The steps for starting an S corporation in California are pretty straightforward. You can start an S corporation by either creating a limited liability company (LLC) or just forming a corporation. The next step entails electing S corp status from the IRS. All this happens during your application for an employer identification number (EIN). Do you know what an IRS is?

An IRS (internal revenue service) is a form of tax classification and not a business structure. Normally, renouncing your business as an S corp helps you in minimizing possible tax burdens and gaining other tax advantages. When creating an S corp, there are some basic requirements and steps to fulfill. What is an S corporation? Read on to know how to easily create one in California.

What Is an S Corporation?

S corporation

An S Corporation or S Corp is a type of business entity that can be formed under civil law, or by the choice of another business entity to be taxed in a certain way. For example, a business can be formed as a partnership, a domestic corporation, or a limited liability company (LLC), and then the business can elect to be taxed under subchapter S of the internal revenue code (IRC). This makes the business an S Corp.

Before electing to be taxed as an S Corp, the business must first choose to be taxed as a corporation. An S Corp must have a separate bank account and keep separate records for its taxable income.

Each corporation shareholder of an S Corp has limited liability for their passive investment income. This limits losses to the assets of the S Corp and does not affect the income taxes of business owners. The corporate structure, as well as how long the business will be in existence, depends on the underlying business income and outstanding shares.

For example, a corporation or an LLC makes a good legal business entity. With limited liability protection, your S corp will acquire a new tax status with minimal tax time. The tax rate and required tax payments may significantly be reduced. Most people shift their business to S corporation for tax purposes.

To qualify for S corporation status, the corporation must meet the following strict requirements:

  • Be a domestic corporation
  • Maybe individuals, certain trusts, and estates
  • May not be partnerships, corporations, or non-resident alien shareholders
  • Have no more than 100 shareholders during original reporting
  • Have only one class of stock at the corporate level
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

Purpose of an S Corporation in California

The main feature of the S Corporation in California is that it is a pass-through corporate entity for federal tax purposes. This means that taxes on the organization’s profits are paid on the owners’ or individual shareholder personal tax returns. It is based on individual tax income rates and shares of stock within the pass-through entities. This pass-through taxation helps the corporation owners and shareholders avoid double taxation for their corporate income.

However, in California, the corporation rules are different in that the state can tax a corporation at the entity level, as well as after they pass through to the shareholders as a separate entity. When you establish an S Corporation in California, you will also receive state tax credits and net operating losses, which can be beneficial to the business assets and annual profit.

What Are the IRS Filing Requirements for Starting an S Corp?

s corporation

The IRS has several eligibility requirements. It can limit the number of shareholders that any type of corporation has to meet to be treated as a separate corporation. If a corporation satisfies the requirements for corporate income tax, the corporation must file Form 2553 Election by a Small Business Corporation. This special rule should then be signed by all the shareholders to elect taxation as an S Corporation in California.

This takes place during the corporation election. S Corps that organize, register, or conduct business in California, or receive a source of income from California must file California Form 100S. This additional form is the California franchise or income tax return. IRS filing requirements may also apply to:

  • Individual tax returns
  • Common stock
  • Sale of stock
  • Dividend income
  • Stock ownership, or
  • Stock transfers

For more information on more S Corp state tax filing requirements, see this guide by the California Franchise Tax Board. There is an annual state tax and franchise tax fees for an S Corporation in California and LLCs that elect to be taxed as S Corps.

The individual income tax rates are either 1.5% of the corporation’s net income or $800, whichever is greater. There are different annual taxation rules for businesses formed after January 1, 2,000 that are in their first year of business. The corporate tax rate will vary based on the tax structure indicated in the tax forms for legal entities.

Contact A People’s Choice for Non-Attorney Help

If you need help with creating your S corporation in California, consulting a legal document assistant is among the best options. No matter how you choose your initial business structure, A People’s Choice provides quality, non-attorney self-help assistance for an affordable fee. We can also assist you with filling out the necessary forms for the business filings with the Secretary of State. To get started, you can start from here or contact us directly at 800-747-2780.

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