California Sole Proprietorship vs LLC:
Fees, Taxes, and Decision Guide (2026)
California is the most expensive state for LLCs among all 50. The $800/year minimum franchise tax applies even if you made no profit. Sole proprietors avoid this charge entirely. Here is what California residents need to know.
The $800 Minimum Franchise Tax: What Most People Miss
California levies an $800/year minimum franchise tax on every LLC, regardless of revenue or profit. This applies from the first year (though year-1 LLCs formed after January 1, 2021 get the first year waived). If your business makes zero profit, you still owe $800.
Sole proprietors in California do not pay this $800 charge. They pay California state income tax on business profit -- but only when they have profit. The LLC's $800 minimum applies no matter what.
California LLC Fees
$70
Articles of Organization filing fee
$800/yr
Annual franchise tax minimum
$20 every 2 yrs
Biennial report fee (Statement of Info)
13.3%
CA state income tax rate (highest)
5-Year Cost: California LLC vs Sole Proprietor
| Structure | Year 1 | Year 2-5 (each) | 5-Year Total |
|---|---|---|---|
| Sole Proprietorship | $0 | $0 | $0 |
| California LLC | $70 (yr 1 franchise waived) | $810/yr avg | $3,310+ |
California-Specific Guidance
California income tax applies to both structures
Both sole proprietors and LLC members pay California state income tax on business income (up to 13.3% for high earners). The LLC does not save California income tax by default. The difference is the $800 franchise tax minimum that LLCs pay and sole proprietors do not.
Gross receipts fee above $250,000
California also charges LLCs a gross receipts fee: $900 for $250k-$499k revenue, $2,500 for $500k-$999k, $6,000 for $1M-$4.99M, and $11,790 for $5M+. These are in addition to the $800 minimum. Sole proprietors avoid all of these.
Year-1 franchise tax waiver
California waived the first-year $800 franchise tax for LLCs formed on or after January 1, 2021. So a new LLC pays the waived $800 in year 1, then $800 every year thereafter. Do not count on this waiver continuing indefinitely.
Should California residents form in another state?
No. If you live and work in California, you must register as a foreign LLC in California regardless of where you form. This means paying $800/year to California plus fees to the out-of-state jurisdiction. Forming in Wyoming or Delaware from California costs more, not less.
Specific Recommendations for California Residents
Stay sole prop if...
- Revenue under $50k and low-risk work
- The $800/year minimum is a meaningful cost relative to income
- No clients requiring an LLC, no employees
Form a California LLC if...
- Revenue above $60k-$70k (S-Corp breakeven is higher given CA's $800)
- Physical services, products, or significant liability risk
- Clients requiring entity status, or hiring employees