Introduction
If you’re launching or expanding a business in California in 2025, one of the most important decisions you’ll make is choosing between forming a corporation or a limited liability company (LLC). Both structures come with different tax costs, compliance rules, and long-term implications. This blog compares both structures from a California tax perspective to help you make the most cost-effective decision.
How California Taxes Corporations
Applicable Code: California Revenue & Taxation Code §23151
C Corporations
- Subject to a flat 8.84% income tax
- Must pay the $800 annual minimum franchise tax
- Must file Form 100
- Subject to double taxation: once at the corporate level, then again on dividends to shareholders
S Corporations
- Subject to a 1.5% tax on net income
- Also required to pay the $800 minimum tax
- Must file Form 100S
- Income passed through to shareholders and taxed on personal returns
How California Taxes LLCs
Applicable Code: California Revenue & Taxation Code §17941
- Subject to a flat $800 annual franchise tax
- LLCs with gross receipts over $250,000 must pay an additional fee
- Not subject to entity-level income tax
- Must file Form 568
- Income passes through to members, who pay tax on personal returns
Side-by-Side Comparison: Corporation vs. LLC
| Tax Factor | C Corporation | S Corporation | LLC |
|---|---|---|---|
| Income Tax Rate | 8.84% | 1.5% | None at entity level |
| Franchise Tax | $800 minimum | $800 minimum | $800 minimum |
| Gross Receipts Fee | No | No | Yes (if over $250,000) |
| Double Taxation | Yes | No | No |
| Filing Form | Form 100 | Form 100S | Form 568 |
| Pass-through Taxation | No | Yes | Yes |
Real Examples Based on Business Income
Example 1: $150,000 Net Income
- C Corporation:
- 8.84% tax = $13,260
- Total: $13,260 (not including shareholder-level tax)
- S Corporation:
- 1.5% tax = $2,250
- Total: $2,250 + income taxed on owner’s personal return
- LLC (under $250K gross receipts):
- $800 flat franchise tax
- Total: $800 + income taxed on owner’s personal return
Example 2: LLC with $1,000,000 Gross Receipts
- $800 franchise tax
- $6,000 gross receipts fee
- Total: $6,800 + income taxed on members’ personal return
Other Costs to Consider
- Legal Formation Fees: $70–$100 with California Secretary of State
- Annual Statement of Information: Required for both LLCs and corporations
- Payroll Taxes: Required if owners are employees (typically in S Corps)
- Self-Employment Tax: Applies to LLC members’ distributive share
- CPA & Compliance Fees: Varies based on entity complexity and filings
Step-by-Step Guide to Choosing the Right Entity
Step 1: Evaluate your projected revenue and net income
Step 2: Consider administrative workload and complexity
Step 3: Decide whether you prefer pass-through or double taxation
Step 4: Estimate tax liability under each structure
Step 5: Consult a CPA for tailored tax projections and structuring advice
Conclusion
Choosing the right entity type affects your tax liability significantly. If you’re running a small business or side hustle, an LLC may be more affordable. As your revenue increases, an S Corporation might offer tax advantages through salary/distribution splits. For high-growth startups seeking investment, a C Corporation is often the only viable choice despite the higher tax cost.
Call to Action
Confused between forming an LLC or a corporation?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant and Enrolled Agent who has helped thousands of business owners legally reduce taxes and choose the most efficient entity type.
📅 Book your appointment here
FAQs – Corporation vs. LLC in California
Q1: Does an LLC always cost less in taxes than a corporation?
Not always. LLCs with high gross receipts may pay more than S Corporations due to additional fees.
Q2: Can an LLC convert to an S Corporation later?
Yes, by making an IRS election using Form 2553 and meeting eligibility requirements.
Q3: Is the $800 annual tax mandatory for all entities?
Yes. All LLCs, corporations, and S Corporations must pay it—even if inactive or loss-making.
Q4: Are corporations better for raising outside capital?
Yes. Investors and venture capital firms generally prefer C Corporations.
Q5: Can I own both an LLC and a Corporation?
Yes. Many business owners form multiple entities for tax or liability purposes.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant in the United States, admitted to practice before the IRS as an Enrolled Agent, and a Fellow Chartered Accountant in India. With more than 15 years of experience, he advises U.S. businesses and entrepreneurs on entity selection, tax planning, and IRS compliance strategies. His clients have collectively saved over $200 million in taxes.
Disclaimer
This article is for educational purposes only and does not constitute legal or tax advice. California tax laws and federal rules are subject to change. Consult with a licensed CPA before selecting your business entity or filing any tax documents.