Several benefits exist for filing an S corporation for a small business. S corporations enjoy flow through taxation, which means the shareholders file taxes on their personal income (usually called singe taxation).
An S corporation also limits shareholder liability by placing what is called a “corporate shield” between the shareholders and the corporation. However, in California, S corporations pay an additional California state tax. To start an S corporation in California, you must incorporate with the California Secretary of State. An S corporation simply means that you elect to be taxed under subchapter S of the Internal Revenue Code.
Incorporating in California
Choose a business name and check availability for that name. California law prohibits new corporations from using similar or deceptively similar names of existing corporations. You can check for the existence of a similar business name by doing an Internet search or checking with the U.S. Patent and Trademark Office.
Appoint directors and other corporate officers. California law requires at least three directors except when the corporation has fewer than three shareholders. In that scenario, the corporation may have the same number of directors as it has shareholders.
Draft articles of incorporation. Articles of incorporation must include the corporation’s name, the corporation’s agent who can accept service of process, it must state the number of shares issued, and be signed by each incorporator. The California Secretary of State has sample articles of incorporation available on its website.
File articles of incorporation with the California Secretary of State. To file with the secretary of state, you must pay a filing fee and enclose a self-addressed envelope.
Draft the corporation’s bylaws. Bylaws are a document that provides for the corporation’s rules and governance. California law requires that a corporation must have bylaws.
Draft and file a statement of information. You must file a statement of information with California’s Secretary of State, which has fill in the blank forms available on its website. This form also requires a filing fee.
Issue stock certificates to the corporation’s shareholders consistent with California law.
Determine your tax obligations. California law requires all corporations (including S corporations) pay a minimum franchise tax. You will also need an Employer Identification Number (EIN) from the Internal Revenue Service (IRS).
Designate your corporation as an S corporation with the IRS. You must elect to be taxed as an S corporation within two months and 15 days of incorporation. To do so, fill out IRS form 2553.
An S corporation is no different than a C corporation or LLC until you elect to be taxed as an S corporation with the IRS. Once you have done so, the corporation’s profits and losses will be taxed as income for the individual shareholders.
This article is not intended to give legal advice. It is intended to give a basic overview of incorporating in California. For a thorough explanation of the issues involved with filing a California S corporation, contact a qualified attorney licensed to practice in the state of California.