Key Takeaways

• The entity you choose, LLC, C corporation, S corporation, changes both what taxes you pay in California and how much.
• Almost every California entity owes the $800 annual minimum franchise tax, with limited first-year relief that currently applies to corporations but not to newly formed LLCs.
• LLCs face a separate fee on top of the $800 once California-source income crosses a threshold; corporations do not pay that fee.
• C corporations pay an 8.84% franchise tax on net income; S corporations pay 1.5%. Both have the $800 floor.
• Self-employment tax, estimated payments, and how income flows to your personal return all turn on your structure, so the tax picture is worth mapping before you commit.

California Business Taxes: How Your Entity Choice Changes What You Owe

The structure you pick for your business is not just a legal decision, it is a tax decision, and in California the tax consequences are real money. The same profit can produce noticeably different tax bills depending on whether you operate as an LLC, a C corporation, or an S corporation. Here is a plain-language map of how California taxes each structure, so you can see what you are signing up for before you commit. Tax figures change, so treat the specific numbers here as a starting point and confirm your situation with a CPA or the Franchise Tax Board.

The one tax almost everyone pays: the $800 minimum

Start with the tax that catches the most people by surprise. California imposes an $800 annual minimum franchise tax (sometimes called the annual tax) on most business entities, LLCs, corporations, limited partnerships, and limited liability partnerships. You owe it whether your business made a profit, broke even, or lost money. As of this writing the minimum is $800 per year; confirm the current amount with the Franchise Tax Board.

There is one important wrinkle on first-year relief. Newly formed corporations are generally exempt from the minimum franchise tax in their first taxable year. That first-year break used to apply to LLCs as well, but it has lapsed for LLCs formed in recent years, so an LLC you form today generally owes the $800 in its first year while a brand-new corporation does not. This LLC-versus-corporation difference trips up a lot of new owners, so it is worth confirming your specific first-year obligation before you budget.

The LLC’s extra layer: the gross-receipts fee

LLCs carry a second California cost that corporations do not. On top of the $800 minimum, an LLC owes an additional fee once its total California-source income reaches $250,000, and the fee climbs in tiers as income rises. As of this writing, the tiers under California law work roughly like this:

• Total California income under $250,000: no fee.
• $250,000 to just under $500,000: $900.
• $500,000 to just under $1,000,000: $2,500.
• $1,000,000 to just under $5,000,000: $6,000.
• $5,000,000 and above: $11,790.

A key detail many owners miss: this fee is based on total income (essentially gross receipts), not net profit. An LLC with thin margins but high revenue can owe a meaningful fee even in a year it barely breaks even. These tier amounts have held steady for a long time, but they are set by statute and can change, so confirm the current schedule with the Franchise Tax Board. A corporation, by contrast, does not pay this gross-receipts fee at all, which can make a corporation more tax-efficient for a high-revenue, low-margin business, one reason entity choice and tax planning go together.

How each structure is taxed on its profits

Beyond the $800 and the LLC fee, the structures diverge on how profits themselves are taxed.

Default LLC (taxed as a sole proprietorship or partnership). The LLC itself generally pays no income tax on its profits; the income passes through to the owners’ personal returns, where it is taxed at personal rates. The owners also pay self-employment tax on their share of the profit. So the LLC’s California cost is the $800 plus any gross-receipts fee, while the income tax happens on the owners’ personal returns.

C corporation. A C corporation pays California’s corporate franchise tax of 8.84% on its net income (with the $800 minimum as a floor). Then, if it distributes profits as dividends, shareholders are taxed again on those dividends on their personal returns. That is the double taxation associated with C corporations, though it bites less for a company reinvesting its profits rather than paying them out.

S corporation. An S corporation’s income passes through to shareholders for federal purposes, avoiding the federal entity-level tax. California, however, still imposes a 1.5% franchise tax on the S corporation’s net income, again with the $800 minimum floor. So an S corporation in California is taxed once at the shareholder level plus that 1.5% at the entity level.

As of this writing the rates are 8.84% for C corporations and 1.5% for S corporations; confirm current rates before relying on them.

A side-by-side to make it concrete

Imagine, as a hypothetical illustration, three California businesses each netting $300,000 in a year, to see how structure shapes the bill. The default LLC pays the $800 minimum plus the $900 gross-receipts fee that kicks in at that revenue, and its owner pays personal income tax plus self-employment tax on the full $300,000 of profit. The S corporation pays the $800 minimum plus California’s 1.5% on its net income, and its owner-employee splits the income into a reasonable salary (subject to payroll tax) and distributions (generally not), trimming the self-employment-style tax, though the owner now also runs payroll. The C corporation pays 8.84% on its net income and no gross-receipts fee, but if it distributes profits to the owner as dividends, those dividends are taxed again on the owner’s personal return. These figures are illustrative only and not a prediction for any real business; the actual numbers turn on facts specific to you, which is why this is worth modeling with a CPA rather than estimating from an example.

No single structure wins this comparison outright, which is exactly the point. The default LLC is simplest but exposes the most income to self-employment tax and adds the fee. The S corporation can reduce that tax but adds payroll and the 1.5%. The C corporation sidesteps both the fee and self-employment tax but risks double taxation if it pays out profits. The best answer flips depending on margins, how much profit the owner takes home versus reinvests, and growth plans, which is why this is worth modeling with a CPA rather than guessing. Treat the figures above as illustrative, not as your actual numbers.

Self-employment tax: a structure-driven cost

For owners of default-taxed LLCs and sole proprietorships, self-employment tax, covering Social Security and Medicare, applies to essentially all of the business’s net profit. This is a significant cost and a major reason some owners eventually elect S corporation treatment, which lets them split income into a salary (subject to payroll tax) and distributions (generally not), potentially reducing the total. That election is its own decision with its own trade-offs, and it pays off mainly once profits are high enough to justify the added payroll and accounting. The point here is simply that your structure determines how much of your income is exposed to these taxes.

Estimated payments and key deadlines

Whatever your structure, California generally expects taxes to be paid as you go, not in a lump at filing. Business owners typically make estimated tax payments through the year, and the entities themselves have their own deadlines. LLCs, for example, prepay the $800 annual tax and, if applicable, the gross-receipts fee on separate schedules during the year, then reconcile on the LLC return. Corporations make estimated payments toward their franchise tax. Missing these interim deadlines can trigger penalties even if you ultimately pay in full, so it is worth knowing your entity’s specific dates or having your accountant track them. Because these deadlines and the related forms change, confirm the current schedule with a CPA or the Franchise Tax Board.

Putting it together

The headline is that entity choice and tax exposure are inseparable in California. A default LLC keeps things simple but exposes profit to self-employment tax and adds the gross-receipts fee at higher revenue. A C corporation avoids that fee and the self-employment tax but faces 8.84% and potential double taxation on distributions. An S corporation threads a middle path, pass-through income plus 1.5%, but only if it qualifies and the owners run payroll. No single one of these is best for everyone; the right answer depends on your revenue, margins, how you take money out, and your growth plans, and is worth confirming with a CPA.

This is exactly the kind of decision worth mapping out with both an attorney and a CPA before you commit. Bay Legal works alongside your tax advisor to structure your business with the full tax picture in view. For guidance on your specific situation, call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

The bottom line

In California, the same dollar of profit can be taxed quite differently depending on your structure. Almost everyone pays the $800 minimum; LLCs add a revenue-based fee; C corporations pay 8.84% with possible double taxation; S corporations pay 1.5% with pass-through income; and self-employment tax weighs heavily on default LLCs and sole proprietors. Understanding this map before you choose, and revisiting it as you grow, is one of the higher-return moves a California business owner can make.

Want help mapping your structure to the most efficient tax outcome? For guidance on your specific situation, call (650) 668-8000 or schedule a consultation at baylegal.com/contact.

Frequently Asked Questions

How does your business structure affect your California state tax obligations?

Your structure determines both which taxes apply and at what rate. Almost every entity owes the $800 minimum franchise tax. LLCs add a revenue-based gross-receipts fee. C corporations pay 8.84% on net income with possible double taxation on dividends, while S corporations pay 1.5% with income passing through to shareholders. Self-employment tax falls heavily on default-taxed LLCs and sole proprietors.

What is the California franchise tax and which entities pay it?

California’s franchise tax includes an $800 annual minimum that applies to most entities, LLCs, corporations, LPs, and LLPs, regardless of profit. C corporations pay 8.84% of net income and S corporations pay 1.5%, each with the $800 minimum as a floor. Newly formed corporations generally get a first-year exemption from the minimum that no longer applies to newly formed LLCs.

How is self-employment income taxed for California LLC owners?

For a default-taxed LLC, the profit passes through to the owners, who pay personal income tax and self-employment tax (Social Security and Medicare) on essentially the full profit. Electing S corporation treatment can reduce self-employment tax by splitting income into salary and distributions, though it adds payroll and accounting requirements.

What are estimated tax payment requirements for California business owners?

California generally expects taxes to be paid throughout the year. Owners typically make estimated payments, and entities have their own interim deadlines, such as LLCs prepaying the $800 tax and the gross-receipts fee on separate schedules. Missing these can trigger penalties even if you later pay in full, so confirm your entity’s dates.

How do California taxes compare for LLCs, corporations, and S corps?

A default LLC pays the $800 minimum plus a revenue-based fee, with profit exposed to self-employment tax. A C corporation pays 8.84% and no gross-receipts fee but faces possible double taxation. An S corporation pays 1.5% with pass-through income but must qualify and run payroll. The most efficient choice depends on revenue, margins, and how you take money out.