If you’re starting a business in California, you’ll usually have to choose between an LLC and a corporation before you sign anything else. The choice affects what you owe the state each year, how you pay yourself, who can invest and whether a licensed professional can use the entity at all.
Neither an LLC nor a corporation is better for every California business. An LLC usually suits owners who want pass-through taxation and flexible profit splits with less paperwork. A corporation suits companies that plan to raise outside investment or issue stock, and California generally requires licensed professionals like physicians to use a professional corporation instead of an LLC.
The side-by-side comparison below draws on Franchise Tax Board (FTB), IRS and California Secretary of State sources checked in October 2026.
What is the difference between an LLC and a corporation in California?
An LLC is owned by members and run under an operating agreement, while a corporation is owned by shareholders and run by a board of directors and officers under bylaws. Both are separate legal entities created by filing with the California Secretary of State.
In the table, “corporation” covers both C and S corporations. S corporation status is a federal tax election rather than a separate entity type, and a qualifying LLC can make that election too.
| Feature | LLC | Corporation |
|---|---|---|
| Formation document filed with the Secretary of State | Articles of Organization | Articles of Incorporation |
| Owners | Members | Shareholders |
| Internal governing document | Operating agreement | Bylaws |
| Who manages the business | The members, or managers the members choose | A board of directors, which appoints officers |
| Default federal income tax treatment | One member: disregarded entity. Two or more members: partnership. Profit passes through to the owners. | Taxed as a C corporation at the entity level unless it elects S corporation status |
| California annual tax | $800 annual tax, plus an LLC fee once total California income reaches $250,000 | Tax on income at 8.84% (C corporation) or 1.5% (S corporation), with an $800 minimum franchise tax |
| First tax year | The $800 annual tax applies in the first year | The minimum franchise tax is waived for the first year, but first-year income is still taxed |
| Statement of Information | Every two years | Every year (stock corporations) |
| Raising capital | Admits members and sells membership interests on terms set in the operating agreement | Issues shares of stock; an S corporation is limited to one class of stock and 100 shareholders |
| Licensed professional services | Generally not allowed in California | Available through a professional corporation |
The FTB, IRS and California Secretary of State pages behind each row are linked in the sections that follow.
How are LLCs and corporations taxed in California?
Taxes are where LLCs and corporations differ most, and the difference starts with federal classification. The FTB says an LLC must have the same classification for California as it has for federal tax purposes, so the federal choice drives the California result.
How an LLC is taxed
By default, the IRS treats a single-member LLC as disregarded from its owner and an LLC with two or more members as a partnership. Either way, the LLC’s profit passes through to the owners’ personal returns.
California adds its own charges. According to the FTB, every LLC doing business or organized in California pays an $800 annual tax. In the first year, that payment is due by the 15th day of the 4th month after the LLC files with the Secretary of State. An LLC with total California income of $250,000 or more also owes an LLC fee, which it must estimate and pay by the 15th day of the 6th month of the tax year. The fee steps up with total California income:
- $250,000 to $499,999: $900
- $500,000 to $999,999: $2,500
- $1,000,000 to $4,999,999: $6,000
- $5,000,000 or more: $11,790
The LLC fee is tied to total income rather than net profit. A high-revenue, low-margin LLC can land in an upper tier even in a year when the owners take home very little.
How a C corporation is taxed
A C corporation pays tax on its own profit. California’s rate for C corporations, other than banks and financial institutions, is 8.84%. The FTB also collects an $800 minimum franchise tax in the first quarter of each accounting period. When the corporation later pays dividends, shareholders pay personal income tax on them too. That second layer is the “double taxation” people mean when they compare C corporations with pass-through entities.
How an S corporation is taxed
An S corporation passes its income, losses and deductions through to shareholders, who report them on their personal returns. The IRS notes that this lets the corporation avoid double taxation on corporate income. California still taxes the S corporation itself, at a lower rate. The FTB taxes every S corporation with California source income at 1.5%, and S corporations are also subject to the $800 minimum franchise tax.
Owners who work in an S corporation can’t take all of the profit as distributions. The IRS says an S corporation must pay reasonable compensation to a shareholder-employee for services before making non-wage distributions to that shareholder, which means running payroll.
To get S status, the business files IRS Form 2553. The IRS instructions say the election is due no more than 2 months and 15 days after the beginning of the tax year it’s meant to take effect, or at any time during the year before.
The first-year difference
The FTB says newly incorporated or qualified corporations aren’t required to pay the minimum franchise tax in their first year, although any first-year income is still taxed at the regular rate. The general first-year exemption for LLCs covered only tax years beginning on or after January 1, 2021 and before January 1, 2024, so an LLC formed in 2026 should plan on paying the $800 annual tax for its first year.
Tax figures change from year to year and depend on your income, your owners and how you take money out, so run your actual numbers with a CPA before you choose.
Which gives better protection from personal liability?
Both structures can protect your personal assets, and neither is automatically stronger. Properly formed and maintained, an LLC or a corporation generally keeps owners’ personal assets separate from the business’s debts and lawsuits. Owners usually lose that protection through how they run the business, whichever form they picked.
California courts can disregard the entity and hold owners personally responsible under the alter ego doctrine, often called piercing the corporate veil. Courts look at conduct like mixing personal and business money, leaving the business without enough capital for its foreseeable obligations, and treating the company as an extension of the owner. No structure guarantees that a court will respect the separation in every dispute.
The liability shield has limits under either structure. It doesn’t protect you from claims based on your own wrongful conduct, and it doesn’t cover business debts you personally guarantee, which landlords and lenders often ask small-business owners to sign.
Habits that help keep the separation real:
- Open a business bank account and run every business dollar through it.
- Sign contracts in the company’s name, with your title, not as an individual.
- Keep a signed operating agreement or bylaws, and record major decisions in writing.
- File Statements of Information and pay California taxes on time so the entity stays in good standing.
How do ownership, management and paperwork compare?
An LLC gives owners more room to design their own arrangement, while a corporation follows a more fixed structure.
An LLC’s operating agreement sets who owns what, who makes decisions and how profit is divided. The LLC can be managed by its members directly or by managers the members choose. An LLC taxed as a partnership can also divide profits in ways that don’t strictly track ownership percentages, within tax rules your CPA can explain.
A corporation runs on bylaws. Shareholders elect a board of directors, the board appoints officers, and the officers handle day-to-day operations. Profits go out as dividends based on share ownership, and the board and shareholders document major decisions in resolutions or minutes.
Ongoing state filings differ as well. The California Secretary of State says LLCs file a Statement of Information every two years in their registration month, while stock corporations file one every year.
One federal filing no longer applies to most new businesses. FinCEN’s guidance, last updated in August 2026, says U.S. companies are exempt from beneficial ownership information (BOI) reporting, whether they’re LLCs or corporations.
Can doctors, dentists and other licensed professionals use an LLC in California?
Generally, no. California law prohibits LLCs from rendering professional services unless a specific law authorizes an LLC to hold the license involved (California Corporations Code Section 17701.04). Corporations Code Sections 13401 and 13401.3 define professional services as services that can be lawfully provided only under a license issued under the Business and Professions Code, the Chiropractic Act, the Osteopathic Act or the Yacht and Ship Brokers Act.
Physicians, dentists and chiropractors are among the licensees who therefore usually practice through a professional corporation. A professional corporation has its own ownership limits and licensing-board rules on top of the usual corporate ones. The article on professional corporation vs. LLC for medical practices covers that comparison in detail.
Which structure works better if you plan to raise money or bring in partners?
A C corporation is usually the easiest fit for outside investors, an LLC works well for a small group of owners who want custom terms, and an S corporation has the tightest ownership limits.
The IRS sets out who can own an S corporation:
- It must be a domestic corporation.
- Its shareholders can only be individuals, certain trusts and estates. Partnerships, corporations and nonresident aliens can’t be shareholders.
- It can have no more than 100 shareholders.
- It can have only one class of stock.
Many investment funds are organized as partnerships, which can’t hold S corporation stock, and the one-class limit rules out the preferred stock that investors commonly negotiate for. A C corporation has neither restriction. Founders who are also weighing a Delaware entity can read about the pros and cons of filing an entity in Delaware.
An LLC can admit new members and create different classes of membership interests through its operating agreement. Pass-through taxation means each member receives a share of the LLC’s taxable income on their own return, which some outside investors would rather avoid.
Whatever you form, put the partner terms in writing. A shareholder agreement or a well-drafted operating agreement should cover buyouts, what happens if an owner leaves, dies or divorces, how deadlocks get resolved and whether owners can sell to outsiders. Without those terms, California’s default rules fill the gaps, and they may not match what the owners intended.
How do you decide, and can you change your structure later?
Start with your plans for the next few years before you compare filing costs. These factors usually carry the most weight:
- How many owners you’ll have, and whether any of them are companies, trusts or nonresident aliens.
- How much profit you expect, and whether you’ll take it out or reinvest it.
- Whether you’ll seek outside investors or offer equity to employees.
- Whether the business will provide services that require a California professional license.
- How you might eventually exit, whether by selling, bringing in a successor or winding down.
Each row below pairs a common situation with the structure that’s usually worth a first look. Use it to start a conversation with your lawyer and CPA. It can’t settle the choice for your business on its own.
| If this describes you | Look at first | Why |
|---|---|---|
| One owner or a few owners, no outside investors planned, profits taken out as income | LLC | Pass-through taxation by default and flexible terms |
| Profits high enough that working owners could take part as salary and part as distributions | LLC or corporation with an S election | S status is a tax election available to either entity; working owners must receive reasonable compensation |
| Plans to raise venture capital or issue more than one class of stock | C corporation | S corporations allow one class of stock and only certain kinds of shareholders |
| Services that require a California professional license | Professional corporation | California generally bars LLCs from rendering professional services |
| An owner that is a company, a partnership or a nonresident alien | LLC or C corporation | Those owners can’t hold S corporation stock |
| Most profit reinvested in the business rather than distributed | Model a C corporation against your LLC numbers | Corporate income is taxed at 8.84% in California, with a second layer of tax when dividends are paid |
You can usually change course later, though some changes are simpler than others. An LLC can elect S corporation tax treatment by filing Form 2553 without changing its legal form. California law also provides a process for converting one entity type into another, such as an LLC into a corporation, but a conversion can have tax consequences, so plan it with a CPA.
Decide before you sign a lease, a loan or a major contract. Agreements signed in your own name, or in the name of an entity you later replace, may need to be assigned or renegotiated, which is why this guide’s first sentence puts the choice ahead of signing anything else. Owners leaning toward an LLC can learn more about working with a San Diego LLC lawyer at the firm.
This article is general information about California business entities, not legal or tax advice for your situation.
Frequently asked questions about LLCs and corporations in California
Is an LLC or a corporation cheaper to run in California?
It depends on your revenue, your profit and how you take money out. LLCs pay an $800 annual tax and corporations pay an $800 minimum franchise tax, but a new corporation doesn’t owe that minimum in its first year. LLCs add a fee once total California income reaches $250,000, while corporations pay 8.84% (C) or 1.5% (S) on income.
Can an LLC be taxed as an S corporation in California?
Yes. An LLC that qualifies can elect S corporation status by filing IRS Form 2553, and the IRS says an eligible entity making that election doesn’t need to file a separate Form 8832. California requires an LLC to keep the same tax classification it uses federally. Ask your CPA which California taxes and fees apply after the election.
Do I need a lawyer to form an LLC or corporation in California?
No law requires a lawyer to file formation documents, and the California Secretary of State accepts Articles of Organization and Articles of Incorporation online. The filing is the short part. The legal work is choosing the structure, drafting the operating agreement or bylaws, setting ownership and buyout terms, and checking professional licensing rules before you sign anything.
Should I form my company in Delaware instead of California?
For a business that operates mainly in California, a Delaware entity usually still has to register here and pay California’s taxes. The FTB applies the $800 annual tax to every LLC doing business in California, and qualified out-of-state corporations file a California Statement of Information every year. That means a second state’s fees and filings on top of California’s.
Do new LLCs and corporations still have to file beneficial ownership (BOI) reports?
Not if they were formed in the United States. FinCEN’s guidance, last updated in August 2026, says U.S. companies are exempt from beneficial ownership information reporting. The requirement now applies to entities formed under foreign law that register to do business in a U.S. state. Check FinCEN’s BOI page before relying on this, because federal rules can change.
How we can help
The Law Office of Kris Mukherji, APC helps California business owners decide between an LLC, a C or S corporation and a professional corporation, and then forms the entity they choose. We can also guide you through registering your business with the California Secretary of State. If you’re bringing in partners, we draft the shareholder and partnership agreements that set ownership, buyout and decision-making terms. If you hold a professional license, we can tell you whether California allows your practice to operate as an LLC at all, and what to form instead if it doesn’t. Learn more about our business entity formation services, or schedule a free consultation with our office at 4275 Executive Square #200, La Jolla, CA 92037. You can also call (858) 442-5747 to talk through which structure fits your plans.