What You Need to Know About S Corporations in California


Are you looking to start a new business in California? If so, you may have heard about S corporations. However, contrary to popular belief, an S corporation is not a business structure — it is a tax status. Any standard corporation or C corporation formed in California can become an S corporation by electing under federal law to be taxed under Subchapter S.

Here is some important information regarding S corporations:

  • Your company must choose to operate as an S corporation.
  • If you form your business as a corporation, your shareholders are not responsible for the losses and debts incurred by the company. Furthermore, creditors may only seek assets for payment from the corporation.
  • S corporations are limited by the types of owners allowed, which may not exceed 100 shareholders.
  • Whether your business is a corporation, partnership or LLC ultimately determines the management structure of your S corporation.
  • Under its S corporation status, your company does not pay federal income tax.
  • According to the law in California, there is a 1.5 percent tax on an S corporation’s net income.
  • Before forming an S corporation, you are required to have a separate bank account and separate records.
  • Unless your company is newly incorporated or qualified, your corporation in California must pay an annual minimum $800 franchise tax.

Starting a business requires knowledge about your industry, finances and the law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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