What is an S Corporation?
An S-Corporation is an IRS tax classification and not a business structure. Businesses such as LLCs and corporations can apply for an S corporation status.
Small businesses mostly prefer S-Corporation status as the taxable income or loss of the S-Corporation passes through to the shareholders. Profit or loss must be reported on their own individual income tax returns.
Requirements for Forming an S Corporation in California
Before you start an S-Corp, you need to be aware of the S-Corporation forming limitations
- Business should be formed within a California State
- Must-Have less than 100 shareholders
- Issue only one class of stock
- Shareholders must be U.S. citizens or permanent resident aliens
- Are owned by private individuals
California differences in forming an S-Corporation:
- An S corporation’s revenue is taxable at the corporate level and the pass-through of its income to the shareholders is also taxable on their income tax returns.
- The S corporation is allowed tax credits and net operating losses.
- Figuring out the tax on built-in gains and excess passive income.
What is the tax rate for S corporations?
S-Corporation must pay an annual tax greater than 1.5% of the corporation’s net income or $800. This tax is due by the 1st quarter of each accounting period regardless of your business activity.
How to Start an S-Corporation in California?
1. Name your Business
Before forming the business, you must choose the business name and check the availability through California Business Search.
2. Choose a Registered Agent for Services of Process in California
You must appoint a Registered Agent for your business who is taking care of the entire legal process on your behalf.
They should be available during all business hours so that they can accept legal notices in person.
3. File California Articles of Organization
You need to file your California Articles of Organization to register an LLC with the State. The Articles of Organization include the company name, business address, California Agent’s Name, and Management details.
The processing fee is waived for submissions from July 1, 2022 – June 30, 2023.
4. File California Statement of Information
This is the second part of registering your LLC.
You need to file your California Articles of Organization to register an LLC with the State.
The Articles of Organization include the LLC name, 12-digit Secretary of State Entity Number, business address, Manager details, California individual and corporation agent name, business types, and CEO details.
This form is due within 90 days of initial registration and every two years thereafter.
The filing fee for the California Statement of Information is $20.00.
5. Create an operating agreement for the S-Corporation election
Your California LLC Operating Agreement is a legal document that outlines the ownership and member duties of your LLC.
They also report information on how the ownership and profits are divided among the members.
6. Apply for an EIN
Get an Employer Identification Number (EIN).
This is the tax ID number for your LLC, commonly referred to as a Federal Employer Identification Number (FEIN).
EINs are free to apply on the IRS website.
7. File Form 2553 for S-Corporation Election
Once your business (LLC or C Corporation) formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corporation status.
You must complete Form 2553 within 75 days of the formation of your LLC or C-Corporation or no more than 75 days after the beginning of the tax year in which the election is to take effect.
If your LLC is past the 75-day deadline, you will also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail.
If you start a small business in California and looking for an S-Corp status for tax advantages, you must be more aware of the registration process. You must do more research on your own and discuss the process with an experienced accountant before start applying for S-Corp status.