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Form a California S Corporation in Under 5 Minutes
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Forming a California S corporation offers key benefits, including strong legal protections and tax advantages. You must file the required official paperwork with the State of California, just like you would for a regular corporation. What sets an S corporation apart is the next step: you and your shareholders can choose this special tax status by filing IRS Form 2553. With online incorporation, you can handle these steps easily from home, speeding up the process of setting up a legally secure and tax-friendly business.
What is a California S corporation?
A California S corporation (or “S corp”) is a special type of business structure that offers the legal protections commonly associated with standard corporations and the tax benefits of pass-through taxation. This means that the business itself does not pay federal income tax, but the profits and losses pass directly to the owners, making tax filing easier.
How to register a California S corp
A California S corp is ideal for those who want legal protection and tax benefits. To become an S corp, you must first establish a regular corporation and then file a specific tax form, known as IRS Form 2553, with the Internal Revenue Service (IRS). The job is done after completing the required paperwork with the State of California.
Like a California C corp, an S corp is considered its own legal entity, separate from its owners. This means that if the business has debts or gets sued, the owner’s personal assets are usually protected.
Protection of shareholders’ personal assets is one of the major reasons California business owners choose to incorporate.
Generally, shareholders in an S corp are only at risk of losing what they’ve invested in the business. Typically, if the business incurs debts or fails, creditors cannot claim the personal assets of shareholders, such as homes or bank accounts, to settle business debts.
However, there are exceptions to this rule. For instance, if the business acted recklessly or was involved in fraud, shareholders may be held personally responsible.
MaxFilings simplifies your California S corp incorporation process. Our user-friendly platform walks you through every step, ensuring a seamless experience from start to finish. Click “Start Your Incorporation” now to take the first step towards a smarter, safer business future.
Set Up Your California S Corporation NowCalifornia S corp taxation
In contrast to C corps, a California S corp doesn’t pay federal income taxes at the corporate level. Even if it has multiple shareholders, each owner reports their share of the business income or loss on their personal tax returns. This is similar to how income is reported for sole proprietorships, partnerships, and LLCs.
As mentioned above, to become an S corp in California, you must file IRS Form 2553 with the Internal Revenue Service. A few states also require a separate state election to gain S corp status; however, only Arkansas, New Jersey, New York, Ohio, and Wisconsin require this additional step.
MaxFilings makes this process easy for you. We’ll prepare IRS Form 2553 and send it your way, complete with step-by-step instructions for finalizing and submitting the form to the IRS.
Important points to consider when forming a California S corporation
Overview
- To set up a California corporation, submit the necessary paperwork to the state and pay any required filing fees.
- File IRS Form 2553 to secure the special tax advantages of an S corp.
- Legally, a California S corp is its own entity, separate from its shareholders.
- Some business activities might be off-limits for California S corps.
- Keep detailed minutes of all shareholder and board meetings, as this is a legal requirement.
- Ownership in a California S corps is capped at 100 shareholders, who cannot be other corporations, LLCs, certain trusts, or non-resident aliens.
Limited liability
- Shareholders in a California S corp usually have limited liability, risking only their initial investment.
- Generally, shareholders aren’t personally responsible for the corporation’s debts or any legal judgments against it.
- Safeguarding personal assets is a key reason why many choose to form an S corp in California.
- There are situations where shareholders’ limited liability may not apply, making them personally liable.
Taxation
- California S corps face audits less frequently than sole proprietorships and partnerships.
- S corps enjoys the benefit of pass-through taxation, which helps shareholders avoid “double taxation.”
- While California S corporations file tax returns for informational purposes, they don’t pay federal income tax themselves.
- Shareholders report their share of income and losses on personal tax returns, allowing losses to offset other income.
- Income and losses are distributed according to each shareholder’s ownership percentage.
- Owners who work for the corporation must receive a reasonable salary, which is subject to Social Security and Medicare taxes, collectively known as FICA taxes. However, any additional profits passed through to owners beyond their salary are not subject to these self-employment taxes.
Raising capital
- Raising additional funds is often simpler for California S corps, as they can issue and sell stock or other financial instruments.
- The sale of stock can fall under state and federal securities regulations.
- Ownership in the S corp can be easily transferred through stock sale.
- California S corps can issue only one class of stock, although all shareholders may not have identical voting rights.
Owners & employees
- Major shareholders may face restrictions on certain fringe benefits.
- Owners actively working in the business qualify as employees, making them eligible for various fringe benefits like group insurance and retirement plans.
- Stock options and bonuses often make corporations more attractive to employers.
- Unlike some other business structures, a corporation has the potential for longevity, continuing to exist even after the death of a shareholder.
Public perception
- Corporations often carry a perception of being more established and substantial in the eyes of the general public compared to sole proprietorships and partnerships.
How to form a California S corp
Forming an S corp in California involves several key steps.
- Name your corporation: The first step is to choose a name for your corporation that is unique and complies with California state naming regulations. You can check name availability through the California Secretary of State’s website.
- File Articles of Incorporation: Submit the necessary Articles of Incorporation with the California Secretary of State and pay the appropriate filing fees. This officially creates your corporation.
- Assign directors and officers: Designate the board of directors and officers who manage the corporation.
- Draft corporate bylaws: Create corporate bylaws to set your corporation’s rules and operating procedures. Although not required to be filed with the state, these are crucial for internal governance.
- Hold initial meetings: Conduct initial meetings for both the board of directors and shareholders to discuss the structure and strategy of the corporation.
- Apply for EIN: Obtain an Employer Identification Number (EIN) from the IRS. This is essential for tax reporting purposes.
- File IRS Form 2553: To elect S corp status, file IRS Form 2553. This form should be submitted to the IRS after the corporation is formed and the EIN is obtained.
- Open bank accounts: Open a business bank account and possibly a merchant account. This helps to separate business and personal finances.
- Compliance and record-keeping: Make sure to keep detailed minutes of meetings and comply with other corporate formalities to maintain your S corp status.
- State tax obligations: Register for state and local taxes, including income, employment, and sales taxes.
- Ongoing reporting: File an annual report (“Statement of Information”) and pay necessary renewal fees to maintain good standing with the state.
Choose MaxFilings for affordable business incorporation
Starting your California S corp doesn’t have to be expensive. With MaxFilings, you get affordability, flexibility, guidance, and peace of mind.
Our Basic Package is $0 + mandatory California state fee, with no hidden charges. Plus, you can save your progress online, get guidance at every step, and enjoy comprehensive services designed for a smooth incorporation process. Start your journey with MaxFilings today!
Incorporating your S corp in California doesn’t have to be expensive.
Our S corp formation packages start at just $0 + California state fee.
You only pay for what’s absolutely necessary, and you get a host of benefits at no additional cost:
- Preparing and filing the Articles of Incorporation
- Unlimited name searches
- FREE registered agent service for a year!
- Unlimited phone & email support
That’s right – all of the above for the mandatory state fee.
Ready to get started?
How do I convert to an S corp in California?
Converting your business to an S corp in California involves several key steps, balanced between state and federal requirements.
State level: California requirements
- Entity structure: Make sure your business is already formed as a C corp or LLC, as these entities are eligible for S corp status.
- Bylaws/operating agreement: Review or amend your bylaws (C corp) or operating agreement (LLC) to ensure they comply with S corp requirements.
- Shareholder eligibility: Ensure all shareholders are eligible to be part of an S corp (e.g., US citizens or resident aliens, no more than 100 shareholders, and not other corporations or partnerships).
Federal level: IRS requirements
- Form 2553: Obtain and complete IRS Form 2553 (“Election by a small business corporation”).
- Filing deadline: Submit the form within two months and 15 days from the beginning of the tax year when the election for S corp status will take effect.
- Signatures: All shareholders must sign Form 2553 to indicate their consent to the S corp election.
MaxFilings can eliminate the hassle of converting to an S corp in California. From preparing all the required documents to submitting them on your behalf, we streamline the complex procedures so you can focus on what matters most: running your business.
Trust us to guide you through state and federal requirements, ensuring your conversion process is smooth, accurate, and fully compliant with all regulations.
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At MaxFilings, we are committed to supporting you every step of the way.
