S Corp vs C Corp vs LLC: The 2025 California Entity Dilemma That Can Add or Drain $20,000 from Your Taxes
Ask a dozen California entrepreneurs how they chose their business entity and you’ll hear a mix of fear-driven stories, “advice from my buddy,” and horror tales of five-figure tax hits. The real difference between an S Corp, C Corp, and LLC isn’t what you heard at a WeWork mixer—or what your first lawyer scribbled on a napkin. The wrong pick racks up $10,000 or more in avoidable taxes and turns innocents into audit bait every year. Here’s the 2025 reality check: each entity can swing your true net profit by as much as 15%, and California’s Franchise Tax Board (FTB) is relentless if you get it wrong.
Quick Answer: How Entity Choice Impacts California Taxes in 2025
S Corp, C Corp, and LLC aren’t just names—they are fundamentally different tax engines. In 2025, California LLCs get hammered with “gross receipts” taxes, S Corps can cut self-employment taxes by thousands, and C Corps create double taxation risks unless you’re a high-growth company aiming to reinvest profits. For most independent contractors, professionals, and small employers, the entity choice can directly decide if you keep an extra $8,000–$20,000 or bleed it away in IRS and FTB checks. The best choice depends on how you get paid (salary vs draws vs dividends), how much you net (over/under $100K), and whether you want outside investment or to stay lean.
This information is current as of 10/20/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.
The Real Cost Structure: How LLCs, S Corps, and C Corps Are Taxed in 2025
If you operate an LLC in California, you start with a mandatory $800 annual franchise fee—no exceptions. But most entrepreneurs don’t realize that once gross receipts cross $250,000, additional LLC fees stack on top. For example, a consulting firm clearing $1.5M in gross receipts pays $6,000 per year in extra state LLC fees alone (see FTB LLC Fee Schedule).
S Corps, on the other hand, pay a flat 1.5% of net income to the FTB but avoid the self-employment tax hit on amounts paid as distributions instead of salary. C Corps are hit twice: once on the corporate profits (21% federal + 8.84% state) and again when owner-shareholders take money out as dividends—adding 20%–23.8% in federal dividend tax, with dividends not deductible to the company.
Example 1: If “Erin,” a successful designer netting $185,000 forms an LLC, she’s taxed like a sole proprietor—her entire profit hits her personal tax return and is subject to both federal and California income tax, plus self-employment tax (about $19,000 in extra FICA/Medicare liability). If she converts to an S Corp and pays herself a $90,000 reasonable W-2 salary, she avoids self-employment tax on the remaining $95,000, typically saving $12,900 in a single year. If she made the C Corp move instead, after payroll and profits, she could lose $8,000+ to double taxation—unless she’s reinvesting those profits for long-term growth.
KDA Case Study: W-2 Entrepreneur Turns $13,200 Loss Into $9,900 FTB Refund
“Darren” was a Los Angeles-based tech consultant who ran his $250K solo LLC as a disregarded entity for years. He pulled everything as owner draws, never paid himself on payroll, and never asked if there was a smarter way. When the FTB audited his books in 2024, he faced a $13,200 assessment because he’d failed to correctly report LLC gross receipts fees and didn’t have documented payroll—plus he overpaid on self-employment taxes. Working with KDA, we restructured his entity into an S Corp, implemented payroll at a market-justified $90,000, and corrected the past two years of filings. The result: a $9,900 refund from the state, $8,600 in FICA savings, and FTB agreed to waive $2,800 in penalties after we showed clear documentation and reasonable cause. Darren’s costs with KDA were $3,000—netting a 6x first-year ROI.
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.
Unpacking the Pros and Cons: S Corp vs C Corp vs LLC
To pick the right entity in 2025, you need to stop thinking forms and start thinking cash flow and risk. Here’s the actual breakdown for most taxpayers:
- LLC – “Default” Trap: Single-member LLCs are taxed as sole proprietors by default, which stacks self-employment tax (15.3%) on every cent of net profit. California adds “gross receipts” fees once you cross $250K, which can snowball fast. Great for holding real estate or partnership flexibility, but expensive for high-profit personal services unless you elect S Corp status.
- S Corp – Payroll Gamechanger: An S Corp lets you split profit between “reasonable” owner salary (subject to full payroll taxes) and shareholder distributions (not subject to FICA/Medicare), often saving $8K-$15K per $100K above your reasonable salary. However, the IRS can reclassify distributions as salary if they think you’re getting too cute. California S Corps owe $800 minimum tax and 1.5% of net income to the FTB.
- C Corp – Double Tax Dilemma: C Corps face a flat 21% federal rate (plus 8.84% state) on corporate profits, and then owners pay again for dividends. For small business or solo owners not seeking outside investments or big employee benefits, the math rarely works. However, if you want to IPO, raise major capital, or park earnings for new ventures, C Corp is worth exploring.
For a complete breakdown of S Corp strategies, see our comprehensive S Corp tax guide.
Most Common Mistake: “Set It and Forget It” Entity Syndrome
Too many California business owners make a knee-jerk decision—then never revisit their entity as profits grow or their goals shift. The two biggest audit or penalty traps in 2025 are:
- Leaving a high-profit LLC taxed on the full self-employment stack for years—overpaying $10k/year or more in FICA
- Failing to actually run payroll through your S Corp, thinking “I can just spike my distributions” without IRS consequences
Red Flag Alert: The IRS handed out more than 12,400 penalties to S Corp owners in California in 2023 for unreasonable compensation and payroll noncompliance (see S Corp IRS guidance). Most were preventable with basic documentation and a periodic entity review.
Side-by-Side Math: The True 2025 Take-Home for $200K California Earners
Let’s run the real numbers for a $200,000 profit, single-owner professional in California.
| Entity | Total Federal + CA Tax | Payroll Taxes | Net to Owner |
|---|---|---|---|
| LLC (solo) | $59,000 | $30,600 | $110,400 |
| S Corp (w/$100K salary) | $50,000 | $15,300 | $134,700 |
| C Corp (no salary, all div) | $66,800 | $0 | $115,200 |
Assumes owner is single, standard deduction, all profit distributed, current as of 2025. Does not factor potential QBI deduction or retirement plan deferrals.
Pro Tip: Document “Reasonable Compensation” Before S Corp Election
To use the S Corp advantage legitimately, you must set (and pay) yourself a “reasonable” salary based on market comps, job duties, and profit levels. The IRS has full authority to reclassify your distributions—and hand you a five-figure FICA bill—if they believe your compensation is artificially low (see IRS S Corp compensation rules). Use platforms like Gusto or SurePayroll to run actual payroll and document in writing (or with salary surveys) what “reasonable” means for your role, experience, and region.
What If I Want to Change My Entity After Starting?
You are not locked into one entity for life. LLCs can make a late election to be taxed as S Corps even after formation—sometimes retroactively for the current or prior year. Converting from LLC to S Corp in QuickBooks (or with a proper payroll processor) is straightforward, but you must file IRS Form 2553 within prescribed windows (see IRS Form 2553 guidance). C Corp conversions are more complex and may trigger built-in gains tax or company-wide recapitalization—always consult with a tax strategist before switching out of a C Corp.
Can Real Estate and Passive Investors Use These Structures?
Short answer: It depends. LLCs are the default structure for real estate investment in California because they provide asset protection, partnership flexibility, and “pass-through” tax treatment—profit flows to personal returns, avoiding double taxation. S Corps generally don’t work for rental properties due to IRS “allowed shareholder limits” and restrictions on passive income; they are most effective for operating businesses or consultants. C Corps and LLCs can both work for RE management, syndications, or flipping activity—but the wrong setup can push passive income into unintended FTB or IRS tax traps.
For tax help tailored to real estate investors, see our services for real estate investors.
FAQ: Entity Selection and California Tax Law in 2025
Will the FTB audit my LLC or S Corp automatically?
Not automatically, but high revenue, rapid changes in salary/distributions, or multiple year losses can trigger scrutiny. Detailed books, salary documentation, and logical compensation are your audit “seatbelt.”
Can I start as an LLC and switch to S Corp later?
Yes. Many owners start as LLCs and elect S Corp status when profits top $80K–$100K. You must file the right IRS form (2553) and comply with payroll rules to make it retroactive.
Do I need a new EIN if I restructure?
Not if you’re only changing tax treatment (LLC to S Corp), but required if forming a new C Corp from scratch.
Book a High-Roi Entity Review Session
Uncertain if your current LLC, S Corp, or C Corp is boosting or draining your profits? Book a personalized consultation and get a forensic review of your California entity. You’ll leave with a real dollar estimate of what you’re missing—and a clear, compliant plan to keep more of your money. Click here to secure your session now.
