How to Start an S Corporation in California

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.

What is an S Corporation?

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:

• Limited liability protection – Owners’ personal assets are shielded from business debts and claims, much like a corporation or LLC limits liability.
• Business deductions – Popular write-offs like health insurance premiums and other fringe benefits.
• Stock sales – Ability to raise investment capital through equity stock options – unlike sole proprietorships or partnerships.

In exchange for these benefits, S corps do come with constraints:

• Can only issue one class of stock to up to 100 shareholders; all must be U.S. citizens or residents. Complex ownership structures can violate IRS requirements for pass-through status.
• Strict record maintenance and meeting rules to preserve incorporation compliance in California.
• Self-employment taxes still apply to owners’ proportional shares of income.

Is an S Corporation Right for You?

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:

• Service companies (law firms, marketing agencies)
• Medical and healthcare practices
• Property management groups
• Restaurants and hospitality brands
• Manufacturers and wholesale suppliers

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.

How to Start an S Corp in California: Required Filings and Disclosures

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:

1. Name and Register Your Corporation

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.

2. Draft Organizational and Governing Documents

These supplemental documents further detail internal rules and structures critical for proper incorporation:

• Corporate bylaws dictate operating processes, shareholder rights, director duties, and procedural guidelines.
• Shareholder agreements describe stock distribution and restrictions. Issue proportional stock certificates to founders per these terms.
• Initial board resolutions appoint the first company directors, document votes, and bind decisions.

3. Obtain an EIN from the IRS

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.

4. File S Corporation Election with the IRS

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.

5. Stay Compliant with the California Secretary of State

You must uphold annual state obligations to preserve your corporation’s good legal standing, like:

• Pay franchise tax
• File Statement of Information (Form SI-550) detailing company leadership each year

Neglecting these can result in suspensions, jeopardizing your limited liability protections. Set calendar reminders to avoid any compliance mishaps.

Maintaining Your California S Corporation Status

While formation steps feel exhaustive, properly maintaining your S corp also takes discipline:

• Issue new stock certificates when admitting additional shareholders, detailing their ownership percentage and voting rights in the company.
• Hold and document annual shareholder meetings reviewing finances, leadership changes, and strategic votes in accordance with your bylaws.
• File annual tax returns to report income, deductions, and profit allocations to owners. A tax professional can assist with handling your tax paperwork.

Master these recurring duties early on. Failing internal governance upkeep risks legal standing down the road.

Are You Ready to Launch Your California S Corporation?

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.