How to form an S corp in California

In California, all corporations are initially established as C corporations (C corps). However, a corporation can be changed into an S corporation (S corp), which is a different type of corporation, that essentially allows the corporation to avoid double taxation. If you want to take advantage of the benefits offered by an S corporation and learn how to form an S corp in California, follow the steps in the guide below.

What is a S corporation?

An S corporation is a unique type of corporation that exempts the corporation from double taxation. What this means is that when a business chooses to be an S corporation, it doesn’t have to pay federal tax on its net income. Instead, profits and losses flow untaxed to shareholders, who then pay tax on their income.

However, it’s important to note that California S corp tax rules dictate a 1.5% state income tax on net income, or an annual franchise tax of $800 – whichever is greater.

How to form an S corp in California

To form an S corp in California, you need to first form a ‘regular’ corporation (C corp.) Starting a corporation is much the same across all 50 states, and involves several steps such as choosing a company name, appointing a registered agent, issuing shares, and filing the Articles of Incorporation. It’s important to note that S corporations are limited to 100 shareholders.

Aside from the above, you’ll also need to open a corporate bank account, obtain an EIN and hold your first board meeting to adopt bylaws, issue shares, and appoint officers. Our blog on how to start a corporation covers these steps in detail.

Once your corporation is active, you can file the official paperwork to elect for your business to be treated as an S corporation. You’ll need to file Form 2553 with the Internal Revenue Service (IRS), and do so within 45 days of incorporating.

Pros and cons of an S corp

If you’re forming a corporation in California and unsure of whether an S corp or C corp is best for you, then you should weigh up the pros and cons of forming both types.

Pros

• The main advantage of an S corp is pass-through taxation. The S corp tax rate in California is favorable, and pass-through taxation means that profits and losses pass directly to shareholders.
• S corps enjoy limited liability protection, much like C corps and LLCs. This ensures that shareholders are not personally liable for business debt.
• Like a C corp, S corporations perpetually exist, and ownership is easily transferred through the transfer or selling of shares.

Cons

• S corps have more stringent ownership rules than regular corporations. They are limited to a maximum of 100 shareholders and only U.S. citizens or foreigners residing in the U.S. can be shareholders. Plus, only one class of stock is allowed with an S corp.
• Forming an S corp in California means your business must comply with stricter IRS rules and compliance requirements, filing around a dozen returns every year. You’ll need to ensure you’re on top of all these requirements if running an S corp, to ensure you don’t become non-compliant or risk violating IRS rules.
• Unlike a regular corporation which can have an unlimited number of shareholders, S corporations cannot, which can limit growth potential and make it harder to attract investors.

Form an S corp in California

Starting an S corp in California is a thorough process that requires a diligent approach to ensure you file all paperwork correctly and stay compliant. If you’re looking to form an S corp in California but unsure where to start, Corporate Creations can help. We're well-versed in assisting businesses with the formation of various companies, including S corporations. Plus, we operate across all 50 states, including California, and have first-hand knowledge of what is required to successfully incorporate there.

Start the incorporation process with us today or get in touch to learn more.

FAQs: S Corp California

How do I do a California S corp lookup?

You may want to look up a California S corp to see whether a business name is available in the state. It’s easy to do so by using the California Secretary of State’s BizFile online service, whereby you can find information about entities by entering the entity name or number. Alternatively, you can reach out to Corporate Creations and we can help you carry out an entity lookup.

What is the S corp tax rate in California?

The tax rate for S corps in California is the greater of 1.5% of the net income or $800. Fortunately, new S corporations are exempt from paying the minimum franchise tax for the first year of doing business.

Can you convert an S corp to a C corp?

Yes, it’s entirely possible to convert your S corporation to a C corporation. To do so, you need to provide a written statement to the IRS that clearly states you wish to revoke your S corporation status. The statement must also be signed by more than 50% of your shareholders. It’s important to note that once you have converted your corporation, you must remain as a C corp for a minimum of five years.