California LLC vs. Sole Proprietorship
In California, the LLC vs. sole proprietorship decision has an extra factor: the $800 annual franchise tax. This means you need enough revenue/liability risk to justify $800/year PLUS state income tax (up to 13.3%) on top of formation costs. For most businesses earning $20K+, the answer is still yes — but the calculation is different from no-tax states. See all comparisons.
Quick Comparison
| Factor | Sole Proprietorship | California LLC |
|---|---|---|
| Formation cost | $0 | $90 (Articles + SOI) |
| Annual franchise tax | $0 | $800 (mandatory) |
| Liability protection | None | Full |
| State income tax | 1%-13.3% | 1%-13.3% (same) |
| S-corp election available | No | Yes |
The $800 Break-Even
When is $800/year worth it?
- If your business has ANY liability risk (clients, products, services) and ANY meaningful revenue: yes
- The $800 is the "insurance premium" for liability protection
- One lawsuit settlement or judgment could cost 100x the annual franchise tax
- S-corp election (available only through LLC) can save $10,000+/year for profitable businesses
FAQ
Ready to get started?
Get StartedIs the $800 tax-deductible?
Yes. The franchise tax is a deductible business expense on your federal return.
Can I defer forming until I'm profitable?
Yes. Many CA entrepreneurs start as sole proprietors and form the LLC once revenue stabilizes above $10K-$20K/year. The risk: you operate without liability protection during the interim.