# LLC vs. S Corp in California

> LLC or S corp in California? How the 1.5% S corp tax, the $800 minimum, the LLC fee, and EDD payroll change the math, with a worked Ventura County example.

Source: https://ridleylawoffices.com/llc-vs-s-corp-california/

**Short answer:** An LLC is a legal entity you form with the Secretary of State. An S corporation is a federal tax election that an LLC or a corporation can make. So in California the real choice is whether your LLC should stay taxed the default way or elect S status. The election usually pays off once profit comfortably exceeds a reasonable salary, after California’s payroll taxes and the 1.5% S corporation tax.

- California follows a valid federal S election automatically (Rev. & Tax. Code § 23801(a)).
- California taxes an S corporation at 1.5% of net income and keeps it subject to the minimum franchise tax (Rev. & Tax. Code § 23802(b)(1) and (c)), which is $800 (Rev. & Tax. Code § 23153(d)(1)).
- An LLC taxed the default way pays the annual LLC tax (Rev. & Tax. Code § 17941(a)).
- It also pays a fee of $900 or more once total California income reaches $250,000 (Rev. & Tax. Code § 17942(a)).
- An owner who works in an S corporation must be on payroll, and California treats that owner as an employee for EDD purposes (Unemp. Ins. Code § 621).

Most owners who ask me “LLC or S corp?” have been told by someone that the S corp saves taxes. Sometimes it does. The question starts in the wrong place, though, because the two aren’t alternatives. You can form an LLC and have it taxed as an S corporation, and plenty of my California clients do. This page walks through how California treats each option, runs the numbers on a real-looking Ventura County business, and shows where the S election stops being worth it.

## Is an S corp different from an LLC?

Yes. An LLC is a type of business entity created under state law. An S corporation is a tax status the IRS grants to an eligible entity that files Form 2553. One answers “what legal thing did I form?” and the other answers “how does the IRS tax it?”

A California LLC exists once the Secretary of State files its articles of organization ([Corp. Code § 17702.01(d)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17702.01)). It’s an entity distinct from its members ([Corp. Code § 17701.04(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17701.04)). Its debts are solely the LLC’s debts, and they don’t become a member’s debts solely by reason of the member acting as a member ([Corp. Code § 17703.04(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17703.04)). That liability shield is the legal reason to form one.

For taxes, an LLC with one owner is ignored by default, and its profit lands on your personal return as if you were a sole proprietor. An LLC with two or more owners is taxed as a partnership by default. Either kind can instead elect to be taxed as a corporation, and then elect S status. When an eligible LLC timely files Form 2553, federal regulations treat it as having also elected to be taxed as a corporation, so no separate Form 8832 is needed ([26 C.F.R. § 301.7701-3(c)(1)(v)(C)](https://www.law.cornell.edu/cfr/text/26/301.7701-3)).

A California small business realistically ends up in one of these setups.

1. An LLC taxed the default way (disregarded for one owner, partnership for more).
2. An LLC that has elected S corporation taxation.
3. A corporation that has elected S corporation taxation.
4. A corporation taxed as a C corporation, which I cover on [C corp vs. S corp](https://ridleylawoffices.com/c-corp-vs-s-corp-california/).

## How does California tax an LLC compared with an S corp?

California taxes the four setups very differently, and this is where national articles fall short. The federal comparison is mostly about self-employment tax. The California comparison adds the LLC fee, the 1.5% S corporation tax, and state payroll taxes.

| Setup | California entity tax | Gross receipts fee | Owner’s pay | California return |
| --- | --- | --- | --- | --- |
| LLC, default taxation | $800 annual tax | Yes, from $250,000 of California income | Draws; profit subject to self-employment tax | Form 568 |
| LLC taxed as S corp | 1.5% of net income, $800 minimum | No | W-2 salary through payroll, then distributions | Form 100S |
| Corporation taxed as S corp | 1.5% of net income, $800 minimum | No | W-2 salary through payroll, then distributions | Form 100S |
| C corporation | 8.84% of net income, $800 minimum | No | W-2 salary, then taxable dividends | Form 100 |

- **California copies your federal classification.** An entity’s classification as a partnership or a corporation for California tax purposes is the same as its federal classification ([Rev. & Tax. Code § 23038(b)(2)(B)(ii)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=23038)). A valid federal S election makes the entity an S corporation for California too ([Rev. & Tax. Code § 23801(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=23801)). There’s no separate California election form.
- **A disregarded LLC still pays California.** Even when the IRS ignores a one-owner LLC, California still charges it the LLC tax and fee and still requires the LLC return (Rev. & Tax. Code § 23038(b)(2)(B)(iii)). I explain the $800 on [the California LLC $800 tax](https://ridleylawoffices.com/california-llc-800-tax/).
- **The LLC fee is on gross, not profit.** The fee is $900 once total California income reaches $250,000, and rises to $2,500, $6,000, and $11,790 at $500,000, $1 million, and $5 million ([Rev. & Tax. Code § 17942(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17942)). “Total income” means gross income plus cost of goods sold, so a thin-margin business can owe a fee while losing money. See [the California LLC gross receipts fee](https://ridleylawoffices.com/california-llc-gross-receipts-fee/).
- **An LLC taxed as a corporation drops out of the LLC tax and fee.** Section 17941 defines “limited liability company” for these charges as one that isn’t taxable as a corporation for California purposes ([Rev. & Tax. Code § 17941(d)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=17941)). Instead it’s a “corporation” for the franchise tax (Rev. & Tax. Code § 23038(c)).
- **The S corporation tax is 1.5%.** California taxes S corporations at 1.5% rather than the 8.84% corporate rate, and an S corporation still owes the $800 minimum franchise tax ([Rev. & Tax. Code § 23802(b)(1) and (c)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=23802)).

## When does an S corp save money in California?

The S election saves money when the self-employment tax you avoid on distributions is bigger than the new costs: payroll taxes on your salary, California’s 1.5% tax, state payroll charges, and the price of running payroll and filing a corporate return. That usually means profit well above what you’d have to pay yourself as a salary.

The savings come from one rule. A sole proprietor or default LLC owner pays self-employment tax of 15.3% on net earnings, made up of 12.4% for Social Security and 2.9% for Medicare ([26 U.S.C. § 1401(a) and (b)](https://www.law.cornell.edu/uscode/text/26/1401)). An S corporation owner pays Social Security and Medicare tax only on wages. Distributions of the remaining profit aren’t wages. The IRS requires the corporation to pay the working owner reasonable compensation before taking non-wage distributions, and it can recharacterize distributions as wages when the salary is too low ([IRS, S corporation compensation and medical insurance issues](https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues)). I cover how to set that salary on [S corp reasonable salary for California owners](https://ridleylawoffices.com/s-corp-reasonable-salary-california/).

### Worked example: a Ventura County consultant

Dana runs a one-person marketing consultancy in Ventura. Her LLC has $240,000 of gross receipts and $160,000 of net profit in 2026. She’s asking whether to elect S status. Assume a reasonable salary for her role is $85,000 and she’s a new employer for EDD purposes.

| Item | LLC, default | LLC taxed as S corp |
| --- | --- | --- |
| Self-employment tax on $160,000 profit | $22,607 | None |
| Social Security and Medicare on $85,000 salary, both halves | None | $13,005 |
| California entity tax | $800 | $1,024 (1.5% of about $68,250) |
| California UI and ETT on first $7,000 | None | $245 |
| California SDI withheld from salary (1.3%) | None | $1,105 |
| **Total of these items** | **$23,407** | **$15,379** |

That’s a difference of $8,028 a year ($23,407 less $15,379) in Dana’s favor before she pays for payroll processing, bookkeeping, and a separate corporate return. A few notes on the math:

- The self-employment figure applies 15.3% to 92.35% of profit, the way [26 U.S.C. § 1402(a)(12)](https://www.law.cornell.edu/uscode/text/26/1402) works, and her profit is under the 2026 Social Security wage base of $184,500 ([IRS Publication 15 (2026)](https://www.irs.gov/publications/p15)).
- Social Security tax is 6.2% each for employer and employee, and Medicare is 1.45% each (IRS Publication 15 (2026)).
- New California employers pay a 3.4% UI rate on the first $7,000 of each employee’s wages, plus 0.1% ETT on the same $7,000, and the 2026 SDI withholding rate is 1.3% on all wages ([EDD, Rates and Withholding](https://edd.ca.gov/en/payroll_taxes/rates_and_withholding/)).
- The S corporation’s taxable income is her $160,000 less salary, the employer half of payroll tax, and UI and ETT, so about $68,250, and 1.5% of that is more than the $800 minimum.

SDI isn’t a pure loss. It buys state disability and paid family leave coverage that Dana doesn’t have as a self-employed owner. And the federal income tax picture shifts too, because salary isn’t qualified business income for the federal 20% deduction under [26 U.S.C. § 199A](https://www.law.cornell.edu/uscode/text/26/199A). California doesn’t allow that deduction at all ([FTB, 2025 Schedule K-1 (565) instructions](https://www.ftb.ca.gov/forms/2025/2025-565-k-1-instructions.html)). Those effects need your CPA’s full return model.

Change one fact and the gap widens. If Dana’s gross receipts had been $600,000 on the same profit, the default LLC would also owe the $2,500 LLC fee. The S corporation wouldn’t. For businesses with heavy pass-through costs, such as a contractor buying materials, that fee alone can tip the analysis.

### Where it stops paying

Rerun the example with $55,000 of profit and a $40,000 salary. Self-employment tax would be about $7,770, and payroll tax on the salary would be $6,120. The S corporation still owes the $800 minimum, the same as the LLC. After $245 of UI and ETT and $520 of SDI, the savings shrink to under $900, which payroll and the extra return will likely consume. I walk through more profit levels for one-owner businesses on [single-member LLC or S corp election](https://ridleylawoffices.com/single-member-llc-vs-s-corp-california/).

## What does the S election cost you in California?

It costs money, paperwork, and flexibility. The money is payroll processing, a corporate return, and the 1.5% tax. The paperwork is running real payroll through the EDD every quarter. The flexibility loss is the one people underestimate.

- **You become an employee of your own company.** California defines “employee” to include any officer of a corporation and any member of an LLC that’s treated as a corporation for federal income tax purposes ([Unemp. Ins. Code § 621(a) and (f)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=UIC&sectionNum=621)). The company registers with the EDD, withholds from your pay, and files quarterly reports.
- **Workers’ compensation enters the picture.** Corporate officers who work for pay are employees for workers’ compensation, though an officer or director can elect out under the listed exceptions ([Lab. Code § 3351(c)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=3351)). Ask your insurance broker how the election affects your policy.
- **Distributions must follow ownership.** An S corporation can have only one class of stock ([26 U.S.C. § 1361(b)(1)(D)](https://www.law.cornell.edu/uscode/text/26/1361)). Generally every share must have identical rights to distributions and liquidation proceeds ([IRS, Instructions for Form 2553](https://www.irs.gov/instructions/i2553)). A multi-member LLC whose operating agreement gives one partner a preferred return, or splits profit differently than ownership, can put the election at risk. The [operating agreement](https://ridleylawoffices.com/california-llc-operating-agreement/) has to be rewritten to fit.
- **Owners are limited.** An S corporation can’t have more than 100 shareholders, can’t have a nonresident alien shareholder, and can have only certain kinds of owners (26 U.S.C. § 1361(b)(1)). In a community property state like California, a nonresident alien spouse’s community interest can itself disqualify the corporation ([26 C.F.R. § 1.1361-1(g)(1)(i)](https://www.law.cornell.edu/cfr/text/26/1.1361-1)).
- **Getting out isn’t free.** Undoing an LLC’s corporate classification is treated for tax purposes as a liquidation of the corporation ([26 C.F.R. § 301.7701-3(g)(1)(iii)](https://www.law.cornell.edu/cfr/text/26/301.7701-3)). If the business holds appreciated assets, that can produce tax. Talk to your CPA before you elect, not after.

## Should I elect S status as an LLC or form a corporation?

For most one- and two-owner businesses I form an LLC and, if the numbers support it, the LLC elects S status. The tax result is the same as an S corporation. What changes is the legal wrapper, and the LLC’s wrapper is usually simpler to keep in order.

- **Annual filings.** A corporation files a Statement of Information every year ([Corp. Code § 1502(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=1502)). An LLC files one every two years ([Corp. Code § 17702.09(a)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17702.09)). See [the California Statement of Information](https://ridleylawoffices.com/statement-of-information-california/).
- **Formalities.** Skipping member or manager meetings isn’t a factor toward alter ego liability for an LLC when the articles and operating agreement don’t require meetings (Corp. Code § 17703.04(b)). Corporations carry more governance expectations. Either way, commingling funds is what gets owners in trouble; see [piercing the corporate veil in California](https://ridleylawoffices.com/piercing-corporate-veil-california/).
- **Protection from your personal creditors.** A creditor of an LLC member generally gets a charging order against the member’s distributions, and that’s the exclusive remedy against the membership interest ([Corp. Code § 17705.03(a) and (f)](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=CORP&sectionNum=17705.03)). Corporate stock doesn’t carry that statutory rule.
- **Licensed professions.** Nothing in the LLC statute permits a California LLC to render professional services as the professional corporation law defines them (Corp. Code § 17701.04(e)). Doctors, dentists, lawyers, CPAs, therapists, and other licensees generally need a [professional corporation](https://ridleylawoffices.com/professional-corporation-california/), which can then elect S status.
- **Outside investors.** If you plan to raise venture money or want federal small business stock treatment, you’re looking at a C corporation. California doesn’t apply the federal exclusion for gain on small business stock ([Rev. & Tax. Code § 18152](https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=RTC&sectionNum=18152)). See [QSBS, Section 1202, and California](https://ridleylawoffices.com/qsbs-section-1202-california/).

## When should an LLC skip the S election?

Skip it when profit is modest, when the business mostly holds property, or when the owners need flexible economics. In those cases the default LLC is simpler and often cheaper.

- **Low or uneven profit.** If profit barely clears a reasonable salary, the savings disappear, as the $55,000 example shows.
- **Rental real estate.** Rental income generally isn’t subject to self-employment tax in the first place, so the S election has little to save. Holding appreciated real estate in a corporation also makes it harder to move the property out later without tax. My [rental LLC guide](https://ridleylawoffices.com/guides/rental-llc/) covers the usual setup.
- **Partners with different deals.** A partnership-taxed LLC can give a money partner a preferred return and a working partner a bigger share of profit. The one-class-of-stock rule doesn’t allow that. See [partnership vs. multi-member LLC](https://ridleylawoffices.com/partnership-vs-llc-california/).
- **A holding structure.** A parent LLC owning operating subsidiaries often works better with default taxation. See [holding company LLCs](https://ridleylawoffices.com/holding-company-llc-california/) and [series LLCs and California](https://ridleylawoffices.com/series-llc-california/).

## How do I make the S election?

File IRS Form 2553 no more than 2 months and 15 days after the start of the tax year it should take effect, or any time during the year before ([26 U.S.C. § 1362(b)](https://www.law.cornell.edu/uscode/text/26/1362)). Every shareholder signs, and in California both spouses sign when the interest is community property ([26 C.F.R. § 1.1362-6(b)(2)(i)](https://www.law.cornell.edu/cfr/text/26/1.1362-6)). That spouse signature is the California mistake I see most. The full walk-through, including late-election relief and how California follows the IRS, is on [filing Form 2553 and the California S election](https://ridleylawoffices.com/s-corp-election-form-2553-california/).

Then set up payroll before the first distribution. Register with the EDD, pick a salary you can defend, and decide whether owner health insurance runs through the company. The IRS treats health premiums paid for a more-than-2% shareholder-employee as W-2 wages (IRS, S corporation compensation and medical insurance issues).

## Guides in this series

Each decision in choosing a California entity has its own page:

- [Entity formation: LLCs and corporations for California owners](https://ridleylawoffices.com/entity-formation/)
- [Sole proprietor to LLC in California](https://ridleylawoffices.com/sole-proprietorship-vs-llc-california/)
- [Single-member LLC or S corp election](https://ridleylawoffices.com/single-member-llc-vs-s-corp-california/)
- [C corp vs. S corp for a California small business](https://ridleylawoffices.com/c-corp-vs-s-corp-california/)
- [Filing Form 2553 and the California S election](https://ridleylawoffices.com/s-corp-election-form-2553-california/)
- [S corp reasonable salary for California owners](https://ridleylawoffices.com/s-corp-reasonable-salary-california/)
- [California professional corporations](https://ridleylawoffices.com/professional-corporation-california/)
- [Partnership vs. multi-member LLC](https://ridleylawoffices.com/partnership-vs-llc-california/)
- [Member-managed vs. manager-managed LLCs](https://ridleylawoffices.com/member-managed-vs-manager-managed-llc-california/)
- [Spouses owning an LLC together](https://ridleylawoffices.com/spouses-owning-llc-california/)
- [Holding company LLCs](https://ridleylawoffices.com/holding-company-llc-california/)
- [Series LLCs and California](https://ridleylawoffices.com/series-llc-california/)
- [DBAs and fictitious business names](https://ridleylawoffices.com/dba-fictitious-business-name-california/)
- [The California LLC operating agreement](https://ridleylawoffices.com/california-llc-operating-agreement/)
- [The rental LLC guide](https://ridleylawoffices.com/guides/rental-llc/)

Once the entity exists, the ongoing filings are on [California LLC annual requirements](https://ridleylawoffices.com/california-llc-annual-requirements/). And if you own the business with someone else, a [buy-sell agreement](https://ridleylawoffices.com/buy-sell-agreement-california/) matters as much as the tax election.

## Frequently asked questions

### Is an S corp better than an LLC in California?

Neither is better in the abstract, because an LLC can be taxed as an S corp. The S election tends to help a working owner whose profit is well above a reasonable salary. It tends to hurt when profit is modest, when the business holds real estate, or when partners need unequal economics.

### Can a California LLC be taxed as an S corp?

Yes. An eligible LLC files Form 2553, and a timely S election also counts as the election to be taxed as a corporation (26 C.F.R. § 301.7701-3(c)(1)(v)(C)). California follows the federal election, so the LLC files Form 100S with the FTB instead of Form 568.

### At what profit does an S corp make sense in California?

There’s no fixed number, and anyone who gives you one hasn’t seen your books. In my examples, a one-owner business with $55,000 of profit saves under $900 before costs, while one with $160,000 saves about $8,000. Your CPA should run your own salary and profit through both setups.

### Does an S corporation pay the $800 minimum tax in California?

Yes. An S corporation pays 1.5% of its California net income or the $800 minimum, whichever is more (Rev. & Tax. Code § 23802(b)(1) and (c)). A newly formed or qualified S corporation doesn’t owe the minimum for its first taxable year, but any first-year income is still taxed at 1.5% ([FTB, S corporations](https://www.ftb.ca.gov/file/business/types/corporations/s-corporations.html)).

### Does an LLC taxed as an S corp still pay the LLC fee?

No. The LLC tax and fee apply only to an LLC that isn’t taxable as a corporation for California purposes (Rev. & Tax. Code § 17941(d)). Once the S election is in effect, the LLC pays the corporate franchise tax at the S rate instead.

### What are the downsides of an S corp in California?

You run payroll through the EDD, pay the 1.5% tax, file a corporate return, and must pay yourself a defensible salary. Distributions must stay proportional to ownership, and only certain owners qualify. Undoing the election later can trigger tax.

### Do I need a lawyer or a CPA for this decision?

Usually both. Your CPA runs the tax comparison and payroll. I form the entity, draft or revise the operating agreement so it’s consistent with the election, and make sure the spouse consents and ownership records are in order.

More in this series

- [Single-member LLC or S corp election in California](https://ridleylawoffices.com/single-member-llc-vs-s-corp-california/)
- [Filing Form 2553 and the California S election](https://ridleylawoffices.com/s-corp-election-form-2553-california/)
- [S corp reasonable salary for California owners](https://ridleylawoffices.com/s-corp-reasonable-salary-california/)
- [C corp vs. S corp for a California small business](https://ridleylawoffices.com/c-corp-vs-s-corp-california/)
- [Sole proprietor to LLC in California](https://ridleylawoffices.com/sole-proprietorship-vs-llc-california/)
- [California professional corporations](https://ridleylawoffices.com/professional-corporation-california/)
- [All business owner guides](https://ridleylawoffices.com/business-guides/)

My [entity formation](https://ridleylawoffices.com/entity-formation/) service is a flat fee: $2,500 for a single-owner LLC, $5,500 for a multi-owner LLC, and $4,500 for a professional corporation. Other work is billed at $500 per hour; see [fees](https://ridleylawoffices.com/fees/).

[Talk to Eric](https://ridley.click/eric-60)

Book a consultation at [ridley.click/eric-60](https://ridley.click/eric-60) or call 805-244-5291. I work with business owners in Ventura, Santa Barbara, and Los Angeles counties by Zoom or phone.

**Please read:** This page is general information about California law as of September 2026. It isn’t legal, tax, or financial advice, and reading it doesn’t make you my client. Tax treatment and the right structure depend on facts this page can’t see, so talk with your CPA as well. An attorney-client relationship starts only with a signed engagement agreement.