Is an S-Corporation Right for My California Business?

California poppies

An S-Corporation is a form of corporation that operates with many more restrictions than a traditional C-Corporation.  Like a Corporation, a California S-Corporation generally provides liability protection to its shareholders, however, to determine the shareholder liability for debts of the business you should look to the underlying entity, which can be a Limited Liability Company or a Partnership, for example.


An S-Corp is really an election that is made when you form a company that elects to be taxed as a corporation.  It is called an S-Corporation because the election under federal tax law is made pursuant to Subchapter S, hence an S-Corporation.  So, after forming your business entity, you will need to file a Form 2553 in order to qualify for S-Corp status.  Be cautious when making this election because rules exist that state you may be obligated to file for S-Corp status within a certain window of time from the time that you initiated your business entity.


Because the underlying entity for an S-Corporation will determine how the company will be run, you must look to whether the underlying entity is a corporation, a limited liability company, a partnership, or some other entity to decide how the company will be managed, by a manager, by the members, by the partners, etc.  An S-Corp may have only a limited number of shareholders and the requirements as to who may be a shareholder are much stricter than for a C-Corporation.  You are required keep separate records and separate bank accounts for your S-Corporation, and, as a business owner, keeping separate accounts and records is a prudent thing to do even if it is not a requirement for your business entity.


The S-Corporation entity generally is not subject to federal taxes, all S-Corporation income, deductions and credits should be poured through to the various shareholders and each shareholder will pay the requisite taxes on their portion of the corporate earnings.  However, in California, S-Corporations  are subject to a small percentage of tax on its net income.  Also, in California an S-Corporation must file a California Form 100S, California S Corporation Franchise or Income Tax Return.

Of course, just like with C-Corporations, if you have a California S-Corporation you may be obligated to pay the annual minimum franchise tax to the State of California.

The above is merely an overview of what S-Corporations are and how one might be used.  Do you think this a business entity you might consider?

For a more in-depth analysis on what might be the best business entity for your business, you may contact me to schedule a time to discuss your business needs.

Integrated General Counsel
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