S Corporation: The Complete Business Guide
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Key Benefits of S Corporation Status
Pass-Through Taxation
Avoid double taxation. Business income/losses pass through to shareholders’ personal tax returns, taxed at individual rates.
Limited Liability Protection
Shareholders’ personal assets are protected from business debts and legal liabilities, similar to a C corporation.
Reduced Self-Employment Tax
Only reasonable salary is subject to FICA taxes. Remaining profits can be distributed as dividends, avoiding self-employment tax.
Business Credibility
“Inc.” or “Corp.” designation enhances professional reputation with clients, vendors, and financial institutions.
Investment Flexibility
Ability to issue stock to raise capital (with restrictions on shareholder types and number).
Transfer of Ownership
Easier transfer of ownership through stock sales without disrupting business operations or triggering dissolution.
S Corporation Formation Process
Choose State
Select state of incorporation (typically home state or California).
Name Reservation
Check and reserve your business name with the state.
File Articles
File Articles of Incorporation with the Secretary of State.
Create Bylaws
Draft corporate bylaws and hold organizational meeting.
Obtain EIN
Get Employer Identification Number (EIN) from the IRS.
File Form 2553
Submit IRS Form 2553 to elect S Corporation status.
S Corporation Formation Process
1
Choose State
Select state of incorporation (typically home state or California).
2
Name Reservation
Check and reserve your business name with the state.
3
File Articles
File Articles of Incorporation with the Secretary of State.
S Corps in California
S Corp is a popular choice for business owners in California because it offers various tax, financial and legal benefits. However, several factors need to be considered when considering whether to set up an S Corp or have your LLC taxed as an S Corp in California
The Basics of an S Corp
An S Corp, or a Subchapter S Corporation, is a corporation that elects to pass Corporate income, losses, deductions, and credits through shareholders for federal tax purposes. Shareholders report a flow-through of income and losses on personal tax returns at their individual tax rates, allowing S Corps to avoid double taxation on corporate income. The S Corp is an ideal option for entrepreneurs and business owners looking for an advanced business organizational structure.
In addition to meeting the conditions outlined by local laws, several requirements must be met to qualify as an S Corp. These include:
- Having no more than 100 shareholders;
- Having only one class of stock;
- Being unable to be owned by certain types of organizations, such as partnerships or LLCs;
- Having U.S.-based shareholders who are all individuals;
- Have U.S.- based residents as shareholders; and
- Other various restrictions
Overall, An S Corp provides plenty of advantages for small businesses and entrepreneurs wanting maximum asset protection.
Advantages and Disadvantages of Filing as an S Corp in California
S Corporation Eligibility Requirements
Must be a domestic corporation formed in the United States
Maximum of 100 shareholders (spouses count as one shareholder).
Only individuals, certain trusts, and estates. No corporations or partnerships as shareholders.
Only a single class of stock is permitted (voting differences allowed).
Must file IRS Form 2553 within 75 days of incorporation or start of tax year.
Disadvantages of Filing as an S Corp in California
Advantages and Disadvantages of Filing as an S Corp in California
When deciding whether or not to file as an S Corp in California, it is essential to understand the advantages and disadvantages of doing so.
Disadvantages of Filing as an S Corp in California
Firstly, there are limits on who can own shares of an S Corp and restrictions on how many shareholders it may have at most. Secondly, filing fees or S Corp costs in California often tend to be higher than other forms of corporations since the state and IRS require additional documentation regarding shareholders’ interests.
Operating an S Corp can entail much more complex rules and regulations than other types of companies do since special care must be taken when dealing with things like distributing corporate profit amongst shareholders or cutting dividend payments so as to avoid running afoul of local laws. While pass-through taxation can be beneficial in some cases, it can also lead to an increased tax liability for higher-income shareholders
FREQUENTLY ASKED QUESTIONS
What Is an S Corp in California?
- An S Corp in California is a filing designation with the IRS paired with an underlining entity. This combines the beneficial attributes of a corporation and a limited liability company with preferential tax treatment.
Who Can Own an S Corp in California?
- Ownership of an S Corp requires at least one shareholder who may be either a U.S. citizen or a permanent resident alien. Also, there cannot be more than 100 shareholders overall. Shareholders must be 18 years or older to qualify.
Advantages of Filing as an S Corp in California
- Maximium of 100 owners
- S-Corp is a tax status for LLCs and not an official business entity type
- Owners must pay themselves a reasonable salary for their industry
- Avoids double taxation on profits
What`s the protections & Taxation
- LLC owners filing as an s-corp can save money on their personal taxes
- Pass through taxation—similar to an LLC, profits are only taxed at the owner level
Drawbacks to Consider
- Ongoing filings and fees to stay in compliance
- All owners must be U.S. citizens and meet all IRS requirements
- Closer IRS scrutiny for the business
Get Started Forming Your S Corp Today
- Whether you’re an established business or starting out, forming an S Corp in California can provide many tax and financial benefits. It’s important to understand all the requirements for registering as an S Corp to take advantage of these benefits and ensure that you’re in compliance with state regulations. While it may seem overwhelming initially, it will be well worth the effort once you’re set up and running.
Ready to Incorporate your business?
Our experts will guide you through the entire process, ensuring compliance with all state and federal requirements while maximizing your tax advantages.