LLC vs S-Corp in California

California has both a personal state income tax and a franchise-tax regime that applies to LLCs and corporations separately. That changes the LLC vs S-corp math compared to a no-income-tax state. The California Secretary of State handles entity formation. The California Franchise Tax Board (FTB) administers state-level entity taxes. The IRS handles federal tax classification via Form 8832 and Form 2553. A California LLC can elect to be taxed as an S corporation for federal and California purposes. California LLC basics. - Articles of Organization (Form LLC-1) filed with the California Secretary of State. Filing fee is $70. - Statement of Information (Form LLC-12) due within 90 days of formation and every 2 years thereafter. Filing fee is $20. - Annual minimum franchise tax of $800 payable to FTB, due each year the LLC is in existence, registered, or doing business in California. Under current law first-year exemptions that existed for some entities have phased out; confirm current first-year treatment with FTB before relying on any waiver. - LLC fee based on California total income, separate from and in addition to the $800 annual tax. The fee tiers under Revenue and Taxation Code section 17942 are: $0 under $250,000; $900 at $250,000 to $499,999; $2,500 at $500,000 to $999,999; $6,000 at $1,000,000 to $4,999,999; and $11,790 at $5,000,000 or more. - Single-member LLCs default to disregarded-entity treatment for federal tax. Multi-member LLCs default to partnership treatment. Either can elect S corp treatment with Form 2553. California S corp basics. - California recognizes the federal S election but imposes a state-level S corporation franchise tax of 1.5% of California net income, with an $800 annual minimum franchise tax. The 1.5% rate is set by Revenue and Taxation Code section 23802. - Unlike the LLC fee, the S corp tax is rate-based on net income, not on gross receipts. At the same revenue, an S corp and an LLC can owe very different amounts of California entity-level tax. - Payroll. An S corp must pay its owner-employee a reasonable W-2 salary. California's Employment Development Department administers state payroll taxes (UI, ETT, SDI, and state income tax withholding). - S corp income passes through to the shareholder's California personal income tax return. California does not allow a federal-style Qualified Business Income deduction for state purposes, so the full pass-through amount is taxable at the shareholder's California personal rate. Why a California trades shop might elect S corp. The primary driver is federal self-employment tax savings. A disregarded-entity LLC owner pays self-employment tax on the full net profit. An S corp owner-employee pays payroll tax on wages only; the distribution portion avoids self-employment tax. In California the analysis has an extra wrinkle: the S corp owes 1.5% on net income but escapes the LLC gross-receipts fee, while the LLC owes $800 plus the LLC fee on revenue tiers but has no 1.5% rate. For a low-margin, high-revenue shop, the LLC fee can exceed the 1.5% S corp tax. For a high-margin, lower-revenue shop, the reverse can be true. Rule of thumb. Run both structures against your projected revenue and net margin before you file. A CPA with California construction clients can compare the $800 minimum, the LLC fee tier you land in, the 1.5% S corp tax on projected net income, federal self-employment tax savings, reasonable-compensation requirements, and payroll and accounting cost. The answer is state-specific in California in a way it is not in a no-income-tax state.