Question:  Should I form a California LLC or a California corporation?

Answer:  The California limited liability company is usually a better entity than the California corporation or limited partnership.  The LLC is a hybrid of the corporation and the limited partnership.  Years ago some lawyers who understood that the corporation and the LP each had some bad characteristics created a new type of entity that took only the best characteristics of the corporation and LP and added those characteristics into the new type of entity called the limited liability company.

The California LLC has fewer formalities than the California corporation.  For example, California corporations must hold annual meetings of shareholders and and directors and the meetings should be documented with minutes.  California LLC law does not require the members or managers of a California LLC to have annual meetings.

If somebody says you should not form a California LLC because California LLCs pay more California state taxes that California LLCs disregard that statement.  Yes, there can be a difference is California state taxes paid by an entity taxed as a corporation vs. an entity taxed as a sole proprietorship or a partnership.  A California LLC can be taxed one of the following four ways for federal income tax purposes:

  • a sole proprietorship if the LLC has one owner or two owners who own their interests in the LLC as community property.
  • a partnership if the LLC has more than one owner.
  • a C corporation.
  • an S corporation if it satisfies all eligibility  requirements.

Thus, if the amount of income your entity will generate is a California state tax issue, then you can have your California LLC taxed as a C corporation or an S corporation (if eligible) to get California corporate tax treatment or as a sole proprietorship or partnership to get non-corporate California state tax treatment.