State Deep Dive
C Corp vs S Corp in California
California imposes the highest combined S corp cost of any US state: an $800 minimum franchise tax (paid every year regardless of income), a 1.5 percent S corp franchise tax on net income, and no state conformity to the federal QSBS Section 1202 exclusion. The math may flip the federal-only S corp decision for California operators.
Updated May 2026. Not tax advice.
California numbers at a glance
Minimum franchise tax
$800
Both C and S corps
S corp tax rate
1.5%
Of net income
C corp tax rate
8.84%
Of net income
The $800 minimum franchise tax
Every California corporation (C or S) and LLC pays an $800 minimum franchise tax to the Franchise Tax Board each year, regardless of income. Paid by April 15 for calendar-year filers. First-year exemption for corporations was extended through 2024 then ended; for entities formed 2025 onward, the $800 minimum applies in the first year. Verify current first-year rules at the FTB.
This is independent of the percentage-based franchise tax. An S corp with $100,000 net income pays the greater of $800 minimum or 1.5% of net income ($1,500), so it owes $1,500.
Source: California FTB S Corporations
The 1.5% S corp franchise tax
California imposes a 1.5 percent franchise tax on the net income of S corporations, on top of the personal income tax shareholders pay on the pass-through K-1. This is unusual: most states either tax the S corp shareholders only (pass-through) or treat the S corp like a C corp at the entity level. California does both.
For a California S corp with $500,000 net income, the entity owes $7,500 in state franchise tax (1.5 percent of $500k). Shareholders then pay California personal income tax on the same $500,000 on their personal returns at marginal rates up to 13.3 percent. The combined California cost may exceed $74,000 on $500k of S corp income.
Worked example: $400k profit California operator
| Line | S Corp | C Corp |
|---|---|---|
| Net income | $400,000 | $400,000 |
| Federal corporate tax | $0 pass-through | $84,000 (21%) |
| CA franchise tax | $6,000 (1.5%) | $35,360 (8.84%) |
| Federal personal tax on $400k | ~$95,000 (varies) | $0 if reinvested |
| CA personal tax on $400k | ~$33,000 (avg ~8.3%) | $0 if reinvested |
| SE-tax saving above salary | ~$10,000 | N/A |
| Total California cost (entity only) | $6,000 | $35,360 |
Indicative example. Personal tax depends on filing status, deductions, and total income. PTET workaround (next section) may reduce the impact for S corp owners.
The PTET workaround for SALT cap
California adopted Pass-Through Entity Tax (PTET) in 2021 under AB 150 (codified at Cal. Rev. and Tax. Code Sections 17052.10, 19900-19906). S corps and partnerships may elect to pay an entity-level 9.3 percent tax on qualified net income; the federal deduction at the entity level effectively bypasses the $10,000 SALT cap for shareholders.
For a California S corp with $400,000 of qualified net income, the PTET election pays $37,200 at the entity level, and shareholders receive a credit on their California personal returns for the same amount, while taking the federal deduction at the entity level. The net federal tax saving may exceed $13,000 for the shareholder. The PTET election was extended through tax year 2030 by SB 113.
California does not conform to QSBS Section 1202
One of the strongest C corp arguments (federal QSBS exclusion of up to $10M or 10x basis) provides no California state tax benefit. A California-resident founder selling C corp QSBS for $10M owes zero federal capital gains tax but pays California personal income tax at marginal rates up to 13.3 percent on the full gain.
For founders building a venture-track company, the QSBS state nonconformity often means establishing residence in a QSBS-conforming state (Texas, Florida, Washington) before sale. This is a residency planning issue, not an entity choice issue.
Source: Cal. Rev. and Tax. Code Sections 17152 and 18152.5 (California QSBS conformity history). California QSBS rules were invalidated by Cutler v Franchise Tax Board (193 Cal.App.4th 960, 2012) and the legislature subsequently allowed the deferral provisions to expire.
Sources
- California FTB S Corporations
- California FTB Form 100S Booklet
- California FTB PTET
- California Secretary of State business entities
Educational only. Consult a California CPA for your specific situation. PTET elections have deadlines that vary by tax year.