LLC gross‑receipts fee when CA‑sourced income ≥ $250k. | 1.5% of net income; $800 minimum franchise tax. | 8.84% of net income; $800 minimum franchise tax. |
| Owners / investors | Flexible members; classes by operating agreement. | Up to 100 U.S. individual shareholders; one class of stock. | Unlimited shareholders, multiple classes; foreign/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 (reported on Schedule C); multi‑member LLCs are partnerships (Form 1065). You can later elect corporate or S‑corp taxation if/when that makes sense.
California costs to know
- $800 annual LLC tax each year the LLC exists or does business in California.
- LLC fee on California‑sourced gross receipts once total CA income ≥ $250,000: $900, $2,500, $6,000, or $11,790 depending on the bracket (in addition to the $800).
Best for: Solo freelancers, consultants, and small teams that value flexibility and aren’t yet consistently profitable beyond owner compensation.
S‑Corporation (an election you make)
An S‑corp isn’t a different legal entity; it’s 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, and remaining profit can be distributed without Social Security/Medicare tax—often lowering overall employment taxes when profits are strong.
Key requirements
- Max 100 shareholders; generally U.S. individuals/residents 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 apply).
California treatment
California recognizes the S‑corp and taxes its income at 1.5% (with an $800 minimum). You’ll file Form 100S in CA.
C‑Corporation
Why choose it: You plan to raise capital, issue multiple stock classes, offer equity incentives, or retain earnings for growth. C‑corps pay tax at the entity level; shareholder dividends are taxed again at the personal level (“double taxation”).
California treatment
State corporate rate is 8.84%, with an $800 minimum franchise tax.
“Which one should I pick?” — How we help clients decide
- Profit profile: After paying a market‑rate W‑2 salary, do you still have consistent profit? If yes, an S‑corp often wins on employment taxes. If profits are small or highly variable, an LLC may be simpler.
- Funding plan: Need outside investors or multiple stock classes? That’s a C‑corp signal.
- Admin appetite: S‑corps and C‑corps add payroll and separate tax returns. Prefer minimal admin? An LLC (default tax) stays light.
- California math: At $250k+ California‑sourced receipts, the LLC fee can tip the scales toward an S‑corp. We’ll model it for you.
Common gotchas (and how we avoid them)
- Late S‑corp election. Missing the 2‑months‑and‑15‑days window can cost a year of savings. We calendar the deadline when you form.
- Unreasonable owner salary. Too low invites IRS scrutiny; too high kills the benefit. We benchmark a defensible range and run payroll correctly.
- Shareholder eligibility. S‑corps can’t have non‑resident aliens, corporations, or partnerships as shareholders, and only one class of stock.
- For LLCs at scale. Don’t forget the California $800 minimum and gross‑receipts fee tiers; we forecast these so there are no surprises.