The most common entity question we hear in Los Angeles is “should I be an LLC or an S corp?” — and it’s built on a misunderstanding. An LLC is a legal structure. An S corporation is a tax election. They’re not rivals: a California LLC can keep its legal wrapper and elect S corp taxation with one IRS form. The real question is which tax treatment your profit level justifies — because in California, both come with a bill.
The default: every dollar of profit pays self-employment tax
A single-member LLC is taxed like a sole proprietorship, a multi-member LLC like a partnership. Either way, the owners’ share of profit is generally subject to self-employment tax — 15.3% for Social Security and Medicare — on top of income tax. Profit of $150,000 means self-employment tax on (roughly) all of it, whether you took the cash out or left it in the business.
The S corp move: salary plus distributions
Elect S corp status and you become your company’s employee. You pay yourself a reasonable salary — payroll taxes apply there, same as anyone’s paycheck — and the remaining profit flows to you as distributions, which are not subject to self-employment tax. That gap, between payroll tax on everything and payroll tax on the salary only, is the entire reason S corps exist in small-business planning. The IRS’s own overview is here, and “reasonable” is the load-bearing word: pay yourself $20,000 to run a $400,000 practice and you’ve volunteered for an audit.
California’s cut (this is where generic internet advice fails)
- LLC: the $800 annual franchise tax, every year, profitable or not — plus the LLC fee once gross receipts pass $250,000 (the fee runs from $900 up to $11,790 at the top tier). Note: the fee is on receipts, not profit.
- S corp: a 1.5% California franchise tax on net income, with the same $800 minimum. High-revenue, thin-margin businesses sometimes do better here than under the LLC fee; high-margin ones pay more. The math is specific to your numbers.
- Payroll overhead: the S corp route means running real payroll — filings, deposit schedules, a W-2 for yourself. Budget for the administration, not just the tax line.
So when does the election win?
There’s no universal threshold, but the shape of the answer is consistent: the S election starts paying for itself when profit comfortably exceeds a reasonable salary for your role — for many LA service businesses that’s somewhere around six figures of steady profit — and keeps paying as profit grows. Below that, the payroll overhead and the 1.5% often eat the savings. Ballpark your own number with our S-corp vs. LLC calculator — it runs the 2026 IRS and FTB figures live — then this is precisely the calculation a mid-year review confirms with your real numbers.
Don’t copy your friend’s entity. Two businesses with identical profit can come out thousands of dollars apart depending on margin, payroll, and how income arrives. Run the math once a year — the election that was wrong at $60k of profit is often right at $160k.
Action items
- Know your true profit (current books first — the math is garbage without them)
- Price a reasonable salary for your role in your market
- Compare: SE tax on everything vs. payroll tax on salary + 1.5% CA tax + payroll costs
- Check the LLC-fee tier your gross receipts land in
- If electing: Form 2553 has deadlines — plan it, don’t improvise it
This article is general information, not tax advice for your specific situation. Rules change and details matter — talk to a CPA (we know one) before acting on anything here.