Should I be a sole proprietor or LLC for my trades business in California?
Sole proprietorship is the default when you start operating as a one-person trades business. No paperwork, no filing fees, and income flows straight to your personal tax return on Schedule C. The tradeoff is that you have zero liability protection. If a client sues over work you did or someone gets hurt on your job site, your personal assets (house, savings, vehicles) are exposed.
An LLC adds a legal shield between your business and your personal life. Structured and operated properly, it keeps business liabilities from reaching personal assets. For trades work where property damage claims and injury risk are real, this protection matters. The catch in California is the $800 minimum franchise tax owed every year regardless of profit. New LLCs currently get the first year waived, but after that, $800 is the floor even in a loss year.
S-Corp election is a tax status, not an entity type. You can elect S-Corp taxation on an LLC once profits justify it. The benefit is reducing self-employment tax. As a sole prop or default LLC, all your net income gets hit with 15.3% SE tax. As an S-Corp, you pay yourself a reasonable salary subject to payroll taxes and take the rest as distributions that avoid SE tax. The break-even point where S-Corp treatment starts making sense is usually around $60K to $80K in net profit, after accounting for payroll costs and the added filing requirements.
California adds complexity most states don’t have. On top of the $800 franchise tax, LLCs with gross revenue over $250K owe an additional LLC fee that scales up to $11,790 at $5M and above. That fee is based on gross revenue, not profit, which catches a lot of trades operators off guard when they have a high-revenue, low-margin year.
The honest answer is that entity structure is a legal and tax decision, not a bookkeeping one. A CPA or business attorney who knows California law should look at your specific situation, including projected revenue, profit margin, risk exposure, and personal asset position, and recommend the right structure. Most established trades operators in Los Angeles County end up either as LLCs with S-Corp election or as S-Corps directly once they’re profitable enough to justify the overhead.
Where we come in is after the structure decision is made. Once you’ve formed an LLC or elected S-Corp status, the bookkeeping and payroll requirements change. Business and personal finances have to stay strictly separated or the liability shield can be challenged. S-Corp status means running real payroll with tax deposits, quarterly filings, and W-2s at year end. That’s where working with bookkeeping services in Pasadena that understand both compliance and how trades businesses actually operate keeps the structure you paid to set up working the way it was supposed to.
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