Those businesses who would like to form an S-corp in California must first complete the process of legally becoming a corporation. In fact, the state doesn’t determine whether or not you can become an S corp, as that designation comes from the Internal Revenue Service as it is a special type of corporation created through an IRS tax election. Choosing the S corp status can offer income tax advantages to small businesses.
- S corporations are considered pass-through tax entities meaning that the business is not taxed itself.
- Any profits or losses are passed on to the shareholders who report that information on their personal income tax returns. This can be beneficial because the company can avoid double taxation, where both the corporation and the shareholders are taxed.
- Additionally, some earnings can be classed as “distributions” meaning they are exempt from self-employment tax. Speak to your accountant about this.
- LLCs can also choose to be taxes as S corporations through a special election with the IRS. This provides the tax advantages of an S corp without all the legal regulations and requirements.
However, California law requires all S corporations to pay state income tax.
In order to form an S corp, the following steps are required:
Choose a Name for your Corporation
Choosing a name to represent your corporation can be difficult. Think about what your business is and what you want to convey to the public. Consider something that is easy to remember but also distinctive. Once you’ve chosen a name, make sure it’s available with the State of California, by checking the Secretary of State’s website and conducting a business entity name availability search. To indicate corporate status, your name must have “corporation”, “incorporated” or “Inc.” at the end.
Prepare the Articles of Incorporation
The articles of incorporation are the formal name for the documents filed to legally create the corporation. The following must be included for filing.
- Name of the corporation (this will be considered the legal name of the corporation)
- Name and address of the registered agent (see below)
- Legal address of the corporation
- Name and address of person filing the Articles of Incorporation– this person is known as the “Incorporator”
- Business purpose of the company
- The number of authorized shares and the par value of the shares
Note, you may want to create your bylaws at this step. The bylaws will outline the voting rights, corporate officers, frequency of meetings for shareholders and directors, quorum rules, and the different authority levels for the directors and shareholders. It is not required to file the bylaws with the Secretary of State, but they prove to be very useful should disputes arise.
File the Articles of Incorporation
Once you have drafted your Articles of Incorporation, they must be filed with the California Secretary of State, which includes a $100 filing fee. You may use your own document, or Form ARTS-GS or ARTS-PC which can be found on the California Secretary of State’s website, under Forms, Samples and Fees. This document details the information that must be included as well as where to file the document. Additional fees may be incurred for faster service such as in-person counter drop off or a guaranteed expedite drop off.
Appoint Directors
California law requires you to appoint directors for your corporation – if you have one or two shareholders, you only need one or two directors. If you have more shareholders than that, you need a minimum of three directors.
Directors are not required to be California residents, and they may be a shareholder. Be sure to confer with your appointments as they need to consent to this role.
Choose a Registered Agent
A registered agent is the designated appointee who will receive official communication on behalf of the corporation. Any time the business is part of a summons, lawsuit, or other legal action, the registered agent will be the person who receives the service of process. This is also the address where the state will send any paperwork regarding renewals, taxes or annual report forms. California registered agents are required by to be a California resident.
Apply for S Corporation Taxation Status
To form an S-corp in California, the corporation must meet certain legal requirements as detailed below.
- The number of shareholders cannot exceed 100.
- The corporation may only have one class of stock.
- Shareholders must be U.S. citizens or residents, and certain types of trusts, estates or tax-exempt organizations are allowed. You may not have partnerships, corporations or non-resident aliens as shareholders.
- Each shareholder has to agree to filing as an S corporation, and must provide consent on the form.
When you are ready, file Form 2553 with the IRS to officially request S corporation status. There is no filing fee associated with this form and you must file within 75 days of the corporate formation in order to obtain immediate status. Otherwise, to be considered for S corp status for the following tax year, the form may be filed by March 15 of that year.