Quick answer. California LLCs, S-Corporations, and C-Corporations are three different ways to organize a business. The choice affects taxes, personal liability exposure, ownership flexibility, fundraising ability, and California-specific annual costs. Every California entity pays the $800 minimum franchise tax under Revenue and Taxation Code §17941. LLCs also pay an additional gross receipts fee on income above $250,000 (R&T Code §17942). S-Corporations pass income to shareholders for federal tax but pay California's 1.5 percent franchise tax on net income, with a minimum of $800. C-Corporations pay California's 8.84 percent corporate income tax plus federal corporate tax, with shareholders taxed again on dividends. Professional services in California cannot use LLCs (Corporations Code §17701.04), so medical, legal, dental, and similar licensed practices must form Professional Corporations.
What are the three entity types?
An LLC (Limited Liability Company) is a flexible entity that gives owners limited liability while allowing pass-through federal taxation by default. An S-Corporation is a federal tax election under IRC §1361 that lets a corporation (or eligible LLC) pass income through to shareholders' personal returns, avoiding C-Corp double taxation. A C-Corporation is the default corporation form: the entity pays its own income tax, and shareholders pay tax again on dividends. All three offer personal liability protection for owners when properly maintained. The differences are in taxation, ownership flexibility, fundraising, and ongoing administration.
California LLC vs. S-Corp vs. C-Corp side-by-side comparison
| Feature | LLC | S-Corporation | C-Corporation |
|---|---|---|---|
| Personal liability protection | Yes | Yes | Yes |
| Federal taxation | Pass-through by default | Pass-through (with S election) | Entity-level (double tax on dividends) |
| California minimum tax | $800 + gross receipts fee | $800 or 1.5% of net income, whichever greater | $800 or 8.84% of net income, whichever greater |
| Ownership limits | Unlimited members, any type | 100 shareholders max, US individuals and certain trusts only | Unlimited shareholders, any type |
| Foreign ownership allowed | Yes | No | Yes |
| Stock classes allowed | N/A (membership interests) | One class (with limited voting variations) | Multiple classes (common, preferred) |
| Ideal for outside investors | Limited (operating agreements help) | Limited (100-shareholder cap, single class) | Standard (preferred stock, convertible notes) |
| Self-employment tax on profits | Yes, on all income | Only on salary, not distributions | N/A (employees taxed normally) |
| Ongoing administration | Lower (annual report, operating agreement) | Moderate (corporate formalities, payroll, Form 1120-S) | Moderate (corporate formalities, Form 1120) |
| California professional services allowed | No (Corp. Code §17701.04) | Yes (if formed as Professional Corporation) | Yes (if formed as Professional Corporation) |
How much does each entity cost annually in California?
Every California LLC, S-Corp, and C-Corp pays the $800 minimum franchise tax under R&T Code §17941. For LLCs, an additional gross receipts fee kicks in under R&T Code §17942 at four tiers: $900 (gross receipts $250,000 to $500,000), $2,500 ($500,000 to $1,000,000), $6,000 ($1,000,000 to $5,000,000), and $11,790 (above $5,000,000). For S-Corporations, the franchise tax is the greater of $800 or 1.5 percent of California-source net income. For C-Corporations, the franchise tax is the greater of $800 or 8.84 percent of California-source net income. Filing fees with the Secretary of State are modest: $70 for LLC formation, $100 for corporation formation, plus annual Statement of Information fees of $20 to $25.
When should I choose an LLC in California?
- Real estate holding entities (each property in its own LLC).
- Single-member or small partnerships in non-professional services.
- Businesses where members want pass-through taxation without S-Corp shareholder restrictions.
- Businesses where flexibility in profit and loss allocation matters (LLC operating agreements can allocate differently from ownership percentages, subject to IRS substantial economic effect rules).
- Businesses with foreign owners (LLCs allow non-US owners; S-Corps do not).
- Businesses unlikely to seek priced equity rounds (LLC capitalization is awkward for VC investment).
When should I choose an S-Corporation in California?
- Profitable owner-operated businesses where the owner-operator pays themselves a reasonable salary and takes the remainder as distributions (saves on self-employment tax compared to LLC).
- Small businesses with US-individual owners only.
- Service businesses with one class of stock and predictable distribution patterns.
- Professional services that have to use a corporate form anyway (form a Professional Corporation, then elect S-Corp federal taxation).
- Businesses planning to stay closely held without outside investment.
When should I choose a C-Corporation in California?
- Startups planning to raise priced equity rounds (VCs almost universally require Delaware C-Corp structure, with California foreign qualification).
- Businesses that need multiple stock classes (preferred, common, convertible).
- Businesses with non-US owners or institutional investors.
- Businesses planning to issue stock options or grants under §83(b) or §1202 QSBS treatment.
- Businesses planning an eventual IPO or strategic acquisition by a public company.
- Businesses where retained earnings will be reinvested in growth rather than distributed.
Why can't California professional services use an LLC?
California Corporations Code §17701.04 prohibits LLCs from rendering professional services unless the licensing act authorizes it. The Medical Practice Act, the State Bar Act, the Dental Practice Act, and most other California licensing acts do not authorize LLC ownership. Licensed practices in California must form Professional Corporations under the Moscone-Knox Professional Corporation Act (Corporations Code §13400 et seq.). A Professional Corporation can elect S-Corp federal taxation. Many California medical and dental practices operate as PCs with an S-Corp federal election. The S-election does not change California's state-level franchise tax structure, only the federal pass-through treatment.
How do I make an S-Corporation election?
File IRS Form 2553 within two months and 15 days of the start of the tax year in which the election is to take effect (or any time during the prior tax year). All shareholders must consent. The election is federal only; California honors the S-election but charges the 1.5 percent franchise tax on net income (with the $800 floor). The S-election is revocable but can only be reinstated five years later, so the decision is not casual. Late S-elections can sometimes be cured under Rev. Proc. 2013-30 if the failure was inadvertent and the entity acted consistently with S status.
Decision framework: which entity is right for you?
Three questions filter most decisions. First, is the business a licensed professional service? If yes, it must be a Professional Corporation in California. PCs typically elect S-Corp federal taxation. Second, will the business raise priced equity from outside investors or VCs? If yes, a Delaware C-Corp is almost always the answer (with California foreign qualification). If no, the LLC vs. S-Corp choice depends on self-employment tax math. Third, is the business profitable enough that the S-Corp salary-vs-distribution savings exceed the cost of running payroll? If yes, S-Corp election makes sense. If no, LLC simplicity wins. For real estate, separate LLCs per property remain the dominant choice.
Frequently asked questions
Which is better in California: LLC, S-Corp, or C-Corp?
There is no universal answer. LLCs work for real estate and small businesses with simple ownership. S-Corps save self-employment tax for profitable owner-operated businesses. C-Corps are the standard for venture-backed startups. California-licensed professional services must use a Professional Corporation, which often elects S-Corp federal taxation.
How much does it cost to maintain a California LLC?
At minimum, $800 per year in California minimum franchise tax under R&T Code §17941. LLCs with gross receipts above $250,000 also pay a gross receipts fee under R&T Code §17942, ranging from $900 to $11,790 depending on revenue tier. Filing and annual Statement of Information fees add modest costs.
Can a California medical practice be an LLC?
No. Under California Corporations Code §17701.04, LLCs cannot provide professional services unless the licensing act authorizes it. The Medical Practice Act does not. California medical practices must form Professional Corporations under the Moscone-Knox Professional Corporation Act.
What is the difference between an S-Corp and a C-Corp?
Both are corporations under state law. The S-Corp is a federal tax election under IRC §1361 that passes income to shareholders' personal returns, avoiding the C-Corp's entity-level federal tax. S-Corps are limited to 100 US-individual shareholders and one class of stock. C-Corps have no shareholder limit and can issue multiple stock classes.
Should a California startup form in Delaware or California?
Venture-backed startups almost always form in Delaware, then register as foreign entities doing business in California. Delaware's corporate law is more developed, VC investors expect it, and certain tax and IP planning works better in Delaware. Non-venture small businesses often form directly in California to avoid the foreign qualification overhead.