How to Choose a Business Structure in California: Sole Proprietorship, LLC, S Corp or C Corp

Business Finance Guide · Getting Started

Pick the business structure that protects you and saves tax

Liability, taxes and California’s yearly costs for each option, in one place.

$800California minimum yearly tax for an LLC or corporation

$70Secretary of State fee to form an LLC

8.84%California corporate tax rate

Your business structure decides who is liable for the company’s debts, how its profits are taxed and what California charges you every year to keep it open.

Most owners pick a structure in an afternoon and live with it for years. That is risky, because the structure touches almost everything: whether a lawsuit can reach your house, whether you pay self-employment tax on every dollar of profit, whether a bank will lend to the company, and how much paperwork you file each year. You can change structures later, but converting costs money and time. Choosing well at the start is cheaper.

The U.S. Small Business Administration (SBA) groups the common choices into five types: sole proprietorship, partnership, limited liability company (LLC), S corporation and C corporation. Here is how each one works for a Sacramento-area business.

The five main business structures

Sole proprietorship

A sole proprietorship is the default: if you start selling on your own and file nothing, you are one. There is no state formation fee and no separate tax return; profit goes on Schedule C of your personal return. The trade-off is total personal liability. The business and the owner are the same legal person, so business debts and lawsuits can reach your personal savings and property. You also pay self-employment tax of 15.3% on net earnings, which covers Social Security and Medicare.

If you operate under any name other than your own legal name, you must file a fictitious business name statement with the county clerk, such as the Sacramento County Clerk/Recorder.

General partnership

Two or more people who go into business together without forming an entity are a general partnership. Profits pass through to the partners’ personal returns, and each partner can be personally liable for the partnership’s debts, including debts another partner creates. A written partnership agreement is essential.

Limited liability company (LLC)

An LLC is a separate legal entity that shields owners, called members, from most business debts. By default, a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, but an LLC can elect to be taxed as an S or C corporation. In California, an LLC pays an $800 annual tax and, once total California income reaches $250,000, an additional LLC fee based on gross receipts, not profit.

S corporation

An S corporation is not a separate kind of company; it is a tax election that a corporation or an LLC makes with the IRS. Profits pass through to the owners, but owners who work in the business are paid a reasonable salary, and only that salary carries payroll taxes. That split is why many profitable small businesses elect S status. The limits: no more than 100 shareholders, one class of stock and only eligible U.S. shareholders. California taxes S corporation net income at 1.5%, with the same $800 minimum.

C corporation

A C corporation is taxed on its own profits, at a 21% federal rate and an 8.84% California rate, and shareholders pay tax again on dividends. That double taxation is the main drawback. The advantages are unlimited shareholders, multiple classes of stock and a structure that venture investors expect. Most companies planning to raise outside equity choose a C corporation.

What an LLC really costs in California each year

The $800 annual tax gets the attention, but growing LLCs also pay a separate LLC fee once total California income reaches $250,000. Because the fee is based on gross receipts, a business with thin margins can owe it even in a year with little profit. The chart shows the combined yearly minimum at each revenue level, based on the Franchise Tax Board’s fee table.

How structure affects borrowing

Lenders care about structure because it decides who stands behind a loan. Even with an LLC or corporation, most small business lenders ask the owner to sign a personal guarantee. In the Federal Reserve’s 2025 Small Business Credit Survey, 59% of firms with debt had used one. A formal entity, a separate bank account and clean books still help: they make it easier to build business credit that is separate from personal credit and to qualify for better terms over time.

How to form an LLC in California, step by step

When to change your structure

Many owners start as sole proprietors or single-member LLCs and revisit the choice as the business grows. Common triggers: profit high enough that an S corporation election could reduce payroll taxes, a new partner joining, plans to raise investment, or a contract that requires a formal entity. Talk with a CPA or attorney before you switch, because the timing of elections and conversions affects your taxes.

Common mistakes when choosing a business structure

• Forming an LLC and then ignoring it. Missing the $800 payment or the Statement of Information can lead to penalties and, eventually, suspension by the state, which can stop you from defending a lawsuit or enforcing a contract.
• Electing S corporation status too early. The payroll, bookkeeping and tax-return costs can outweigh the savings until profits are high enough. Run the numbers with a CPA first.
• Skipping the operating agreement. Without one, disputes between members fall back on default state rules that may not match what the partners intended.
• Mixing money. Paying personal bills from the business account is the fastest way to weaken the liability protection you formed the entity to get.

Key terms

• Pass-through taxation: business profit is taxed on the owners’ personal returns rather than at the company level.
• Double taxation: a C corporation pays tax on its profit, and shareholders pay tax again on dividends.
• Member: an owner of an LLC.
• Reasonable salary: the wage an S corporation owner who works in the business must take before taking distributions.
• Franchise tax: California’s $800 minimum annual tax on LLCs and corporations for the privilege of doing business in the state.

The bottom line: a sole proprietorship is fine for testing an idea, an LLC fits most small businesses, an S corporation election can pay off once profits grow, and a C corporation is built for companies raising outside investment. Whatever you choose, keep the paperwork current and the money separate.

Free help in the Sacramento region

You do not have to work through these decisions alone. SCORE Sacramento pairs owners with volunteer mentors, many of them retired executives, bankers and accountants, at no cost. The Sacramento Valley Small Business Development Center offers free one-on-one advising on financing, budgeting and financial statements. The SBA’s Sacramento District Office can explain loan programs and connect you with lenders, and community lenders such as California Capital and Opening Doors serve owners who need smaller loans or extra support. Browse our Business Resources and the free business help guide for more.

Frequently asked questions

Sources

• SBA: Choose a business structure
• California Franchise Tax Board: Limited liability company (annual tax and LLC fee)
• California Franchise Tax Board: Corporations ($800 minimum franchise tax)
• California Franchise Tax Board: Business tax rates
• California Secretary of State: Limited liability company forms and fees
• California Secretary of State: Statement of Information fees
• IRS: S corporations
• IRS: Forming a corporation
• IRS: Self-employment tax (Social Security and Medicare taxes)
• City of Sacramento: Business Operations Tax
• Federal Reserve Banks: 2026 Report on Employer Firms (2025 Small Business Credit Survey)