Business formation paperwork on a desk, LLC vs S Corp in California: Which Saves You More in Taxes?

LLC vs S Corp in California: Which Saves You More in Taxes?

If you have already formed an LLC in California, you are not choosing between two legal structures. You are choosing between two ways the same company is taxed. By default, a multi-owner California LLC is taxed as a partnership, and a single-owner LLC is taxed as a sole proprietorship, meaning the owner reports the business on a personal return. An LLC can also elect to be taxed as an S corporation, which is the option most people mean when they search for llc taxed as s corp california. The entity stays an LLC. Only the tax treatment changes.

This guide compares the two paths on California costs, owner taxes, the S election, and the ongoing work of running an S corporation. It also answers the question behind should I elect S corp for my LLC California: what changes, what stays the same, and who should run the numbers.

Informational content only. This page is not legal or tax advice. Tax treatment depends on your facts, and rules change. Confirm your decision with a qualified CPA, and talk to an attorney if ownership, liability, or contract questions are involved.

The California cost of an LLC taxed by default

An LLC taxed as a partnership or sole proprietorship pays two California charges that do not depend on whether it elects S status:

  • The $800 annual tax. You pay it with voucher FTB 3522. It is due on the 15th day of the 4th month of the tax year. For the first year, it is due on the 15th day of the 4th month after the date the Secretary of State files your Articles of Organization.
  • The LLC fee. This applies once California total income reaches $250,000. California total income means gross income plus cost of goods sold, not gross receipts. You pay the fee on Form FTB 3536 and settle the final amount on Form 568.

The LLC fee is tiered:

California total incomeLLC fee
$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

First-year rule. Every LLC organized or registered in California from 2024 through 2026 owes the $800 minimum from its first year. The first-year exemption covered only LLCs formed from 2021 through 2023, so older guides that describe it as still available are out of date. An LLC whose first taxable year begins in 2027, 2028, or 2029 pays $400 in year one under Revenue and Taxation Code 17941(g)(2). Confirm the first-year amount with the Franchise Tax Board before you pay.

Owners of a default LLC also pay federal self-employment tax on their net earnings from self-employment. That tax is 15.3%, made up of 12.4% for Social Security up to the annual wage base and 2.9% for Medicare. Check the Social Security Administration for the current wage base, because it changes each year.

The California cost of an S corporation

An LLC or corporation taxed as an S corporation pays California a different set of charges:

  • The 1.5% tax on net income. The rate is 1.5% of net income, with an $800 minimum. S banks pay 3.5%. The tax scales with profit, so it has no flat amount and no threshold.
  • The minimum tax is waived in the first year for a newly formed or qualified S corporation.
  • No LLC fee. The Franchise Tax Board's due-dates guidance lists no annual fee for S corporations, so the tiered LLC fee does not apply.
  • Form 100S is due on the 15th day of the 3rd month after the end of the tax year. A 6-month extension is available.

If your LLC elects S status with the IRS, California taxes it as an S corporation. The statute defines an LLC for the LLC tax and fee as one "not taxable as a corporation for California tax purposes" (Revenue and Taxation Code 17941(d)). That means the $800 minimum and LLC fee rules do not map cleanly onto an S-electing LLC. Confirm with the Franchise Tax Board how the first year, the minimum, and the fee apply when an LLC elects S status.

How owners are taxed under each path

Default LLC. Profit flows through to the owners' personal returns. Owners generally pay self-employment tax on their share of net earnings, as described above. California personal income tax applies to the owners' share too, at graduated rates up to 12.3%, plus a 1% mental health tax on income above $1 million.

S corporation. Profit also flows through to the owners, and California personal income tax applies the same way. The difference is how owner-employees are paid. A working owner takes a salary, and that salary runs through payroll and is subject to payroll taxes. Distributions above the salary are not subject to self-employment tax. The IRS expects the salary to be reasonable for the work performed, and the split between salary and distributions is the central judgment in this decision. A CPA should advise you on what salary is reasonable for your role.

Optional pass-through entity elective tax. Both an S corporation and an LLC taxed as a partnership or S corporation can elect the pass-through entity elective tax, which is 9.3% for tax years 2021 through 2030. This is an election at the entity level, not a separate structure, and it changes how income is taxed to the owners. Review the details on the Franchise Tax Board website at ftb.ca.gov and with your CPA before you elect it.

How the S election works

The S election is made federally on IRS Form 2553. California follows the federal election and does not require a separate California form, but the Franchise Tax Board states that IRS approval is required. The deadline is:

  • No more than 2 months and 15 days after the start of the tax year the election is to take effect, or
  • At any time in the preceding tax year.

Read the IRS instructions for Form 2553 before you file, and keep proof of filing. Your effective date depends on when you file, so a CPA should confirm the date on which the election takes effect for your entity.

More information about the form is on the IRS site at irs.gov/forms-pubs/about-form-2553.

What running an S corporation adds

The S election does not add a filing fee, but it adds administrative work that a default LLC does not have:

  • Payroll for owner-employees. Salary paid to working owners runs through payroll. If you have employees, you must register with the Employment Development Department (EDD) and handle withholding and payroll reporting.
  • Payroll taxes on salary. You must withhold and remit the taxes owed on each salary payment.
  • Reasonable compensation. The IRS expects working owners to receive reasonable pay before distributions.
  • Two returns. The entity files a federal return on Form 1120-S and a California return on Form 100S.
  • Corporate formalities. If you form a corporation rather than an LLC, you must follow corporate governance rules, such as bylaws, board action, and shareholder records. An LLC that elects S status keeps LLC governance.
  • Ownership limits. The Franchise Tax Board lists limits for S corporations, including no more than 100 shareholders and limits on the types of owners allowed.

Filing costs that apply either way

These costs go to the Secretary of State and do not change with your tax election. Confirm current amounts on the Secretary of State's site before you file.

ItemCostTiming
Articles of Organization (Form LLC-1)$70One time, at formation
Articles of Incorporation (stock corporation)$100One time, at formation
Statement of Information for an LLC (Form LLC-12)$20Within 90 days of filing, then every two years
Statement of Information for a corporation (Form SI-550)$25Within 90 days of filing, then every year
Missed Statement of Information penalty$250Assessed by the Franchise Tax Board after a Secretary of State notice
LLC name reservation$10Lasts 60 days

Two structural limits also matter. California does not allow a domestic series LLC. And an LLC cannot render a licensed professional service, so a licensed professional practice uses a professional corporation instead. Professional corporations are a separate question, and a CPA or attorney should advise you if that applies to you.

Other registrations to check

California has no general statewide business license. The Secretary of State issues no licenses or permits, and the CDTFA seller's permit is not a business license. A business that forms an LLC or corporation registers it with the Secretary of State. You also register with the California Department of Tax and Fee Administration if you sell taxable goods, and with the EDD if you have employees. Your activity may require additional licenses from state boards or local agencies.

Most California cities charge a local business tax or registration certificate. Of the 483 cities, 445 report revenue from one, and there is no common formula. The right answer depends on the city, so check your city's business tax office before you open for business.

Who should ask a CPA before electing S status

The S election is worth a professional review if any of the following apply:

  • You are a working owner and need to decide what salary is reasonable.
  • You have, or expect, several owners with different roles or ownership shares.
  • Your California total income is near one of the LLC fee thresholds, or you expect it to grow.
  • You are considering the pass-through entity elective tax.
  • You are unsure how the first-year minimum, the $400 or $800 amount, and the LLC fee apply to an LLC that elects S status.
  • You plan to add owners, since S corporations face shareholder limits and owner type limits.
  • You provide a licensed professional service and need to choose between an LLC and a professional corporation.

A CPA can model your expected profit against both paths, using your actual income, owner pay, and filing history. This guide does not do that math for you, and no single figure applies to every business. Ask your CPA to compare the numbers for your specific situation, including payroll costs that an S corporation adds.

Official resources

Disclaimer. This article is informational only and is not legal, tax, or accounting advice. Fees, thresholds, and deadlines change, and some amounts are subject to confirmation with the named agency. Before you elect S status or change your tax treatment, consult a qualified CPA. For ownership, liability, or contract questions, consult a licensed California attorney.

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