Most new California businesses form as either a limited liability company (LLC) or a corporation. Both can protect owners from personal liability for business debts. They differ in how they're taxed, what the state charges, how they're governed, and how easily they take outside investment.
Liability protection
Both structures are separate legal entities, so owners generally aren't personally responsible for the business's debts and obligations. That protection depends on treating the entity as separate — keeping business money in business accounts, signing contracts in the company's name, and keeping basic records. It also doesn't cover obligations you sign personally, like a personal guarantee on a lease or loan.
How each is taxed
- LLC. By default, a single-member LLC is disregarded for federal tax purposes and a multi-member LLC is treated as a partnership, so profits generally pass through to the owners. An LLC can instead elect to be taxed as a corporation. California follows the same classification as the federal return.
- C corporation. The corporation pays tax on its income, and shareholders are taxed again on dividends they receive.
- S corporation. A corporation (or an LLC taxed as a corporation) that meets IRS eligibility rules — including limits on the number and type of shareholders and on classes of stock — can elect S status with IRS Form 2553, so income generally passes through to shareholders.
Tax treatment is often the deciding factor, so it's worth running the numbers with your CPA before you file.
What California charges
| LLC | Corporation | |
|---|---|---|
| Formation filing (Secretary of State) | Articles of Organization: $70 | Articles of Incorporation (stock): $100 |
| Statement of Information | Within 90 days, then every two years: $20 | Within 90 days, then every year: $25 |
| Minimum annual tax (Franchise Tax Board) | $800 annual tax, including the first year | $800 minimum franchise tax; newly incorporated corporations are not required to pay it in their first taxable year |
| Additional state charge | LLC fee if total California income is $250,000 or more (from $900 to $11,790) | Franchise tax based on income, subject to the minimum |
Figures are from the Secretary of State and Franchise Tax Board pages listed below as of October 2026. Check the sources before you file — fees and rules change.
Governance and paperwork
An LLC is governed mainly by its operating agreement, which can be tailored to how the owners want to run things. A corporation has a more fixed structure: shareholders elect a board of directors, the board appoints officers, and the corporation follows its bylaws and keeps minutes and records. Neither operating agreements nor bylaws are filed with the Secretary of State, but both matter to owners, banks, and investors.
Raising money
Venture investors commonly expect to invest in a corporation, where stock, preferred stock, and stock option plans are standard. LLCs can take investment too, and are common for owner-operated and closely held businesses. An LLC can convert to a corporation later, but conversion has legal and tax steps, so if you already plan to raise venture capital, it's worth deciding early.
Questions to ask before you choose
- Do you plan to raise money from outside investors, and what kind?
- Will you issue equity to employees or advisors?
- Do you expect the business to distribute profits to owners, or reinvest them?
- How many owners are there, and how do you want decisions made?
- What does your CPA recommend for your tax situation?
Sources
- Franchise Tax Board — Limited liability company
- Franchise Tax Board — Corporations
- California Secretary of State — LLC forms and fees
- California Secretary of State — Corporation forms and fees
- California Secretary of State — Statements of Information filing tips
- California Secretary of State — Business Entities FAQs
- IRS — Limited liability company (LLC)
- IRS — About Form 2553, Election by a Small Business Corporation