Starting an S Corporation in California

For an LLC, electing S corp status can lead to savings on self-employment taxes in specific scenarios. Meanwhile, for C corporations (C corps), it can serve as a means to avoid double taxation on federal income taxes.

Understanding S Corporations

‍It's essential to recognize that an S corporation is not a distinct business structure; rather, it's a tax designation attainable by either an LLC or a corporation if they meet specific criteria. We will outline these criteria and the steps required to elect S corp status if it aligns with your business goals.

If you intend to establish an LLC with S corp status, our S corp service can guide you through the process. Additionally, we offer a range of services to assist you in managing and expanding your business while remaining compliant with both federal and California regulations.

Requirements and Restrictions for S Corporations

‍Before embarking on the path to forming an S corp in California, it's crucial to understand the prerequisites and limitations. To qualify for S corporation status, an entity must:

• Be a domestic corporation or LLC, implying it must have been formed within the state of California.
• Not fall under the category of ineligible corporations, including specific financial institutions, insurance companies, and domestic international sales corporations.
• Possess only one class of stock.
• Maintain no more than 100 shareholders or members, with "shareholders" referring to corporate owners and "members" pertaining to LLC owners.
• Consist solely of eligible shareholders or members, which includes individuals, certain trusts, and estates. Shareholders cannot be partnerships, corporations, or non-resident aliens unless they meet specific criteria defined by the IRS.

It's important to note that not all business entities are eligible for S corp classification. However, if your business meets these criteria, you can apply for S corp status.

Considerations for S Corporations in California

‍When an LLC or C corp elects S corp status for federal income tax purposes, most states apply state income tax in a similar manner. In other words, the business is subject to federal and state income taxes at the individual level.

However, California differs from this norm. In California, S corporations are subject to state income taxes at both the corporate and individual levels. Here are a few other distinctions to bear in mind:

• S corporations in California are required to pay an annual minimum California franchise tax, amounting to 1.5% of the corporation's net income or $800, whichever is greater. This minimum franchise tax is due in the first quarter of each accounting period, regardless of the corporation's activity status or profitability. Notably, California does waive this minimum tax for newly formed or qualified S corporations filing their initial return for the first taxable year, provided they are registered with the California Secretary of State.
• S corporations in California can avail themselves of tax credits and net operating losses, subject to specific regulations.
• Detailed calculations are necessary for tax assessments related to built-in gains and excess passive income.

7 Steps to File as an S Corporation in California

‍To establish a California S corporation, you must either form a limited liability company (LLC) or a C corporation, if you haven't already done so. Subsequently, you need to file an election form with the Internal Revenue Service (IRS).

If you are ready to learn about the process of filing as an S corporation in California, we will guide you through it. Initially, we will elucidate how to establish an LLC in California. Alternatively, if you prefer to create a California corporation, you can follow the instructions on our California corporation page. In Step 7, we will provide insights into filing for S corp status, whether you choose an LLC or corporation.

Step 1: Register a Business Name

‍Select a distinctive name for your California company that is not already in use by another California business. You may conduct a business name check with the state of California. Additionally, you can reserve your chosen name if you are not yet prepared to file Articles of Organization with the state of California. It's crucial to adhere to the state's naming guidelines, avoiding profanity, misleading names, and any titles that may imply government affiliation.

Step 2: Appoint an Agent for Service of Process in CA

‍Nominate a California agent for service of process, commonly referred to as a "registered agent." This individual or entity will receive important legal notices on behalf of your company and must be available during business hours to accept notices in person.

Step 3: File California Articles of Organization

‍Submit your California Articles of Organization, which detail the involved parties in your LLC and their contact information. These articles are a mandatory requirement for all LLCs in California. We specialize in handling such paperwork, ensuring it is completed correctly on your behalf.

California differs from many other states as it requires two separate forms for LLC formation: the Articles of Organization and the Statement of Information, which we will cover next.

Step 4: File California Statement of Information

‍File your California Statement of Information, a crucial part of the initial paperwork when starting your LLC in California. This step is essential for retaining your LLC name and status with the state and must be completed within 90 days of formation.

Step 5: Create an Operating Agreement for S Corporation Election

‍Draft a California operating agreement for your LLC, outlining management rules, operating procedures, ownership distribution, and profit allocation among members. While many states do not mandate LLC operating agreements, California requires them.

To assist you in crafting an operating agreement for your California limited liability company, we offer an operating agreement template to simplify the process.

Step 6: Obtain an Employer Identification Number (EIN)

‍Secure an Employer Identification Number (EIN), also known as a Federal Employer Identification Number (FEIN). This unique identifier serves as the tax ID for your LLC, establishing its identity with the IRS. Similar to how your Social Security Number is used for personal tax filings, the EIN is employed for business tax purposes.

Step 7: File Form 2553 for S Corporation Election

‍Submit Form 2553, Election by a Small Business Corporation, to attain S corp status once your LLC or C corporation formation gains approval from the state. The IRS specifies that you must file Form 2553 within 75 days of forming your LLC or C corporation or no later than 75 days after the start of the tax year in which you want the election to take effect. In the case of LLCs that miss the 75-day election deadline, you must also file Form 8832, Entity Classification Election, to opt for taxation as a corporation. Subsequently, both Form 8832 and Form 2553 should be filed together via USPS-certified mail.

For comprehensive guidance on when and how to file Form 2553, please refer to the IRS website.

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‍Disclaimer: The content on this page is for informational purposes only and does not constitute legal, tax, or accounting advice. Seek the counsel of a licensed professional for specific questions related to these topics.