Plan your expenses and deductions strategically each year
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Maintain accurate and organized financial records for easy reporting
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S-Corp vs. LLC in California: Which Structure Actually Saves More Taxes?
If you own a profitable California business, the question isn’t whether you’re paying too much in taxes — it’s how much.
Choosing between an LLC and an S-Corporation can determine whether you keep an extra $10,000–$40,000 in your pocket each year.
At PacificWestTax, we help business owners make that choice with data-driven tax modeling — not guesswork.
Understanding the Basics
An LLC (Limited Liability Company) offers legal protection and flexibility.
By default, profits “pass through” to your personal return and are subject to self-employment tax — roughly 15.3% on most income.
An S-Corporation is also a pass-through entity, but it allows you to split income between a reasonable salary (subject to payroll taxes) and shareholder distributions (not subject to self-employment tax).
That single distinction can create major savings.
Example: Same Income, Different Outcome
Let’s say a Los Angeles consultant earns $250,000 in net business profit.
- As an LLC, all $250,000 is subject to self-employment tax.
- → Roughly $38,000 in additional federal taxes.
- As an S-Corp, the owner pays themselves a $100,000 salary and takes $150,000 as a distribution.
- → Payroll taxes apply only to the salary portion.
- → Potential savings: $15,000–$20,000 per year.
Those numbers scale fast as income rises.
California’s Twist: Franchise and State Taxes
California imposes an $800 minimum franchise tax on both LLCs and S-Corps, plus:
- LLCs: a gross-receipts fee that increases with total revenue
- S-Corps: a 1.5% state tax on net income
While both pay the same minimum, high-margin service businesses often find the S-Corp still comes out ahead due to the self-employment tax savings.
When an LLC Still Makes Sense
An LLC may be better if you:
- Are just starting out and earning under $100K
- Have multiple partners or flexible ownership needs
- Hold rental properties or passive investments (where S-Corp status isn’t ideal)
You can also start as an LLC and later elect S-Corp taxation once profits grow — it’s a common, low-friction path.
Avoiding Common Mistakes
Many California business owners make these costly errors:
- Paying themselves too little as an S-Corp owner (flagging IRS audits)
- Keeping LLC status long after profits justify switching
- Mixing personal and business expenses (kills deductions)
- Ignoring California’s separate state filing requirements
Entity choice isn’t one-and-done — it should evolve with your income and goals.
Strategic Review: What We Do at PacificWestTax
Our entity planning process includes:
- Reviewing your current tax returns and payroll setup
- Modeling multiple structures (LLC vs. S-Corp vs. multi-entity)
- Calculating your real savings under each
- Filing elections and setting up compliant payroll systems
We don’t guess — we show you the math before making a move.
Key Takeaways
- The S-Corp structure can reduce self-employment tax by thousands each year.
- LLCs offer flexibility but can become expensive as profits rise.
- California’s extra taxes change the equation — modeling is key.
- Reviewing your entity annually ensures long-term savings.