Choosing the Right Entity for Your California Business: S-Corp vs LLC vs C-Corp
- Michael Silvers
- Jul 22
- 2 min read
If you're a lawyer, accountant, doctor, or other licensed professional in California, your business structure isn’t just a technicality—it directly affects your tax bill and personal liability. And while many start out as sole proprietors, that choice quickly becomes inefficient and risky once your income grows.
This week on The Silvers Financial Weekly Brief, we break down why the California Professional Corporation with an S-Corp election is often the best option for profitable, owner-operated practices.
Why Your Entity Choice Matters
Two core reasons:
Liability protection – shields your personal assets from business debts or malpractice by others in your firm.
Tax efficiency – allows you to reduce self-employment taxes and legally keep more of what you earn.
Common Structures (and Their Drawbacks)
Sole Proprietorship
Easy to start
Offers zero personal liability protection
100% of profit is hit with self-employment tax (~15.3%)
LLC
Offers liability protection
Not permitted for licensed professionals in California
Still taxed like a sole proprietorship unless S-Corp status is elected
Pays $800+ in annual state fees
C Corporation
Provides strong protection and long-term structure
Subject to double taxation: corporate profits + personal dividends
Not eligible for QBI deduction or pass-through tax treatment
Often not worth it unless you’re raising capital or reinvesting heavily
The Smart Choice: Professional Corporation with S-Corp Election
Why it works:
Meets California’s legal requirement for licensed professionals
Offers protection against malpractice by others in your firm
Allows for S-Corp tax election, splitting income between salary and distributions
The tax benefit:
Only your W2 salary is subject to employment taxes
Remaining profit (distributions) is exempt from self-employment tax
Result: Significant savings once your profit exceeds ~$60,000 annually
Real-World Example
You earn $100,000 net income:
As a sole proprietor: pay ~$15,300 in self-employment tax
As an S-Corp (with a $60,000 salary): pay ~$9,180 in payroll tax, with $40,000 exempt
That’s over $6,000 in savings—every year
At $300,000 in profit, those savings can exceed $22,000 annually.
Other Advantages of S-Corp Status
Pass-through taxation (no federal corporate tax)
Eligible for the 20% QBI deduction
Can deduct health insurance, retirement, and other benefits
Perpetual existence, easier succession planning
California-Specific Notes
Franchise tax: 1.5% of net income or $800 minimum
First-year exemption available for new corps
Estimated tax payments required quarterly
Final Thought
If your practice is profitable and growing, the Professional Corporation with S-Corp election offers the best balance of liability protection and tax savings in California. It's not always simple, but it is strategic—and the long-term savings speak for themselves.
Have questions or want us to cover a specific topic? Send them in—we might feature your question next week.
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