Two partners in Rancho Cucamonga run a marketing agency billing about $600,000 a year. Every national article they read on entity choice says roughly the same thing: a C corporation if you will raise venture money, otherwise an LLC or an S corporation. None mentions what California charges for each, or that a Wyoming LLC will not change the bill.
For an Inland Empire business that will live its whole life here, the state layer is often the bigger number.
How much does California tax an LLC, S corporation or C corporation each year?
Every one of them owes at least $800. An LLC pays an annual tax under Cal. Rev. & Tax. Code § 17941 equal to the corporate minimum in section 23153, owed until it cancels, active or not. A corporation pays the greater of $800 or a tax on net income: 8.84 percent under section 23151, or 1.5 percent for an S corporation under section 23802.
The LLC also pays a fee under section 17942 measured by total California income, meaning gross income plus cost of goods sold. Profit is irrelevant. The fee is $900 from $250,000, $2,500 from $500,000, $6,000 from $1 million, and $11,790 at $5 million. An LLC that loses money on $1.2 million of receipts still owes $6,000.
Under section 23153(f), a new corporation skips the minimum tax in its first year, though an S corporation still pays 1.5 percent on first-year income. The LLC first-year exemption for 2021 through 2023 has expired. SB 122, signed June 29, 2026, added section 17941(g)(2), setting the first-year LLC tax at $400 for taxable years beginning in 2027 through 2029. The same $800 follows a rental house held in an LLC, as I discussed in the post on LLCs and trusts for rental property.
Watch year-end dates. Under section 23114, a corporation with a taxable year of 15 days or less and no business in it owes nothing for that stub, and the FTB’s Form 568 instructions give LLCs a matching rule. An LLC organized in mid-December 2026 that opens immediately owes $800 for 2026 and misses the $400 rate.
How do the numbers compare for a $600,000 business in Rancho Cucamonga?
Illustratively, give the agency two equal owners and put it in its third year. All $600,000 of revenue comes from California clients, and staff, rent and software cost $240,000, leaving $360,000 before the owners are paid.
As an LLC taxed as a partnership, the company owes $800 plus a $2,500 fee, $3,300 in all, and each owner reports $180,000. As an S corporation paying each owner $100,000, with an assumed $16,000 of employer payroll taxes, net income is $144,000 and the 1.5 percent tax is $2,160, with no fee.
As a C corporation with the same salaries, California takes 8.84 percent of $144,000, about $12,730, before the 21 percent federal rate in 26 U.S.C. § 11(b), and any later dividend is taxed again to the owners. The S corporation comes out about $10,570 ahead of the C corporation. Its edge over the LLC grows in a bad year, when it owes only $800 while the LLC still pays a fee on gross receipts.
Can a doctor, dentist, lawyer or CPA practice through a California LLC?
No. Cal. Corp. Code § 17701.04(e) bars an LLC from rendering professional services here, as Corp. Code § 13401(a) defines them: services lawful only under a license authorized by the Business and Professions Code, the Chiropractic Act or the Osteopathic Act. A checklist steering a Riverside dental practice toward an LLC recommends something California forbids.
The usual answer is a professional corporation under the Moscone-Knox Professional Corporation Act, Corp. Code § 13400 et seq., whose shares go only to licensed persons under section 13406(a). It can elect S status, paying 1.5 percent and the $800 minimum with no fee. Lawyers, accountants and a few design professions may also use a registered limited liability partnership under Corp. Code § 16101, which owes $800 under Rev. & Tax. Code § 17948 but no fee.
What rules govern a California LLC that never signed an operating agreement?
The Revised Uniform Limited Liability Company Act, Corp. Code § 17701.01 et seq., fills the gaps. Each member owes the loyalty and care duties in section 17704.09, changeable only in a written agreement with informed consent. Under section 17704.04, profits and distributions follow the recorded value of contributions, so partners who split the work evenly but recorded only one partner’s $50,000 have a lopsided default.
A member may withdraw at any time under section 17706.01, and without a written buyout term keeps only a transferee’s right to future distributions. A member’s personal creditor gets a charging order, the exclusive remedy under section 17705.03(f). Section 17707.03(c) gives the others a buyout right in a dissolution suit.
A corporation runs on bylaws, minutes and a board under Corp. Code § 300(a). With 35 or fewer shareholders it can elect close corporation status under section 158 and operate by shareholders’ agreement under section 300(b), and section 2000 offers its own buyout. Done properly, neither form is light on paper; the LLC’s risk is that its defaults run silently.
Will a Wyoming or Delaware LLC avoid California’s $800 tax?
No. Section 17941 reaches any LLC doing business here under section 23101, wherever formed, and a company run from California is commercially domiciled here under section 23101(b)(1), with no dollar test. The thresholds matter for outside companies with a small footprint. The FTB’s 2025 figures were $757,070 of California sales or $75,707 of property or payroll, or 25 percent of the total. The FTB had not posted 2026 amounts when I checked in October 2026.
The foreign LLC must also register under Corp. Code § 17708.02. Until it does, section 17708.07(a) bars it from suing in California, and the FTB describes a $2,000 penalty for doing business unregistered. The owner pays two states. A passive investor is different: in Swart Enterprises, Inc. v. Franchise Tax Board, 7 Cal. App. 5th 497 (2017), a 0.2 percent member of a manager-managed LLC was not doing business here. Not so for an owner working in Ontario.
When does an S election save California owners money?
The savings are mostly federal. A working LLC member generally pays self-employment tax under 26 U.S.C. § 1401 on the whole share, while an S corporation owner pays payroll tax only on wages. The IRS requires reasonable compensation first and looks at how much revenue the owner’s own services produce. My $100,000 salaries are an assumption; if the owners personally generate most of the revenue, the IRS could push higher.
California taxes wages, profit shares, dividends and gains alike as ordinary income, up to 12.3 percent plus the 1 percent tax over $1 million in section 17043, or 13.3 percent. The 3.8 percent tax in 26 U.S.C. § 1411 is federal and generally hits business income only for passive owners.
The PTE elective tax under section 19900 lets a partnership-taxed LLC or an S corporation pay 9.3 percent at the entity level, deduct it federally as IRS Notice 2020-75 permits, and pass a credit to owners. After SB 132 the FTB lists it through 2030, and from 2026 a missed June 15 prepayment cuts the credit by 12.5 percent instead of voiding the election. With the cap in 26 U.S.C. § 164(b)(6) at $40,400 for 2026, phasing down above $505,000 of income, owners at $180,000 may gain little from it.
Is the C corporation QSBS exclusion worth anything in California?
Only federally. Rev. & Tax. Code § 18152 says 26 U.S.C. § 1202 does not apply in California. The state’s own version, former section 18152.5, required 80 percent of assets and payroll in California; Cutler v. Franchise Tax Board, 208 Cal. App. 4th 1247 (2012), held that requirement unconstitutional as applied to the companion deferral rule. AB 1412 (2013) granted partial relief for 2008 to 2012 sales and let the section lapse January 1, 2016. Friday’s post covers QSBS gifting.
| California issue | LLC (partnership) | S corporation | C corporation |
|---|---|---|---|
| Entity tax | $800; $400 first year for years beginning 2027 to 2029 | 1.5% of net income, $800 minimum | 8.84% of net income, $800 minimum |
| Receipts fee | $900 to $11,790 from $250,000 of California income | None | None |
| Owner level | Profit share taxed when earned; self-employment tax | Wages plus profit share; payroll tax on wages only | Wages, then dividends taxed again |
| Licensed professionals | Not allowed | Professional corporation | Professional corporation |
| Returns and paperwork | Form 568, FTB 3522, FTB 3536; operating agreement | Form 100S, payroll, bylaws | Form 100, payroll, bylaws |
| QSBS | No | No | Federal only |
Frequently Asked Questions
Do I owe California’s $800 tax if my LLC made no money?
Yes. A California-organized or registered LLC owes the annual tax every year until it cancels, even with no income. The separate fee starts at $250,000 of California income. For a first taxable year beginning in 2027 through 2029, the tax is $400.
Is an S corporation cheaper than an LLC in California?
Often, because 1.5 percent of net income can be less than $800 plus the receipts fee. In exchange you run payroll, pay each working owner a reasonable salary, and live within federal limits such as one class of stock.
Can my California LLC be taxed as an S corporation?
Yes. California follows the federal election, so the LLC files Form 100S, pays 1.5 percent with an $800 minimum, and drops the LLC fee. The LLC act still governs its internal affairs, so the operating agreement still matters.
If I form my LLC in Wyoming, do I still owe California tax?
If you run it from California, yes. It is commercially domiciled and doing business here, so it must register and pay the $800 tax and any fee, on top of Wyoming’s own charges.
Does California allow the federal QSBS exclusion?
No. Section 18152 turns off section 1202 for California, and the state’s own version lapsed after the Cutler decision. The federal exclusion may still apply, but California taxes the whole gain at rates up to 13.3 percent.
How North Star Law Firm Can Help
North Star Law Firm sets up California companies through its entity formation practice and models the state and federal numbers through entity selection and S corporation planning. Since the statutory defaults decide whatever nobody writes down, it also drafts operating and shareholder agreements. Phillip Zagotti is a California attorney and a CPA, admitted to the U.S. Tax Court.
Before you form or restructure a company, contact North Star Law Firm or schedule a consultation.