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 in order to be taxed in a certain way. For example, a business can be formed as a partnership, a corporation, or a limited liability company (LLC), and then the business can elect to be taxed under subchapter S of the Internal Revenue Code. 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. In addition, the shareholders of an S Corp have limited liability, which limits losses to the assets of the S Corp, and does not affect the shareholders personally. The management structure, as well as how long the business will be in existence, depend on the underlying business entity, for example, a corporation or a LLC.

Purpose of an S Corporation in California

The main feature of the S Corporation in California is that it is a pass through entity for federal tax purposes. This means that taxes on the organization’s profits are paid on the owners’ or shareholders’ personal tax returns, at the individual tax income rates. This helps the owners and shareholders avoid double taxation. However, in California, the rules are different in that the state can tax a corporation at the corporate level, as well as after the pass through to the shareholders. However, 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. The IRS has several requirements, for example limiting the number of shareholders, which a corporation has to meet in order to elect to be treated as an S Corp. If a corporation satisfies the requirements, the corporation must file Form 2553 Election by a Small Business Corporation signed by all the shareholders to elect taxation as a S Corporation in California. S Corps that organize, register, or conduct business in California, or receive a source of income from California must file California Form 100S, which is the California Franchise or Income Tax Return. 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 for an S Corporation in California and LLCs that elect to be taxed as S Corps. The tax is 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, 2000 that are in their first year of business.

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No matter how you choose to organize your initial business structure, A People’s Choice provides quality, non-attorney self-help assistance for an affordable fee. A People’s Choice can assist you with filling out the necessary forms for the business filings with the Secretary of State.

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