Choosing the Right Business Entity in California (2025 Edition)
Choosing the right legal structure is one of the first and most important decisions a business owner can make. Your entity type affects everything from taxes and liability to compliance and credibility. For California entrepreneurs in 2025, understanding the options—and the latest state-specific considerations—is essential to laying a strong legal and financial foundation.
Understanding Entity Types and Why They Matter
Starting or expanding a business in California means making an important decision about your legal structure. The business entity you choose affects your taxes, liability, and how much paperwork you’ll deal with each year. In 2025, with California laws and federal tax rules constantly evolving, choosing the right structure is more important than ever.
This blog compares the most common entity types: sole proprietorships, general partnerships, limited partnerships, LLCs, S corporations, and C corporations—focusing on legal liability, taxation, and administrative obligations. Whether you’re a new entrepreneur or rethinking your business structure, this guide will help you better understand your options and how they apply in California.
Sole Proprietorships
Sole proprietorships are the simplest form of business. There is no legal separation between you and your business—you report income and losses directly on your personal tax return, and you’re personally liable for debts or lawsuits. It’s easy and inexpensive, but it offers no liability protection.
A sole proprietorship makes sense for side businesses, freelancers, or low-risk ventures, especially those just getting started. However, as your business grows or begins to assume risk, the lack of liability protection may become a concern.
General Partnerships
General partnerships operate similarly to sole proprietorships but involve two or more people. Unless otherwise specified by a written agreement, each partner shares equally in management, profits, and losses. Like sole proprietors, general partners are personally liable—not just for their own actions, but also for those of their partners.
This structure is quick to establish and offers simple pass-through taxation. However, the unlimited liability and shared responsibility make it crucial to have a clear partnership agreement and to work only with trusted individuals.
Limited Partnerships (LPs)
A limited partnership offers more complexity and some liability protection. In an LP, at least one general partner manages the business and bears unlimited liability, while limited partners invest capital and enjoy liability protection up to the amount of their investment—as long as they remain passive.
LPs are often used in investment ventures or real estate, where passive investors want to participate in profits without being involved in daily operations. In California, LPs must be registered with the Secretary of State and meet specific filing and tax obligations.
Limited Liability Companies (LLCs)
Limited liability companies are one of the most flexible and popular entity types for California businesses. LLCs combine liability protection with operational flexibility and various tax options. Members of an LLC are generally not personally liable for company debts.
By default, single-member LLCs are taxed as sole proprietorships and multi-member LLCs as partnerships. However, LLCs can elect to be taxed as an S corporation or a C corporation, depending on what’s most advantageous. This flexibility makes LLCs a top choice for many small businesses, professionals, and family-run operations.
LLCs in California must pay an $800 annual franchise tax. If the business earns more than $250,000 in gross receipts, an additional LLC fee applies based on the company’s revenue. As of 2025, California no longer waives this $800 fee in the first year, so new businesses should factor it into their budgets.
Administrative requirements are relatively light—LLCs must file Articles of Organization, a Statement of Information, and maintain an operating agreement. Unlike corporations, they aren’t required to hold formal meetings or issue stock, making them easier to manage.
S Corporations
An S corporation is a corporation that elects a special tax status with the IRS to avoid double taxation. Like an LLC, it offers pass-through taxation, meaning profits and losses are reported on the individual tax returns of shareholders. However, S corporations must meet specific requirements, including having 100 or fewer shareholders, offering only one class of stock, and limiting shareholders to individuals (not partnerships or corporations).
In an S corp, owner-employees must be paid a "reasonable salary" subject to payroll taxes. Any remaining profits can be distributed as dividends, which are not subject to self-employment taxes. This creates an opportunity for potential tax savings compared to LLCs taxed as partnerships.
California imposes a 1.5% tax on an S corp’s net income, or a minimum of $800 annually. S corporations must observe corporate formalities like issuing stock, holding annual meetings, and keeping minutes. They also require separate corporate bylaws and shareholder agreements.
For owner-operated businesses with consistent profits, S corp status can provide tax efficiency and liability protection. Many LLCs eventually elect S corp taxation once they reach certain income thresholds.
C Corporations
C corporations are traditional corporations taxed separately from their owners. This means that profits are taxed once at the corporate level and again when distributed to shareholders as dividends—known as double taxation.
C corps are more formal and require strict compliance with corporate procedures, including maintaining bylaws, issuing stock, filing annual reports, and holding regular board and shareholder meetings. In exchange, they provide the strongest liability protection and are often favored by investors.
While C corps are typically not ideal for small service businesses due to double taxation and complex compliance, they are well-suited for companies planning to reinvest profits, attract venture capital, or go public. California C corps pay an 8.84% state income tax, and like other entities, must pay the $800 minimum franchise tax.
2025 Updates to Keep in Mind
Qualified Business Income (QBI) Deduction: The 20% QBI deduction for pass-through entities remains available for 2025 but is scheduled to expire in 2026 unless extended by Congress. This deduction may reduce taxable income for owners of LLCs, S corps, and partnerships.
The QBI deduction allows eligible business owners to deduct up to 20% of their qualified business income from their taxable income. It applies to sole proprietorships, partnerships, S corporations, and certain LLCs. However, eligibility phases out for higher-income earners—especially those in "specified service trades or businesses" like law, medicine, and consulting. The deduction applies only to income taxes, not self-employment or payroll taxes, and is subject to various IRS limitations and calculations.
End of First-Year Franchise Tax Waiver: California no longer offers the first-year $800 franchise tax waiver for new LLCs and LPs. This affects startup budgeting and entity planning.
Corporate Transparency Act: On March 26, 2025, the U.S. Department of the Treasury removed the reporting requirements for U.S. citizens and domestic reporting companies. This decision means that domestic entities are no longer required to submit beneficial ownership information (BOI) to FinCEN under the CTA.
Conclusion
Choosing the right business entity is a foundational decision that impacts your liability exposure, tax treatment, administrative obligations, and ability to raise capital. Sole proprietorships and partnerships offer simplicity, but lack protection. LLCs and S corporations offer liability shielding and potential tax advantages, making them ideal for many California business owners. C corporations remain essential for startups seeking investment or long-term growth through reinvestment.
Ultimately, the right structure depends on your specific business goals, income, industry, and risk tolerance. What’s right for one entrepreneur may not be right for another.
Need help choosing the right entity? Contact Devey Law, A Professional Law Corporation to schedule a Consultation. We guide California businesses through formation, compliance, restructuring, and succession planning—ensuring you’re built on a solid legal foundation.
Need help with Incapacity Planning, Estate Planning, Trust Administration, Probate, or Business Law? Devey Law is here for you. Call us at 805.720.3411 or email info@deveylaw.com to schedule a consultation.
This blog is for informational purposes only and does not constitute legal advice. Reading this blog does not create an attorney-client relationship between you and Devey Law, A Professional Law Corporation. Laws and regulations may change, and the information provided may not reflect the most current legal developments.
