Choosing and forming a business entity in California is a decision with legal, tax and practical consequences that last for as long as the business exists. California law offers limited liability companies, corporations, several kinds of partnerships and professional entities, and each is governed by its own statute in the Corporations Code. California also taxes entities in ways that surprise owners who have formed companies in other states, starting with an annual tax that applies whether or not the business earns a profit. As a California entity formation attorney, Michael Holmes helps founders, family businesses and real estate investors pick the right structure, file it correctly with the Secretary of State and set up the governing documents that make the liability shield worth having.
Holmes Law is a remote practice with no physical office, and California clients work with Michael Holmes directly by phone, video and secure document exchange. This page goes deeper on formation than the broader California business law page. Companion pages cover operating and shareholder agreements, buy-sell agreements and business contracts, which are usually the next steps once an entity exists.
The Main Entity Choices Under California Law
California’s business entity statutes are found in the Corporations Code. The choice among them turns on liability protection, management flexibility, tax treatment, the number and type of owners, whether outside investors are expected, and whether the business provides licensed professional services.
Limited Liability Companies
The California Revised Uniform Limited Liability Company Act, Corporations Code § 17701.01 and following, has governed California LLCs since 2014. An LLC gives its members limited liability, and by default it is taxed as a partnership if it has two or more members or disregarded if it has one, with the option to elect corporate or S corporation treatment for federal purposes. The act is flexible: most of its rules are defaults that the operating agreement can change. It also contains traps. An LLC is member-managed unless its articles of organization say it is manager-managed (Corp. Code § 17704.07), and in a member-managed LLC every member has management authority, which is rarely what an investor-owned company wants.
Corporations
The General Corporation Law, Corporations Code § 100 and following, governs California business corporations. A corporation is formed by filing articles of incorporation, is managed by a board of directors, and issues shares. Directors owe duties of care and loyalty, with the standard of care codified in Corp. Code § 309. Corporations remain the standard vehicle for businesses that plan to raise venture capital or issue equity compensation, and they suit S corporation elections well. California also permits a statutory close corporation under Corp. Code § 158, which allows shareholders to govern by agreement rather than through a board, though few owners use it.
General Partnerships, Limited Partnerships and LLPs
A general partnership under the Uniform Partnership Act of 1994 (Corp. Code § 16100 and following) requires no filing at all, which is why two people who start doing business together can end up in a partnership without meaning to, each personally liable for the other’s business debts. Limited partnerships, governed by the Uniform Limited Partnership Act of 2008 (Corp. Code § 15900 and following), still appear in real estate and family holding structures. Registered limited liability partnerships are available only to a short statutory list of licensed professions, including law and public accountancy.
Sole Proprietorships
Operating without an entity avoids formation filings and the annual entity tax, but it leaves the owner personally exposed to every business liability. A sole proprietor using a trade name must also file a fictitious business name statement with the county under Business and Professions Code § 17910 and following.
Forming the Entity With the California Secretary of State
Formation filings are made with the California Secretary of State, now largely through its bizfile Online system. The core filings are:
- Articles of organization for an LLC, stating the name, the agent for service of process, the addresses, and whether the company will be managed by one or more managers;
- Articles of incorporation for a corporation (Corp. Code § 200 and following), stating the name, purpose, agent for service of process and authorized shares;
- Certificate of limited partnership for a limited partnership;
- the initial Statement of Information, due within 90 days after formation for both LLCs and corporations.
The name must be distinguishable from names already on record and must carry the correct designator, such as “LLC” or “Inc.” Filing is only the start. An LLC should have a written operating agreement from day one, and a corporation needs bylaws, initial board action, share issuance and a stock ledger. Many California founders form online and never take these next steps, which leaves the company without the paper trail that protects owners when a dispute or a creditor arrives.
Statements of Information and Ongoing Filings
After formation, California requires periodic Statements of Information that report the entity’s addresses, its agent for service of process, and its managers, officers or directors. A corporation files one every year (Corp. Code § 1502), and an LLC files one every two years (Corp. Code § 17702.09). Missing a Statement of Information can lead to penalties and eventually to suspension by the Secretary of State.
Suspension is a serious matter in California. A suspended entity loses its powers, rights and privileges, which can include the right to defend itself in court and to enforce its contracts. Suspension can come from either the Secretary of State, for filing failures, or the Franchise Tax Board, for tax and return failures, and revival requires curing every underlying problem. Tracking these deadlines is a basic part of keeping a California company in good standing.
California Taxes on Entities
Tax is the area where California differs most from other states, and it often drives the entity choice.
The $800 Annual Tax
Every LLC doing business or organized in California must pay an annual tax of $800, and every corporation incorporated, registered or doing business in California must pay the $800 minimum franchise tax, according to the Franchise Tax Board. The tax is owed even if the company has no income. The FTB states that newly incorporated or qualified corporations are not required to pay the minimum franchise tax in their first taxable year. A first-year exemption for LLCs, LPs and LLPs under Assembly Bill 85 applied only to entities that organized or registered between January 1, 2021 and December 31, 2023, so new LLCs should plan for the annual tax from the start.
The LLC Fee
On top of the annual tax, an LLC with total income from California sources above $250,000 owes a separate LLC fee. The FTB’s current schedule starts at $900 for total income of $250,000 up to $499,999 and rises in tiers to $11,790 for total income of $5,000,000 or more. Because the fee is based on gross income rather than profit, a high-revenue, low-margin business can pay more as an LLC than it would as a corporation, which is one reason entity choice deserves real analysis rather than a default.
Corporate and S Corporation Taxes
California taxes C corporations on net income at the entity level. California also recognizes the federal S corporation election, but unlike federal law, California imposes an entity-level franchise tax on S corporation net income at a reduced rate, subject to the same minimum. Shareholders then report their share of income on their own California returns. A business that is weighing an LLC taxed as a partnership against an S corporation should model the California entity-level costs, the LLC fee, payroll and self-employment tax, and the owners’ plans for distributions and eventual sale.
Property Tax and Real Estate Held in Entities
Owners who plan to hold California real estate in an entity must also think about property tax. Under Proposition 13, a change in ownership triggers reassessment. Transferring property into an entity owned in the same proportions as the prior title is generally excluded from reassessment, but later transfers of interests in the entity can trigger reassessment under Revenue and Taxation Code § 64. When one person or entity acquires more than 50 percent control, or when the original co-owners cumulatively transfer more than 50 percent of the interests, the entity’s real property can be reassessed. Changes in control or ownership must be reported to the Board of Equalization on form BOE-100-B within 90 days, and the BOE notes that late or missing filings carry a penalty. Holmes Law coordinates entity planning with the California real estate side of a client’s affairs for exactly this reason.
Agent for Service of Process
Every California entity must designate an agent for service of process. The agent can be an individual who resides in California with a California street address, or a corporation that has registered with the Secretary of State as a commercial agent under Corp. Code § 1505. Using a commercial agent keeps an owner’s home address off the public record and ensures that lawsuits and government notices are received and forwarded even when the owner is traveling. A missed service of process can lead to a default judgment, so the agent designation should never be an afterthought.
Series LLCs, Professional Entities and Other Special Structures
Series LLCs
The California LLC act does not provide for forming a series LLC in California. Series LLCs formed in other states can still do business here, and the Franchise Tax Board’s position is that for annual tax and LLC fee purposes each series of a series LLC is a separate LLC, with its own Form 568 and its own annual tax. For California real estate investors, that often erases the cost advantage that makes series LLCs attractive elsewhere, and separate LLCs or a holding company structure may work better.
Professional Corporations
Licensed professionals in California face their own rules. The Moscone-Knox Professional Corporation Act, Corp. Code § 13400 and following, governs professional corporations for doctors, dentists, lawyers, accountants and other licensed professions, and the licensing boards impose their own ownership and name requirements. The California LLC act does not permit an LLC to render professional services that require a license, so a professional practice that would be an LLC in many other states is typically a professional corporation, or in some professions a registered limited liability partnership, in California.
Nonprofits and Other Forms
Nonprofit public benefit, mutual benefit and religious corporations have their own statutes and their own tax-exemption process, and benefit corporations and social purpose corporations are available for for-profit companies that want a stated public purpose. These forms are occasionally the right fit, and a formation conversation should at least consider them.
Foreign Qualification: Out-of-State Entities Doing Business in California
Many owners form in Delaware, Nevada or Wyoming and then operate in California. That rarely avoids California obligations. A foreign corporation transacting intrastate business in California must qualify with the Secretary of State (Corp. Code § 2105), and a foreign LLC must register (Corp. Code § 17708.02). Separately, the Franchise Tax Board treats an entity as doing business in California if it actively engages in transactions for profit here or meets bright-line thresholds for California sales, property or payroll under Revenue and Taxation Code § 23101, which are adjusted over time. An entity doing business in California owes the annual tax whether or not it has qualified.
An unqualified foreign entity that transacts intrastate business can face penalties and may be barred from maintaining an action in California courts until it qualifies. For a business that operates primarily in California, forming a California entity is often simpler than forming elsewhere and then maintaining two sets of filings and two registered agents.
Choosing the Right Structure: Practical Questions
A formation consultation with Holmes Law works through questions such as these:
- How many owners are there now, and will outside investors or employees receive equity later?
- Will the owners work in the business, and how will they be paid?
- What is the expected revenue in California, and how does the LLC fee compare with corporate taxes at that level?
- Will the business hold real estate, and what are the property tax consequences of later ownership changes?
- Is the business a licensed profession that must use a professional corporation?
- What is the exit plan: a sale, a transfer to family, or a wind-down?
- How does ownership fit with the owners’ California estate planning, including whether interests will be held in a revocable trust?
The answers point to a structure, and the structure then shapes the governing documents. A two-member LLC with one working owner and one investor needs very different provisions from a family holding company or a startup that plans to raise capital.
Keeping the Liability Shield Intact
Forming an entity is not enough to protect the owners’ personal assets. California courts disregard the entity under the alter ego doctrine when there is a unity of interest and ownership such that the separate personalities of the company and its owners no longer exist, and treating the acts as the company’s alone would sanction a fraud or promote injustice. Common problems include commingling personal and business funds, undercapitalization, using company assets for personal purposes and failing to hold the entity out as a separate business. For LLCs, Corp. Code § 17703.04 provides that failing to hold meetings or observe meeting formalities is not a factor in alter ego liability when the articles or operating agreement do not require meetings, but the other factors still apply.
The practical rules are simple: separate bank accounts, signed contracts in the entity’s name, adequate capital and insurance, current filings and taxes, and written records of major decisions. The operating and shareholder agreements page discusses veil piercing and governance in more depth.
Frequently Asked Questions
Do I need an attorney to form an LLC in California?
The Secretary of State’s filing can be completed without a lawyer. The value of legal help is in choosing the right entity, drafting the operating agreement, handling tax and property tax issues and avoiding default rules that do not fit the business. Most of the problems Holmes Law sees in existing companies come from what was not done after the filing.
Should I form in Delaware or Nevada instead of California?
For a business that operates in California, forming elsewhere usually adds cost without avoiding California’s annual tax or registration requirements. Delaware can make sense for companies raising institutional venture capital, but a small or family business based in California is usually better off with a California entity.
Is an LLC or an S corporation better in California?
It depends on revenue, profit, how the owners are paid and the exit plan. The LLC fee is based on gross income, while an S corporation pays a reduced-rate entity-level tax on net income. The comparison should be run with real numbers and with the owners’ tax preparer.
Can I put my rental property in an LLC?
Yes, and it is common. The deed transfer is generally excluded from reassessment if ownership proportions stay the same, but later transfers of LLC interests can trigger reassessment under Revenue and Taxation Code § 64. Lender consent, title insurance and the annual tax should all be addressed before the transfer.
What happens if my California company is suspended?
A suspended entity loses its rights and powers, including in many cases the right to defend or bring a lawsuit and to enforce its contracts. Revival requires filing missing statements and returns and paying amounts owed. It is much easier to stay current than to revive.
Does a new California LLC owe the $800 tax in its first year?
Under current FTB guidance, the first-year exemption for LLCs applied only to LLCs organized or registered between 2021 and 2023. LLCs formed outside that window should plan to pay the annual tax for their first taxable year.
Speak With a California Entity Formation Attorney
Holmes Law helps California business owners choose an entity, file it correctly and put the governing documents and tax planning in place from the start. The practice is remote, so meetings happen by phone or video wherever you are in California. To discuss forming a new California LLC or corporation, or reviewing an entity you already have, contact Holmes Law to schedule a consultation with Michael Holmes. Contacting Holmes Law does not create an attorney-client relationship, and this page is general information, not legal advice for your situation.