Choosing a Business Entity in California: LLC vs. Corporation & More

California's common business structures — sole proprietorship, partnership, LLC, and corporation — differ mainly in personal liability and taxes. LLCs and corporations shield your personal assets but owe California's $800 minimum annual franchise tax; sole proprietorships and general partnerships avoid that tax but leave you personally liable for business debts.

The first big decision in starting a California business is what legal structure to use. It drives two things that matter most: whether your personal assets are protected, and how you’re taxed.

The four common structures

Structure	Liability protection	Taxes	State formation
Sole proprietorship	None — you’re personally liable	Pass-through (personal return)	None required
General partnership	None — partners personally liable	Pass-through	None required
LLC	Yes — personal assets shielded	Pass-through by default; $800 min tax	File with Secretary of State
Corporation	Yes — personal assets shielded	C-corp or S-corp election; $800 min tax	File with Secretary of State

Liability is the dividing line

The biggest reason to form an LLC or corporation is the liability shield: if the business is sued or can’t pay its debts, your personal assets are generally protected. A sole proprietorship or general partnership offers no such protection — you and the business are legally the same.

The cost of protection: the $800 tax

That protection comes with California’s $800 minimum annual franchise tax, owed by LLCs, corporations, LPs, and LLPs (a corporation’s first year is exempt; an LLC’s is not). Sole proprietors and general partnerships skip the $800 — but carry full personal liability.

Next steps

Most owners choose between an LLC and a corporation. See how to form an LLC and how to form a corporation for the exact filings and fees. Because the choice has tax and liability consequences, it’s worth confirming with a professional — connect with a lawyer.

Frequently asked questions

What's the difference between an LLC and a corporation in California?

Both protect your personal assets from business liabilities. An LLC is simpler to run and is pass-through taxed by default; a corporation has more formalities (board, bylaws, shares) and can elect S- or C-corp tax treatment. Both owe California's $800 minimum franchise tax.

Does every California business owe the $800 franchise tax?

LLCs, corporations, LPs, and LLPs owe the $800 annual minimum franchise tax. Sole proprietorships and general partnerships do not — but they also give you no liability protection.

Do I need to form an entity at all?

No. You can operate as a sole proprietor with no state formation filing. But you're then personally liable for business debts and lawsuits, which is why most owners form an LLC or corporation.

Which structure is best for a small business?

For many small businesses an LLC balances liability protection, tax flexibility, and low formality. The right choice depends on your liability exposure, how you want to be taxed, and whether you'll raise investment — worth confirming with an attorney or CPA.

Related guides

Business & Breach of Contract Disputes in California When a contract is broken in California, the non-breaching party can usually sue for money damages, and in some cases for specific performance. The deadline to sue is 4 years for a written contract and 2 years for an oral one (Code of Civil Procedure §337/§339).

California Contract Basics A valid California contract needs four things: parties capable of contracting, their mutual consent, a lawful object, and consideration (Civil Code §1550). Most contracts can be oral, but some — like real estate sales or agreements that can't be performed within a year — must be in writing under the statute of frauds.

How to Form a Corporation in California To form a California corporation you file Articles of Incorporation (Form ARTS-GS) with the Secretary of State for $100, file a Statement of Information (Form SI-550, $25) within 90 days and then annually, and pay the $800 minimum franchise tax — which is waived in the corporation's first year. An S corporation is a tax election, not a separate entity.

How to Form an LLC in California To form a California LLC you file Articles of Organization (Form LLC-1) with the Secretary of State for $70, designate an agent for service of process, file a Statement of Information (Form LLC-12, $20) within 90 days, and pay the $800 annual minimum franchise tax to the Franchise Tax Board.

Choosing a Business Entity in California