How to Start a California S Corporation

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To start a corporation in California, you file a document called articles of incorporation with the Secretary of State’s office. Every California corporation starts as a C corporation – which means that it is taxed according to the provisions of Subchapter C of the Internal Revenue Code. To convert your C corporation to an S corporation, you must file the required form with the IRS requesting that your corporation be taxed under Subchapter S of the Internal Revenue Code. Both the Secretary of State and IRS provide the necessary forms and information to facilitate starting an S corporation in California.

Obtain the sample form for Articles of Incorporation from the Secretary of State's office. This can be downloaded from the secretary's website. Although you can draft your own articles, the form indicates the basic information needed to create articles acceptable for filing. The secretary's website also provides tips on preparing the articles for filing.

Read More: The Steps in Starting an S-Corp

Prepare your Articles of Incorporation by inserting the required information where indicated on the form: your corporation's name (Section 1); the name and address of the agent who will accept court papers on behalf of the corporation (Section 3) and the number of shares the corporation will be authorized to issue (Section 4).

Sign and print your name on the prepared articles at the bottom of the form, and it is ready for filing. At the time of publication, the secretary's filing fee is $100, if the articles are mailed for filing. Mailing instructions are included on the form. An additional $15 is charged if the articles are hand delivered to the secretary's office for filing.

Obtain IRS form 2553, called Election by a Small Business Corporation, which can be downloaded from the IRS website along with instructions. The form must be completed, signed by all the shareholders and filed with the IRS within two months and 15 days from the date of incorporation in order for it to be effective for your corporation's first taxable year. If you file late, the election will not be effective until the next tax year, unless the IRS grants you relief for a late election.

Warnings

  • To qualify for S corporation classification, the IRS imposes strict rules on your corporation that do not apply to C corporations. For example, an S corporation is limited to 100 shareholders and one class of stock. Partnerships, corporations and non-resident aliens are prohibited from being shareholders of an S corporation. If your S corporation violates any of these rules, the IRS will reclassify your corporation to a C corporation for tax purposes.

Tips

  • You should be notified within 60 days of filing form 2553 if the IRS has accepted the corporation's election for S corporation classification and the effective date.

    All California corporations, including S corporations, are subject to a yearly minimum franchise tax of $800, which should be paid to the Franchise Tax Board.