So form your business elsewhere. It's true that some states are more friendly to small businesses than others, but generally the reasoning holds true. If that's not enough, you could always pick up shop and shift your nexus to another state.<p>It's really up to the owners judgment, but a significant franchise tax bill on a small business might be preferred over the additional administrative requirements for running an S corp. At least in the former scenario, you are bringing in some nice revenue.<p>[UPDATE: here's some info on California S corp vs. LLC: <a href="http://en.wikipedia.org/wiki/S_corporation#California.2C_New_York_City_additional_taxes" rel="nofollow">http://en.wikipedia.org/wiki/S_corporation#California.2C_New...</a>]