Statutory Snapshot
- LLC: California Revenue & Taxation Code (R&TC) §§ 17941 ($800 annual tax) and 17942 (gross-receipts fee). Federal entity classification follows IRC § 7701 and Reg. § 301.7701-3.
- S-Corp: R&TC § 23802 imposes a 1.5 percent tax on net income (minimum $800). Federal rules are in IRC §§ 1361–1362.
- PTET (either entity): R&TC §§ 19900–19906 — flat 9.3 percent on each consenting owner’s California-source income (election sunsets after the 2025 tax year unless extended).
2025 Entity-Level Tax Matrix
| Feature | LLC (taxed as partnership or disregarded) | S-Corp |
|---|---|---|
| Minimum Tax | $800 every year (no first-year holiday in 2025) | $800 waived for entities formed on or after Jan 1 2020 |
| Income-Based Tax | None (aside from elective PTET) | 1.5 percent of California net income (3.5 percent for financial corps) |
| Gross-Receipts Fee | $900 – $11,790 once CA receipts reach $250,000 | None |
| PTET Eligibility | Yes, if all qualifying members consent | Yes, if all qualifying shareholders consent |
| Owner Compensation | Draws; self-employment tax if active | W-2 salary (reasonable comp) plus distributions |
| Key CA Forms | FTB 3522 ($800); FTB 3536 (fee); Form 568; PTET vouchers (3893) | Form 100-S; PTET vouchers (3893) |
| Key Federal Forms | Form 1065 + K-1s or Schedule C | Form 1120-S + K-1s |
Worked Example — NeuroStream AI
| Item (2025) | LLC | S-Corp |
|---|---|---|
| CA Net Income | $1,200,000 | $1,200,000 |
| CA Gross Receipts | $1,200,000 | $1,200,000 |
| Entity-Level Tax (before PTET) | $800 + $6,000 fee = $6,800 | 1.5 % × 1.2 M = $18,000 (≥ $800) |
| PTET (if elected) | + $111,600 (9.3 % of $1.2 M) | + $111,600 |
| Total Federal Deduction | $118,400 | $129,600 |
| CA Credit Passed to Owners | $111,600 | $111,600 |
Take-away: At lower revenue levels, an LLC usually has the smaller California tax burden. An S-Corp may justify its higher entity tax with payroll-based § 199A benefits and investor preferences.
Step-by-Step Decision Guide
- Project three-year revenue and profit.
- Compare entity taxes.
- LLC: $800, potential gross-receipts fee, optional PTET.
- S-Corp: 1.5 percent of income (minimum $800), optional PTET.
- Assess payroll needs. If founders must draw salaries, S-Corp mechanics may already align with their plans.
- Model the PTET. Pay Voucher 3893 by June 15 2025 to keep the option alive.
- Run a § 199A analysis. S-Corp W-2 wages can boost the qualified business income deduction.
- Consider exit scenarios. Venture investors often prefer a C-Corp; converting from an S-Corp is simpler than from an LLC taxed as a partnership.
- Document the decision. Keep minutes or an operating-agreement memo showing projections and reasoning.
Conclusion
Choosing between an LLC and an S-Corp in California hinges on revenue scale, owner payroll needs, the elective PTET, and long-term fundraising plans. A quick comparison of state taxes alone can be misleading; run full cash-flow models before filing Articles or electing S-Corp status.
Call to Action
Need a side-by-side cash-flow model tailored to your 2025 projections? Schedule a strategy session with Anshul Goyal, CPA EA FCA today: https://calendly.com/anshulcpa/
Disclaimer
This content is for educational purposes only; consult a qualified professional regarding your specific situation.
Top 5 FAQs
| Question | Short Answer |
|---|---|
| 1. Does an S-Corp pay the $800 in year 1? | No, first-year waiver applies to corporations formed on or after January 1 2020. |
| 2. Can a single-member LLC elect S-Corp status? | Yes, file IRS Form 2553 and start paying the 1.5 percent CA tax after election. |
| 3. Does the LLC fee continue after converting to S-Corp? | No, the fee under § 17942 stops once the entity is taxed as a corporation. |
| 4. Can I switch from LLC (partnership) to S-Corp mid-year? | Possible via an asset transfer or § 351 exchange, but it creates a short tax year and usually a new EIN. |
| 5. Are PTET credits treated the same for both structures? | Yes, unused credits carry forward up to five years on the owners’ CA Form 540. |
About Our CPA
With 15 years of U.S. and international tax experience, Anshul Goyal, CPA EA FCA has prepared more than 20,000 tax returns and helped clients save over $200 million. As Managing Partner of Kewal Krishan & Co., he guides AI and SaaS founders through entity choice, PTET planning, and venture-scale tax strategy.