Tax News
What are the Differences between S Corporations and Limited Liability Companies?

In California there are various ways someone chooses to conduct business. To assist a new business owner in deciding which form of ownership will best meet their needs, get FTB 1123, Franchise Tax Board Guide to: Forms of Ownership, as an overview with filing guidelines. 

The question we hear most often is “What are the differences between S corporations and Limited Liability Companies (LLCs)?”

The first thing to remember is an LLC is a legal business entity formed under state law. Generally to form an S corporation you must first create a corporation under state law. Then you must make a timely federal tax election to be an S corporation under Internal Revenue Code (IRC) Section 1362(a)(1). This S corporation election is made by filing the federal Form 2553, Election by a Small Business Corporation, with the Internal Revenue Service (IRS). However, even a taxpayer whose default classification is a partnership or a disregarded entity may seek to be classified as an S corporation, provided the entity meets all other requirements to qualify as a small business corporation under IRC Section 1361(b)[1]

The S corporation election affects the taxation of the business; however, it does not change the business’s legal form[2] (i.e., corporation, LLC, partnership or sole proprietorship), so the underlying structure and the legal requirements of the business entity do not change. For example, corporations are required under California Corporation Code to have annual meetings, and maintain corporate minutes, LLCs are not. Corporations required to file a Statement of Information with the California Secretary of State (SOS) every year, while LLCs are required to file the Statement of Information biannually (every two years) with SOS. An S corporation election will not change these requirements.

A taxpayer who has a valid federal S corporation election must file in California as an S corporation using our Form 100S, California S Corporation Franchise or Income Tax Return.[3]

In California, an S corporation election can have a major effect on a business entity. To help assist you, we put together the following chart showing some of California differences between an S corporation and an LLC:

LLC S Corporation
Tax forms 568 100S
Business entity tax and fee Yes

Annual tax $800 (due on the 15th day of the fourth month from the start of the tax year)

LLC fee of:
$0, $900, $2,500, $6,000, or $11,790 based on California sourced total income plus cost of goods sold (California sourced gross receipts)

Yes

Business and California non-business Income is taxed at 1.5% or minimum tax $800 whichever is more

In addition, there is a Q sub tax of $800

Estimated fee or tax form FTB 3536, Estimated Fee for LLCs

Estimated LLC fee is due and payable on 15th day of the sixth month after the beginning of the tax year.

Any additional fee amount is payable by the original due date of the LLC return.

Form 100-ES, Corporation Estimate Tax

Estimated tax due on the 15th day of fourth, sixth, ninth and 12th month.

Tax return date due Annual tax due15th day of 4th month of its taxable year Income or franchise tax due 15th day of 3rd month after close of its tax year (March 15 tax return due date)
Extension form FTB 3522, LLC Tax Voucher FTB 3539, Payment Voucher for Automatic Extension for Corporations or Exempt Organizations, or FTB 3586, Payment Voucher for Corporations and Exempt Organizations (e-filed) Returns
First year annual tax/minimum franchise tax exception No Yes
Business entity estimated payments Yes Yes
Estimated due dates Estimated LLC fee

June 15 (15th day of 6th month)

April 15 – 30%
(minimum $800)
June 15 – 40%
September 15  – 0%
(total paid should be 70%)
December 15 – 30%
Form to report distributive share of income Schedule K-1 (568), Member’s Share of Income, Deductions, Credits, etc. Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc.

Note: There may be tax and legal consequences in electing to be treated as an S corporation. Taxpayers may wish to seek further advice from an expert before making an election.

For more information on key features and filing guidelines of various forms of business, get FTB 1123 or our audio presentation Small Business Video Presentation at ftb.ca.gov.

[1] For more details on the eligibility tests get IRS Instructions for Form 2553, Election by a Small Business Corporation.

[2] To change (convert) a business’s legal form proper documents would need to be filed with the Secretary of State’s office.

[3]Revenue and Taxation Code (R&TC) Sections 23801 and 18601

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