Starting a Business in California? Should you start with an LLC?

LLC vs. S Corp in California: How to Choose the Right Entity for Your Business

Are you launching a new business or moving from W2 employee to contractor?

If so, you’ve probably heard about both LLCs and S Corporations... and you have questions!

“Do I start as an LLC? Should I just go straight to an S Corp?” 

We get this question all the time — and frankly the answer is "It depends", the entity choice for your business is custom to your needs.  What is best for your neighbor may not be best for you. 

But here’s what is true for most new business owners in California:

Starting as an LLC gives you legal protection and flexibility, and you can always elect S Corporation status later once the tax savings are worth the added complexity.

Let’s walk through why that works — and who it doesn’t work for.

Why Do So Many People Start With an LLC?

Have you asked yourself any of these lately?

• “How do I protect myself legally without overcomplicating things?”

• “Can I wait to deal with taxes until my business is actually making money?”

• “I just need something simple to get started — is LLC the way to go?”

If so, an LLC is probably a great starting point.

Here’s why:

• You get personal liability protection — your business is legally separate from you

• It’s flexible — you can be a solo owner or bring on partners

• Taxes are simple if you are a single owner

•  And when you're ready? You can elect S Corp status without changing your entity

In other words, it gives you room to grow — without making it complicated before you need to.

NOTE: Becoming an LLC does not provide tax savings, but it does add liability protection. The same tax deductions are availble to your business if you operate as a Sole Proprietorship as if you are operating as an LLC.

But… Not Everyone Can Form an LLC in California

Here’s something a lot of new business owners don’t realize:

Certain professions in California are not allowed to form LLCs.

Yep — if you work in a licensed profession that’s regulated by the state, you legally can’t form an LLC under California law.

Examples of professions that can’t be LLCs in California:

• Attorneys

• CPAs

• Doctors and surgeons

• Chiropractors

• Dentists

• Clinical social workers

• Psychologists

• Architects

• Engineers

• Veterinarians

If that’s you, don’t worry — you’re not out of options.

Instead, we help our professional clients form a Professional Corporation (PC) and then elect S Corporation status to get the tax benefits.  The only other alternative is to operate as a Sole Proprietorship and get a big insurance policy!

So whether you’re opening a therapy practice, private medical office, or law firm — we’ve got a strategy that fits your field. 

What’s the Deal With S Corporations?

Here’s where a lot of people get confused.

An S Corporation isn’t a business type — it’s a tax election you make with the IRS.

So technically, you don’t “form an S Corp.”
You form an LLC or C Corporation, then file IRS Form 2553 to be taxed as an S Corp.

Why go through that? One big reason:

Tax savings.

Once your business is consistently earning $50,000 or more in net profit, an S Corp structure can help you save thousands on self-employment taxes each year.

We work with business owners all the time, and this is usually the turning point:
💡 When your profit hits that $50K+ mark, the math starts to make sense.

But here’s the thing — S Corps come with extra work:

• You have to run payroll for yourself

• File an additional business tax return (Form 1120-S)

• Pay yourself a “reasonable salary”

• Keep up with tighter bookkeeping and compliance

• Save more in taxes with our S Corporation Optimization Strategies

That’s why we don’t usually start with an S Corp — but we do plan for it. 

What’s the Smart Move?

Here’s the path we guide most of our clients through:

1. Start with an LLC (if you’re allowed to)

• You get legal protection right away

• You keep startup and admin simple

• You don’t overpay for complexity you don’t need yet

2. Elect S Corp Status When the Time Is Right

• Typically around $50K+ in annual net profit is when the ROI on tax savings is more than the cost to run an S Corp and when our discussions begin with clients. 

• The tax savings begin to outweigh the costs - read more at What does an S Corp cost?

• When you are ready to follow the additional compliance requirements, admin and bookkeeping that will be required of S Corporations 

Bonus: Already Have an LLC?

You’re halfway there.
Electing S Corp status is just a tax filing — no need to change your name, EIN, or bank account.
Just file Form 2553, adjust how you pay yourself, and you’re off and running. 

We do recommend you reach out and have a tax professional help in filing the S Corporation Election. Fixing an incorrect 2553 will be an IRS nightmare that we don't wish on anyone.

Example: Alex the Therapist

Alex is a licensed therapist in California.
Because of state law, he can’t form an LLC — so we helped him set up a Professional Corporation (PC) instead...when his profits reached the point where it made sense.

His first year, he brings in $38,000 in profit — not quite ready for S Corp status yet and so he operated as Sole Proprietor.

By year two, he’s going to make $90,000 in profits.

We step in to:

• Setup a new Professional Corporation and Elect S Corporation status 

• Set him up with payroll

• Save him nearly $7,000 in self-employment taxes

All without changing his business name, branding, or EIN. 

Example: Emma the IT Consultant

Emma left her W2 job in California and is consulting now on the side.
She can form an LLC.

Her first year, she brings in $25,000 in profit — not quite ready for S Corp status yet

By year two, she’s going to make $100,000 in profits.

We step in to:

• Elect S Corporation status on her LLC

• Set her up with payroll

• Save her nearly $10,000 in self-employment taxes

All without changing her business name, branding, or EIN because her LLC was already in place.

So... What’s Right for You?

If you’re just getting started:

• Can you legally form an LLC in your field?

• Is your goal to grow, but keep things manageable for now?

• Are you making under $50K profit so far?

If you answered “yes,” an LLC is likely the smart move for today — and we’ll help you level it up later when S Corp savings kick in.

But if you're in a licensed profession or your profit is already growing fast, it might be time to start with a Professional Corporation and S Corp combo right from the jump. 

Let’s Get You Set Up the Smart Way

At Julie R Merrill CPA & Associates, we help new business owners every day — from coaches and consultants to lawyers and therapists — get their business foundations in place, and right from day one.

Schedule a Business Consultation so we can determine what is best for you. Because even if the numbers "make sense" on paper, you may not be ready for the increased admin and compliance that comes along with an S Corporation.

We are going to listen to your goals and personal needs and then we provide advice that is tailored to your situation.

And after you setup your business, we don't go away. We are here for you as much or as little as you need us to be involved.

...because when you do become an S Corporation, your tax-saving toolkit explodes and we are here to help you optimize those tax savings when you get ther.

📩 Want help with your new business next steps?
Book a Business Consultation with our new business experts. You bring the vision. We’ll help you build it right.

Disclaimer: We are not attorneys are not providing legal advice...in this article or in our consultations. In all the filings that we provide to clients, we work with attorneys and legal service partners to do the legal legwork for us.