Which business structure is right for you?
Your entity choice quietly shapes how much tax you pay, what you're personally on the hook for, and how easily you can grow. This guide walks through each option in everyday language — what it is, who it fits, and what California asks of you — so you come to the table already informed.
Four things your structure decides for you.
There's no single "best" entity — only the one that best fits your owners, your profit, and your risk. Before the labels, it helps to see what's actually at stake in the choice.
Whether your home and savings are shielded if the business is sued or can't pay its debts.
How profit is taxed — once on your return, or twice — and how much self-employment tax you owe.
How easily you can bring on investors or partners, and issue ownership to them.
The filings, fees, payroll, and recordkeeping you take on each year to stay in good standing.
Follow the questions to a starting point.
A simplified path based on the questions we actually ask. It points you toward a likely fit — the final call always comes after we run your numbers.
Decision logic adapted from CNE's intake framework and Spidell's California tax guidance. Illustrative only — not a recommendation for your situation.
Self-employment tax isn't the same as income tax.
This trips up almost every new owner. The same dollar of profit can be touched by three separate taxes — and they don't work the same way or fund the same things. Self-employment tax is the one most people don't see coming, because as an employee it was quietly split with your employer.
Income tax asks "how much did you make?"
Federal and state income taxes look at your total income and rise in steps. Earn more, and the next dollars are taxed at a higher rate. Deductions and credits can lower the bill.
SE tax asks "did you work for it?"
Self-employment tax is a flat 15.3% on your earnings from work, no matter your bracket. It replaces the Social Security and Medicare taxes a W-2 job splits with your employer — which is exactly the tax an S-Corp can help you reduce.
Rates shown are current statutory ranges, rounded; SE tax applies up to the annual Social Security wage base, with the Medicare portion continuing above it. Sources: IRS, California Franchise Tax Board.
Same $150,000 — but one of them pays the tax twice.
A salaried employee and a self-employed sole proprietor each earn $150,000. They owe similar income tax — but the employee splits Social Security and Medicare with their employer, while the self-employed owner carries both halves alone. That extra layer is what an S-Corp election is built to shrink.
The sticker shock most new business owners and self-employed individuals feel at year-end usually isn't because they owe dramatically more than an employee. It's about timing.
As an employee, your company quietly withholds tax from every paycheck — roughly 26 small payments a year if you're paid every two weeks. You never see that money, so you never feel it leave. When you're self-employed, no one withholds for you. Wait until April to pay it all at once, and the very same tax bill lands as one giant number — which is exactly why it feels enormous. The fix is quarterly estimated payments, so your tax is spread across the year the way a paycheck would.
Illustrative only — single filer, California, standard deduction; self-employed figures reflect the ½ SE-tax and 20% QBI deductions, which lower their income tax. Your actual numbers depend on filing status, deductions, and profit. We model your real situation before recommending anything. Sources: IRS, California Franchise Tax Board.
A closer look at each one.
The two rise together.
As you move toward stronger protection and bigger tax savings, the price tag and the paperwork climb with them. The trick is matching the structure to where your business actually is.
Relative ratings, not exact figures — meant to show the trend. The right level of cost and complexity is the one your income and goals justify.
Where the self-employment tax savings come from.
Self-employment tax (about 15.3%) is the big lever. As a sole proprietor it hits all your profit. As an S-Corp it only hits the salary you pay yourself — the distributions ride free. Here's the same $150,000 profit, two ways.
Simplified illustration for explanation only. Real numbers depend on a reasonable-salary study, payroll costs, state tax, and your full return. Sources for SE-tax mechanics: IRS, AICPA.
The QBI deduction
Many pass-through owners can deduct up to 20% of qualified business income under Section 199A. It applies to sole props, partnerships, LLCs, and S-Corps alike — but income limits, your profession, and how much salary an S-Corp pays all change the math. It's a key part of comparing structures, not an afterthought.
California's Pass-Through Entity Tax
Under AB 150, partnerships and S-Corps can elect to pay California tax at the entity level (9.3%) and pass owners a matching state credit — a legal way to work around the federal SALT cap and reduce federal tax. It's one of the bigger recent planning opportunities for California owners.
What the state expects, on what schedule.
California adds its own filings and the $800 minimum franchise tax on top of federal rules. Missing these is where good-standing problems and penalties usually start.
California charges LLCs an extra fee based on income.
Beyond the $800 minimum franchise tax every entity pays, an LLC owes a separate gross-receipts fee once its total California income clears $250,000. It's tied to revenue — not profit — so it applies even in a low-margin year. Plan for it as your top line grows.
Calendar-year filers; dates shift for fiscal years and weekends/holidays. The LLC fee tiers are based on total California source income and apply on top of the $800 minimum. Confirm current deadlines and fee amounts with the IRS, FTB, and EDD each year.
The five structures, side by side.
| Entity | How it's formed | CA annual tax | How profit is taxed | Self-employment tax | Best for |
|---|---|---|---|---|---|
| Sole Proprietor | No state filing; just a local business license / DBA | None (no entity fee) | Once, on your personal return (Schedule C) | Yes — on all net income | Single-owner, low-risk businesses |
| General Partnership | No filing; operate via a written agreement | None (no entity fee) | Pass-through to partners (Form 1065 → K-1) | Yes — on each partner's share | Trusted, hands-on co-owners |
| Limited Partnership | File Form LP-1 ($70) with CA Secretary of State | $800 minimum | Pass-through (Form 1065) | GP: yes · Limited partners: no | Raising capital from passive investors |
| LLC | Articles of Organization + Statement of Information | $800 min + fee tiered by gross receipts | Pass-through by default (Form 568), or elect S-Corp | Managing members: yes (unless S-elected) | Flexible liability protection |
| S-Corporation | Incorporate + file IRS Form 2553 to elect | Greater of $800 or 1.5% of net income | Pass-through via K-1; salary + distributions | Only on reasonable salary — not on distributions | Profitable owners cutting SE tax |
| C-Corporation | Incorporate with CA and IRS filings | $800 min + 8.84% corporate tax | Taxed at the entity, then again on dividends (double) | No SE tax; payroll taxes on wages | Scaling, outside investors, reinvestment |
Figures reflect current California rules and are rounded for clarity. Sources: IRS, California Franchise Tax Board, CA Secretary of State, and Spidell. Verify thresholds for your year before acting.
This guide is general educational information about California business entities, not legal or tax advice. Rules, rates, and thresholds change and apply differently to every business — please talk with us before acting on anything here.
Still weighing your options? Let's run your numbers.
Reading about the structures gets you part of the way — the right answer comes from your actual profit, owners, and goals. We'll model it and recommend the structure that keeps the most in your pocket.
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