How to Start an S-Corp in California


Steve Bennett
Steve Bennett
Business Formation Expert
Steve runs LLCBuddy, helping entrepreneurs set up their LLCs easily. He offers clear guides, articles, and FAQs to simplify the process. His team keeps everything accurate and current, focusing on state rules, registered agents, and compliance. Steve’s passion for helping businesses grow makes LLCBuddy a go-to resource for starting and managing an LLC.

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Start an S-corporation in California

California, popularly known as The Golden State, offers a bunch of benefits for business owners, especially the state capital Sacramento has a lot to offer to the rising entrepreneurs in the state. If you want to start a business in California, you must choose an appropriate corporate structure. You can have a corporation or a sole proprietorship or set up an LLC in California. There are a few guidelines that you should be aware of when it comes to starting an S-Corporation. In California, S-Corporation is businesses’ most common corporate structure, especially start-ups. It was developed in order to give companies limited liability protection while preserving the advantages of being a distinct legal organization.

In this article, you will learn about how to start an s-corporation in California. You will also learn whether an s-corporate business structure suits your business. Please read all the points carefully before starting your business in California.

What is an S-Corp in California?

An S corporation (S-corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other business structures. It’s a tax classification that might result in significant financial savings for both corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

If you want an S corp status for your business, you can always form an LLC to protect your personal assets from business debts. It takes some basic steps to have a successful s-corporation in California. S-Corps do pay corporate income taxes, but they are still treated as disregarded companies for federal tax purposes.

S-corps pay corporate taxes that LLCs do not have to pay. If you want to have an S-corp status, then we would recommend you have an LLC instead. This will protect your personal assets from your business liabilities and you don’t have to pay any corporate taxes.

–LLCBuddy Editorial Team

Limitation and Requirements of S-Corp in California

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

If you are qualified for the limitations and requirements, you can apply for an S-Corp in California.

How to Start an S-Corporation in California?

To create S-Corp in California, you must follow the below guidelines that include forming a business name, hiring a Agent for Service of Process, filing your Articles of Organization, creating an operating agreement in California, requesting an EIN, filing a form 2553.

Step 1: Register a Business Name in California

After you have decided on the idea to start an S-Corp in California, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an LLC, there is a complete guide on California LLC name guidelines for a proper LLC name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in California.
  • Limit of restricted words that need a license in California, for example, doctors, attorneys, etc.
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hiring the California Agent for Service of Process

The next step in starting an S-corp in California is hiring a California Agent for Service of Process, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence in California. Forming an LLC and an S-corp will be easier if you have Agent for Service of Process in California.

Step 3: File Your California Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). California Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. In order for the “Articles of Organization” to be filed, you need to pay a filing fee to the state. In California, the filing fee is $70.

In California, along with the Articles of Organization, you must send the Statement of Information to file your company. The statement of information is a mandatory document in California, but other states do not have this document.

Step 4: Creating an Operating Agreement in California

After you have filed your Articles of Organization in California, the next step is to create an LLC operating agreement in California. The California LLC operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following-

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure. For more details about how an operating agreement works, please check Operating Agreement.

Step 5: Request for EIN in California

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in California can be through the following:

  • Apply Online- You can apply for EIN online, the most desirable and fastest method for users.
  • Apply by Fax- Another method of obtaining EIN is to fax Form SS-4 (PDF) after entering all the correct information to (855) 641-6935.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is 4 weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, we can get your EIN for you. Our EIN service is quick and hassle-free. For more details about EIN for your business, check why you need EIN.

Step 6: File Form 2553 for Your S-Corp Business in California

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, in order to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS. In California, you can send your form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Advantages of Starting an S-Corporation in California

Filing an S-Corp in California has numerous benefits and advantages.

  • Writing Off Losses: With S-corp, owners can deduct business losses from their individual income statements. If the company loses money in the first few years, it may balance its other sources of revenue. Even so, understand the shareholder loss limitations set by the IRS.
  • Pass-Through Taxation: Starting an S-Corp is the widely known advantage in forming this kind of business structure since an s-corp uses a pass-through taxation structure. The company does not pay twice the tax in this kind of taxation. Because of this structure, most start-ups and entrepreneurs in California apply for an S-Corp LLC.
  • Qualified Business Income Deduction: A qualified business income, or QBI, is the total of all qualified items of income, gain, deduction, and loss from any qualified trade or business, including S-Corp. With this, S corp owners may deduct up to 20% of their eligible earnings under the Tax Cuts and Jobs Act.

FAQs

What is an S-Corp?
An S-Corp is a type of corporation that is recognized by the Internal Revenue Service (IRS) and the California Secretary of State. It offers the same legal protection and tax benefits as other types of corporate entities, but also offers its owners more flexibility in terms of taxation.
What are the advantages of forming an S-Corp in California?
Forming an S-Corp in California offers several advantages to business owners, such as limited liability protection, access to special tax credits, and the ability to raise capital through stock issuance. Additionally, California laws provide additional flexibility in terms of ownership and management structure.
How do I form an S-Corp in California?
To form an S-Corp in California, you must first file a certificate of incorporation with the California Secretary of State. You must also file Form 2553 with the IRS, and obtain a state Employer Identification Number (EIN). Additionally, you must draft and adopt corporate bylaws and put together a board of directors.
Who can be an owner of an S-Corp in California?
Generally, any natural person, such as a US citizen or resident alien, can be an owner of an S-Corp in California. Additionally, certain types of trusts, estates, and certain types of corporations may also be eligible to be an owner of an S-Corp in California.
What are the tax implications of forming an S-Corp in California?
Generally, owners of an S-Corp in California are taxed on their share of the S-Corp’s income. This means that the S-Corp’s profits are not taxed at the corporate level, but are instead passed on to the owners and taxed at their individual tax rates.
What are the annual filing requirements for an S-Corp in California?
An S-Corp in California must file an annual Statement of Information with the California Secretary of State. Additionally, the S-Corp must file an annual federal tax return with the IRS and may be required to file additional state and local tax returns.
Are there any restrictions on the types of activities an S-Corp in California can engage in?
Generally, an S-Corp in California can engage in any type of activity that is legal in the state. However, some activities, such as certain investment activities, may be restricted or prohibited by the state.
What are the requirements for paying myself as an owner of an S-Corp in California?
Generally, owners of an S-Corp in California must pay themselves a “reasonable” salary for their services. This salary should be in line with the market rate for similar positions in the industry and should be based on the number of hours worked and the complexity of the tasks being performed.
What are the requirements for issuing dividends to owners of an S-Corp in California?
Generally, dividends are distributions of profits to owners of an S-Corp in California and must be formally declared by the board of directors. Additionally, the S-Corp’s profits must be sufficient to cover the dividends, and the dividends must be issued proportionally according to the owners’ ownership interests.
How do I dissolve an S-Corp in California?
To dissolve an S-Corp in California, you must first notify the Secretary of State and the IRS of your intent to dissolve the S-Corp. You must also file a final federal tax return and pay any outstanding taxes. Finally, you must formally dissolve the S-Corp by filing a certificate of dissolution with the Secretary of State.
What are the benefits of forming an S-Corp in California?
Forming an S-Corp in California offers benefits like limited liability protection for the owners, potential tax savings for the business and its owners, and the ability to raise capital more easily.
What are the steps to start an S-Corp in California?
The steps to start an S-Corp in California include choosing a business name, filing the Articles of Incorporation with the California Secretary of State, creating a corporate bylaws and operating agreement, obtaining a federal Employer Identification Number from the IRS, and obtaining any necessary licenses and permits from the local government.
What documents are required to form an S-Corp in California?
The documents that are required to form an S-Corp in California include the Articles of Incorporation and the corporate bylaws and operating agreement.
How much does it cost to form an S-Corp in California?
The cost to form an S-Corp in California typically ranges from $100-$800, depending on the complexity of the filing and additional services that are requested.
How long does it take to form an S-Corp in California?
It typically takes between 2-4 weeks to form an S-Corp in California, depending on the complexity of the filing and any additional services that are requested.
Is it mandatory to have a board of directors for an S-Corp in California?
Yes, an S-Corp in California must have a board of directors that is responsible for managing the operations and making decisions on behalf of the corporation.
What are the tax implications of an S-Corp in California?
An S-Corp in California is subject to federal, state, and local taxes. The federal taxes include income tax, payroll tax, and self-employment tax. The state taxes include income tax and franchise tax. The local taxes may include business license tax and personal property tax.
What is the legal process for closing an S-Corp in California?
The legal process for closing an S-Corp in California includes filing a Certificate of Dissolution with the California Secretary of State, notifying all creditors and customers of the dissolution, filing Form 966 with the IRS, and submitting final tax returns and paying any outstanding tax liability.
What is an S-Corp in California?
An S-Corp in California is a type of business entity that is organized and taxed as a corporation under state law, but can elect to be taxed as a pass-through entity under the federal tax code.
What is the California tax rate for an S-Corp?
The California tax rate for an S-Corp is the same as the state’s income tax rate, which is currently a flat rate of 9.3%.
What documents do I need to form an S-Corp in California?
The documents you need to form an S-Corp in California are the Articles of Incorporation, an Employer Identification Number (EIN), and an Operating Agreement.
Is there a fee to form an S-Corp in California?
Yes, there is a fee to form an S-Corp in California. The filing fee for the Articles of Incorporation is $100.
What is the California Annual Franchise Tax for an S-Corp?
The California Annual Franchise Tax for an S-Corp is $800.
What are the ongoing requirements for an S-Corp in California?
The ongoing requirements for an S-Corp in California include filing an Annual Statement of Information, holding annual meetings, issuing stock certificates, and filing taxes each year.
What are the additional costs associated with an S-Corp in California?
The additional costs associated with an S-Corp in California include legal and accounting fees, costs for maintaining corporate records, and taxes.
Do I need to register my S-Corp with the California Secretary of State?
Yes, you will need to register your S-Corp with the California Secretary of State by filing the Articles of Incorporation.
What is the deadline for filing taxes for an S-Corp in California?
The deadline for filing taxes for an S-Corp in California is the 15th day of the 4th month after the end of the taxable year.
How do I pay taxes for an S-Corp in California?
To pay taxes for an S-Corp in California, you must file Form 100S, which is the Corporation Franchise or Income Tax Return for an S-Corporation.
What is the penalty for not filing taxes for an S-Corp in California?
The penalty for not filing taxes for an S-Corp in California is a minimum fine of $20 and a maximum fine of $2,500 or 2.5% of the unpaid taxes due, whichever is greater.
What is the cost to dissolve an S-Corp in California?
The cost to dissolve an S-Corp in California is $30 for filing the Articles of Dissolution.

Also Read

Why California S Corporation is So Important

An S Corporation is a type of corporation that offers business owners the liability protection of a traditional corporation while also providing some tax benefits commonly found in partnerships or sole proprietorships. What makes the S Corporation so important in California, and in states across the nation, is its flexibility and ability to accommodate a wide range of business needs.

One of the key benefits of an S Corporation is pass-through taxation. This means that the corporation itself does not pay taxes on its income. Instead, the income is “passed through” to the shareholders, who report it on their personal tax returns. This can result in significant tax savings for shareholders, as they can potentially pay a lower tax rate on their share of the corporation’s income compared to if the corporation paid taxes at the corporate level.

Another advantage of an S Corporation is limited liability protection. Like a traditional corporation, an S Corporation protects its shareholders from personal liability for the company’s debts and legal obligations. This separation between the business and its owners can be crucial in protecting personal assets and safeguarding against unforeseen liabilities.

Moreover, an S Corporation is not limited to the number or type of shareholders it can have. This flexibility allows business owners to choose the ownership structure that best fits their needs, whether that be a small family-owned business or a larger corporation with a diverse group of shareholders. This flexibility also extends to the distribution of profits, giving shareholders the ability to allocate income in a way that benefits them personally from a tax perspective.

In California, specifically, the benefits of operating as an S Corporation are especially valuable due to the state’s hefty tax burden. With one of the highest marginal income tax rates in the nation, California residents and business owners may benefit greatly from the pass-through taxation available to S Corporations. Additionally, the state’s complex regulatory environment can make liability protection essential for business owners looking to mitigate risks.

Ultimately, the S Corporation serves as a valuable tool for business owners looking to strike a balance between liability protection, tax advantages, and flexibility in ownership structure. With its ability to adapt to a variety of business needs and goals, the S Corporation has become an indispensable option for entrepreneurs in California and beyond. By understanding the importance of this business structure and its potential benefits, business owners can take advantage of the opportunities it offers to grow and thrive in an ever-evolving business landscape.

Conclusion

In conclusion, starting an S-corp in California is a strategic choice for entrepreneurs seeking the benefits of limited liability and favorable tax treatment. One can successfully establish an S-corp by following the outlined steps, including selecting a unique name, filing the Articles of Incorporation, obtaining necessary licenses, and adhering to state-specific regulations. Ultimately, this corporate structure offers a strong foundation for business growth and protection, making it a worthwhile consideration for those looking to launch a venture in California.

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