Deciding on the proper business structure is a crucial first step when starting a business in California. One type of corporation, a Subchapter S corporation, sometimes called a small business corporation, offers business owners key benefits like liability protection and pass-through taxation.
While setting up an S corporation in California entails a few more steps than other business entities, the advantages often make it worth the effort for small businesses and entrepreneurs.
In this comprehensive guide, we’ll walk through everything you need to know about establishing and maintaining an S corp in California, from understanding requirements to filing paperwork to comply with statutory obligations.
An S corp is an incorporated business that chooses to be taxed under Subchapter S of the Internal Revenue Code. This special tax election allows company profits to “pass-through” the business and be reported on the personal returns of owners. An S corp designation requires submitting IRS Form 2553.
This differs from a standard C corporation, where the entity itself pays taxes on profits via the corporate tax rate before shareholders receive any distributions. By skipping this dual taxation, S corps offers savings for many business ventures.
Additional perks include:
In exchange for these benefits, S corps do come with constraints:
We find S corps to be ideal structures for a range of mid-sized ventures with plans to eventually sell or exit privately down the road.
Common candidates in California include:
Attributes like limited liability and pass-through taxation provide financial flexibility for these company types to retain earnings for expansion or operating costs rather than high-income taxes.
Before taking forming steps, discuss your specific entity needs with both a business attorney and a CPA to confirm an S corp aligns with your commercial goals and tax situation. But for many entrepreneurs, it strikes the right balance of liability protections, simplified tax compliance, and access to capital.
If an S corporation appeals to you after weighing the pros and cons, let’s explore the process for establishing one properly in California. You’ll need to complete six key steps:
First, select and reserve your corporation’s business name with the Secretary of State. It must include a designation like Corporation, Incorporated, Company, or Limited.
Next, draft and file Articles of Incorporation (Form ARTS-GS) to register your entity. This public document names officers, establishes shares, and outlines activities.
These supplemental documents further detail internal rules and structures critical for proper incorporation:
An Employer Identification Number creates your tax identity, similar to a Social Security Number for individuals. Apply online through the IRS website to receive your EIN instantly.
Submit Form 2553 within two months and 15 days from your incorporation date to elect S corporation tax status, which enables pass-through taxation. This IRS approval activates major savings once operating.
You must uphold annual state obligations to preserve your corporation’s good legal standing, like:
Neglecting these can result in suspensions, jeopardizing your limited liability protections. Set calendar reminders to avoid any compliance mishaps.
While formation steps feel exhaustive, properly maintaining your S corp also takes discipline:
Master these recurring duties early on. Failing internal governance upkeep risks legal standing down the road.
Choosing an S corporation structure offers California small business owners and entrepreneurs clear benefits when launching and growing their companies. While the S corp setup process entails a few more administrative steps than LLCs or partnerships, the liability protections and preferential pass-through tax treatment often make the extra effort worthwhile for many.
This guide covered the necessary aspects of successfully forming and maintaining an S corp in California, but legal needs vary for every business.
Contact us and connect with an experienced S corp business attorney who understands how to incorporate (or transition to) an S corporation that can best support your short- and long-term commercial endeavors.
Vincent Tong is the CEO and Managing Partner of TONG LAW, a business and employment law firm located in Oakland, CA. Vincent is a fierce advocate for employees facing discrimination and wrongful termination. With several successful jury trial victories and favorable settlements, he has earned a strong reputation for delivering exceptional results for his clients.
In addition, Vincent provides invaluable counsel to businesses, guiding them on critical matters such as formation and governance, regulatory compliance, and protection of intellectual property assets. His depth of experience allows him to anticipate risks, devise strategies to avoid legal pitfalls, and empower clients to pursue their goals confidently.
Vincent currently serves as the 2021 President of the Board of Directors for the Alameda County Bar Association and sits on the Executive Board for the California Employment Lawyers Association. Recognized for outstanding skills and client dedication, he has consecutively earned the Super Lawyers’ Rising Star honor since 2015, reserved for the top 2.5% of attorneys. He also received the Distinguished Service Award for New Attorney from the Alameda County Bar Association in 2016. He is licensed to practice before all California state courts and the United States District Court for the Northern and Central Districts of California.
