LLC or S Corporation in California: Setup and First-Year Taxes

The Decision Points

• What each one is. An LLC is a legal entity formed by filing Articles of Organization, Form LLC-1, with the Secretary of State; a corporation is formed by filing Articles of Incorporation. An S corporation is not an entity but a federal tax status, elected on Form 2553 by a corporation or by an LLC eligible to be taxed as one. By default an LLC with one member is disregarded for income tax and an LLC with two or more members is taxed as a partnership.
• Who pays self-employment tax. A sole proprietor or an LLC member taxed by default pays 15.3 percent self-employment tax on 92.35 percent of the business's net earnings: 12.4 percent for Social Security on earnings up to the $184,500 wage base for 2026 and 2.9 percent for Medicare, owed once net earnings reach $400. An S corporation instead pays its shareholder-employee a salary through payroll, which must be reasonable compensation for the services performed before any non-wage distributions are made, and Social Security and Medicare taxes apply to that salary, 6.2 percent and 1.45 percent each for the employer and the employee.
• When the election pays off. When the self-employment tax the election removes outweighs what it adds: California's 1.5 percent tax on the corporation's net income, monthly payroll, a separate bank account and records, and a corporate return each year. There is no fixed income at which it turns; we run both calculations with the owner's expected profit and salary before the form is filed. See Tax Planning.
• The $800 and the first-year rule. An LLC pays an $800 annual tax by the 15th day of the fourth month after it files with the Secretary of State, every year until it is cancelled, plus an LLC fee once total California income reaches $250,000: $900 at $250,000–$499,999, $2,500 at $500,000–$999,999, $6,000 at $1,000,000–$4,999,999 and $11,790 at $5,000,000 or more. A corporation pays the $800 minimum franchise tax but not in its first taxable year; an S corporation's first-year income is still taxed at 1.5 percent, and a C corporation's at 8.84 percent.
• The Form 2553 deadline. No more than two months and 15 days after the beginning of the tax year the election is to take effect, or at any time during the preceding tax year; a late election can be accepted under Rev. Proc. 2013-30 within 3 years and 75 days of the intended effective date. California treats a corporation that elects federal S status as having elected for California on the same date.
• Registering with the City of Los Angeles. A business in the city registers with the Office of Finance for a Business Tax Registration Certificate, and a business based elsewhere whose people work in the city on seven or more days in a year registers too; the annual renewal is due by the last day of February, and a registered business with worldwide gross receipts of $100,000 or less pays no tax when it renews on time. A business that sells goods subject to sales tax also needs a seller's permit from the CDTFA, which has no fee though a security deposit may be required.
• Payroll once the S corporation pays a salary. The corporation registers with the EDD as an employer within 15 days after paying more than $100 in wages in a calendar quarter, withholds federal and California tax each pay period, files Form 941 each quarter and the DE 9 and DE 9C with the EDD, and issues Form W-2 by January 31, which for 2026 wages is February 1, 2027. See Payroll.
• Statements of Information. An LLC files one with the Secretary of State within 90 days of registering and every two years after that, for $20; a California stock corporation files within 90 days and then every year.