California LLC: S corp or C corp?

California at a glance

What is different about California?

California is the state where an S corporation is not tax-free. The Franchise Tax Board taxes every S corp with California income at 1.5% of net income, on top of the $800 minimum franchise tax that every corporation owes whether it is active, inactive or losing money. A plain LLC owes its own $800 annual tax, plus a fee of $900 to $11,790 once California income reaches $250,000. So the S election does not erase the entity-level bill. It swaps the LLC fee for a 1.5% levy on net income after your salary. The C corp route skips the pass-through and pays a flat 8.84% on its own. The numbers are close enough that your profit level, not the label, decides it.

Does California recognize a federal S corp election?

California recognizes your federal S election, but it does not leave the S corporation untaxed. The FTB taxes every S corp with California income at 1.5%, and the $800 minimum franchise tax is due in the first quarter of each accounting period. You file Form 100S, due the 15th day of the 3rd month after year-end, and the IRS approval is the only election you need. If your income is split between California and other states, Schedule R apportions it. A brand-new S corp that did no California business in a year of 15 days or fewer can have the minimum waived.

Does my LLC need a separate California election or form?

California has no separate S election form on the FTB's S corporation page; the S corp files California Form 100S each year, due the 15th day of the 3rd month after year-end.²

What does California tax an S corp or LLC at the entity level?

• A California S corporation pays 1.5% of its California net income, with an $800 minimum franchise tax due every year.³
• A California LLC pays an $800 annual tax, plus an LLC fee of $900 to $11,790 once its California income reaches $250,000.⁵
• An LLC with more than $250,000 of California income pays a graduated fee, from $900 up to $11,790, on top of the $800 tax.⁷
• California waives the minimum tax for a new S corporation that did no business in California and whose first taxable year was 15 days or fewer.⁸

Is a California LLC taxed as a C corp ever better?

A California C corporation pays a flat 8.84% of net income, according to the FTB, and never less than the $800 minimum franchise tax. There is no break for a small corporation. Profit taxed at the corporate level is taxed again when you take it out as a dividend, and California taxes that personal income at graduated rates up to 12.30%. For that reason a C corp makes sense in California mostly when you plan to keep earnings in the company rather than pay them out.

Run your California numbers

In California the S election starts to pay when your net profit is large enough that the payroll-tax savings on distributions beat the 1.5% entity tax. The $800 minimum is due as an LLC or an S corp, so it is not a deciding cost. The real extra cost is the 1.5% on net income after your salary. Below roughly the point where your salary alone eats the profit, you may save nothing.

How much would a California LLC owner save as an S corp?

Assumes a 60% salary¹⁰ and a single filer. Income tax is left out. C corp dividends are taxed again.

When is the Form 2553 deadline for a California LLC, and what if I miss it?

Late relief: federal steps, deadline guide.

What to do next

More on California: How to start a California LLC · How to start a California corporation · California LLC cost · California annual report · Annual report late fees by state

Common questions