Small Business & Property Ownership · Starting a business
Business structures compared
In this guide
- California business structures differ in how they are formed, how owners are liable, how income is taxed, and what they cost each year.
- Sole proprietorships and general partnerships don’t separate the owners’ personal liability from the business’s debts.
- LLCs and corporations are registered with the Secretary of State and owe at least $800 a year to the Franchise Tax Board.
This guide describes the common structures in general terms. Which one suits a particular business depends on many facts, and people often discuss the choice with a tax professional, an attorney, or a free Small Business Development Center advisor.
| Structure | How it is formed | Owners and business debts | Default income tax treatment | California annual tax |
|---|---|---|---|---|
| Sole proprietorship | No state formation filing. Local license, and a DBA if using another name. | The owner is personally responsible. | Reported on the owner’s personal return. | None at the business level. |
| General partnership | Two or more people doing business together. A state filing is optional. | Each partner can be personally responsible. | Partnership return; income passes through to partners. | None at the business level. LPs and LLPs owe $800. |
| Limited liability company (LLC) | Articles of Organization filed with the Secretary of State. | Generally limited to the owners’ investment, with exceptions. | One owner: part of the owner’s return. Two or more: partnership. Can elect corporate treatment. | $800 annual tax, plus an LLC fee when gross receipts exceed $250,000. |
| Corporation | Articles of Incorporation filed with the Secretary of State. | Generally limited to the shareholders’ investment, with exceptions. | C corporation: taxed at the entity level (8.84% in California). Eligible corporations can elect S status (1.5% in California, with income passing to shareholders). | $800 minimum franchise tax, generally starting in the second year. |
| Nonprofit corporation | Articles of Incorporation filed with the Secretary of State. | Generally limited, with exceptions. | Tax-exempt only after approval from the IRS and the Franchise Tax Board. | None once exempt; annual information filings apply. |
What the liability rules mean
An LLC or corporation generally keeps the entity’s debts separate from the owners’ personal property. That separation has limits. Owners remain responsible for their own wrongful acts and for debts they personally guarantee, and courts can disregard an entity that isn’t kept separate from its owners. See How liability and creditor laws work.
Licensed professions
California limits which structures some licensed professionals can use. For example, many professions that require a state license, such as law, medicine and accounting, cannot use an ordinary LLC and instead use a professional corporation or, for some professions, a limited liability partnership. The relevant licensing board explains the rules.
Changing structures later
Businesses can convert or reorganize. A change usually involves new state filings, tax registrations, contracts, bank accounts and licenses in the new name.
Common questions
Does forming an LLC change income taxes?
Not by itself for most single-owner LLCs, which are reported on the owner’s return by default for federal purposes. California adds the $800 annual tax and, above $250,000 in gross receipts, the LLC fee. The FTB and IRS pages explain the rules.
Official sources for this guide
Keep reading