What You Need to Know About S Corporations in California

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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.