LLC vs C Corp vs S Corp: The Tax Decision California Owners Can’t Afford to Get Wrong
Most California business owners assume that choosing between an LLC, C Corp, or S Corp is simply paperwork or branding. Here’s the reality: the wrong move can bleed five or even six figures in avoidable taxes over your business life—and it’s almost never a one-size-fits-all answer. Today, we’re breaking down what the difference between c and s corp for llc means for your bottom line in 2025, who should care, and why quick, cheap legal paperwork from a site or attorney can actually cost you tens of thousands in lost savings or added risk with the IRS.
Bottom Line Quick Answer: Choosing between an LLC taxed as a sole prop, an S Corporation, or a C Corporation fundamentally changes your tax rates, how you pay yourself, and your audit exposure. S Corp status nearly always benefits CA solos and small partnerships profitable beyond $60,000/year, while C Corps are mostly for startups planning massive outside investment or a public exit. But the devil is in the details—and in California, the Franchise Tax Board (FTB) adds extra traps you won’t face in most states. This blog reveals the real math, the must-know IRS forms, and plain English examples for every owner type so you can stop leaving money on the table.
This information is current as of 12/22/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.
The Entity Election Trap: Why Your LLC Status Isn’t Enough
Most entrepreneurs form an LLC thinking they’re done—it’s safe, it’s flexible, and it avoids “double taxation.” But here’s what the average owner misses: the IRS doesn’t inherently recognize LLCs for federal taxes. Instead, your LLC defaults to either sole proprietor (if one owner) or partnership (if more than one owner), unless you affirmatively elect S Corp or C Corp status (via IRS Form 2553 or 8832, respectively). Failing to make the right election means defaulting to tax treatment that may not fit your profit level—or your long-term risk tolerance.
For example, a single-member LLC will funnel all net business profit onto your personal 1040 using Schedule C, subjecting every dollar to ordinary income tax rates plus 15.3% self-employment tax. A C Corp, by contrast, gets hit with 21% flat corporate federal tax, but faces a second round of tax (dividends) if you pull out the earnings. S Corps, on the other hand, offer both corporate legal protection and pass-through tax savings—as long as you play by the IRS’s reasonable salary rules (see IRS Form 1120-S).
What about partnership LLCs? California FTB taxes all LLCs a minimum of $800 annually, with an additional gross receipts fee above $250,000—even if you lose money. If you haven’t analyzed your gross receipts or considered your profit split, you may be overpaying every year. This is a hidden drain for real estate partnerships and service businesses alike.
Looking to align your business’s unique profit pattern or number of owners? Our business owner persona page explains how tailored strategies outperform cookie-cutter legal filings.
S Corp Election: The Self-Employment Tax Shield Most Owners Ignore
If your LLC’s net profits are consistently above $60,000, electing to be taxed as an S Corporation can deliver major tax savings. Why? The S Corp allows you to split your income into two pieces: a “reasonable” salary (subject to payroll taxes) and the remainder as a profit distribution, which is not hit by self-employment tax. For most professional services (lawyers, consultants, real estate agents, marketing agencies, tech freelancers), this lets you shave $6,000–$25,000 per year off your tax bill legally.
Here’s direct math for a solo CA LLC with $150,000 net annual profit:
- Default LLC (Schedule C): $150,000 taxed at your personal income tax rate + $22,950 SE tax
- S Corp Election: Take a $70,000 salary (~$10,710 payroll tax). Remaining $80,000 as distribution (no payroll tax). Self-employment tax savings: $12,240 per year.
Of course, the IRS watches for owners who set implausibly low salaries. See the IRS’s own guidance on reasonable compensation. And don’t ignore California’s $800 minimum franchise fee, or its 1.5% S Corp tax (on net CA income only).
Pro Tip: For a complete breakdown of S Corp strategies, see our comprehensive S Corp tax guide.
Want to see how salary and distributions affect your specific taxes? We recommend testing scenarios with this small business tax calculator before making the leap.
KDA Case Study: Marketing Consultant Doubles Retirement Savings—and Cuts Tax Bill $18,700
Jessica, a San Diego marketing consultant with a single-member LLC, earned $120,000 net after expenses. For two years, she paid self-employment and income tax as a default LLC, netting about $85,000 after all taxes. We restructured her setup to elect S Corp status, ran payroll of $60,000 (documented with industry wage data), and took the rest as K-1 profits. Her first-year self-employment tax dropped by $9,000. Plus, by running her own W-2, she qualified for $19,500 pre-tax 401(k) deferral—more than double the pure Schedule C limit at her income. Consulting fee: $3,200; first-year net tax and retirement savings: $18,700.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
When a C Corp Actually Makes Sense (and the Overlooked Double Taxation Trap)
C Corporations get touted by some legal planners because of the flat 21% federal tax rate and unlimited number of shareholders. But for most service businesses and small real estate shops, running an LLC taxed as a C Corp means you’ll pay that 21% corporate tax on profits and a second tax when you pay yourself dividends—often at your highest ordinary rate. Unless you expect to accumulate profits in the business for years or are planning to raise venture capital, this “double tax” will wipe out any notional advantage over a properly run S Corp or pass-through LLC.
Example: A Los Angeles design firm did $300,000 net in profits. As a C Corp, $63,000 went to federal tax at 21%. If the owners paid out the rest as dividends, they’d face another 15%–20% tax, plus CA state tax. Total out-of-pocket? Over $93,000—nearly 31%. Compare to an S Corp or partnership, and you’re usually thousands ahead each year.
Still, the C Corp has its place. If your growth plan involves outside investors, stock options, accruing large benefits (like health or group life insurance), or selling the company outright in a few years, the C Corp may be strategic. Just know: for most local CA LLCs, C Corp status is rarely optimal for ongoing tax efficiency.
If evaluating a C Corp, schedule a session to model your pay and profit patterns alongside your exit goals. Our entity formation service can help you avoid irreversible mistakes at setup.
Common Mistake That Triggers an Audit: The DIY S Corp Disaster
Red Flag Alert: The #1 error we see? Turning an LLC into an S Corp without running verifiable payroll or reporting a reasonable salary via payroll tax forms (941/940). The IRS regularly audits S Corps where owners don’t run payroll, or pay themselves below-market wages—expecting past tax savings to be clawed back, plus interest and penalties.
- Neglecting to file IRS Form 2553 timely (due March 15 for new S Corps!)—see official IRS Form 2553 guidance.
- Taking all income as distributions, zero as salary—major audit trigger.
- Missing CA minimum franchise tax, LLC fee, or Secretary of State filings.
This isn’t just a theoretical risk. The IRS, per annual reports, recoups millions each year by busting improper S Corps for payroll avoidance or missed filings. The fix: use a professional payroll provider, document salary rationale, and keep up with both federal and CA filings—including Form DE-9 with EDD on California wages.
Can I Switch My Current LLC to S Corp or C Corp This Year?
Yes, but timing (and paperwork) matters. IRS rules require you to file Form 2553 (S Corp) or 8832 (C Corp) within strict windows—usually by March 15 for tax year changeovers, or within 75 days of entity formation for new LLCs. In some cases, late election relief is possible, but the IRS and FTB are less lenient with habitual late filers. Always map your multi-year profit projections before switching—switching tax status annually can spook the IRS and increase odds of audit. Ask your tax strategist to model multi-year scenarios and confirm the ROI before pulling the trigger.
FAQ: Key Differences, Qualifying, and Risk Factors
- What’s the difference between S Corp and C Corp for my LLC? S Corps: Avoid double tax, pass profits to owners, but limits on owners and stock types. C Corps: Flat 21% corporate tax, no owner or share limit, but pay double tax when profits are distributed.
- Who should pick S Corp? LLCs with net profits above $60,000/year, stable ownership, and service-oriented (not passive investor) models benefit from S Corp election unless investing or going public is a near-term goal.
- Who should stick to default LLC? Brand-new businesses earning under $50,000/year, side hustlers, or anyone not yet ready for payroll admin may keep the default until outsized profits justify S Corp admin.
- Will this trigger an audit? The IRS scrutinizes S Corps failing to pay real wages—use wage benchmarking tools and keep payroll records for all owner-employees.
- What do I need to do for CA compliance? All LLCs pay $800/yr minimum tax (even if losses), complex gross receipts fees kick in at $250K+, and S Corps owe 1.5% CA tax plus business owner payroll filings.
Book Your Tax Strategy Session
Don’t let a quick or “cheap” LLC or corporation setup cost you five figures in taxes or bring an unwanted audit notice. Book your custom entity and tax strategy session with a real California adviser who will model your unique profit path, run entity math, and set you up to take home more—safely. Book your tax strategy consultation now before deadlines or audit letters hit.
