Key Takeaways

  • To understand how to form an S corp in California, you must follow both state incorporation steps and federal S corp election requirements.
  • California requires filing Articles of Incorporation, appointing directors, designating a registered agent, and submitting a Statement of Information within 90 days.
  • To elect S corp status, you must file IRS Form 2553 within specific timelines and meet eligibility requirements, such as having no more than 100 shareholders and only one class of stock.
  • California imposes both an annual franchise tax and a percentage-based tax on net income, even for pass-through S corps.
  • Nonresident shareholders may be subject to California withholding rules.
  • Benefits include potential tax savings through pass-through taxation, limited liability protection, and flexible salary/dividend distributions.

California S Corp Filing Requirements

California S corp filing requirements refer to the prerequisites in the state of California for forming a business entity that is taxed in accordance with Subchapter S of the tax code. You must meet certain legal standards, such as no more than 100 shareholders and only one class of stock.

Eligibility Rules for S Corporation Status in California

Before you begin the process, ensure your business meets IRS and California eligibility criteria for S corporation status:

  • Entity type: Must be a domestic corporation or LLC eligible to elect corporate tax treatment.
  • Shareholder limits: No more than 100 shareholders.
  • Shareholder type: All shareholders must be U.S. citizens or resident individuals, certain trusts, or estates. Partnerships, other corporations, and nonresident aliens cannot be shareholders.
  • Stock structure: Only one class of stock is permitted, though differences in voting rights are allowed.
  • Business type restrictions: Certain financial institutions, insurance companies, and domestic international sales corporations are ineligible.

Meeting these requirements is essential before filing IRS Form 2553 for S corp election, as noncompliance can lead to automatic rejection or termination of your S corp status.

Filing Requirements for S Corporations in California

The first step to form a corporation, in any state in the United States, is to register the business entity with the Secretary of State. California is no exception. After California recognizes a business entity as a corporation, that company can apply for S corporation status with the Internal Revenue Service (IRS).  Many businesses select this status because of its advantages to small businesses in income tax. Here are the steps involved:

1. California’s Secretary of State provides a website that allows you to search current corporation names registered in the state. You may search this site to ensure that the name you’ve selected hasn’t already been registered by another business entity. The suffix for the name must indicate the corporation’s status, “Inc.” would be an example.

2. Unlike most states, California does not require a state tax i.d. number.

3. Directors must be appointed. If your business corporation has at least three shareholders, then you must appoint at least three directors. If your corporation has fewer directors than three shareholders, then you may appoint only as many directors as shareholders. Shareholders must consent to these appointments. They need not be California residents, and it’s acceptable to appoint shareholders as directors.

4. A registered agent must be appointed. This agent must be a resident of California.

5. Articles of Incorporation must be drafted. You must include:

– Name of corporation

– Name of Registered Agent and their address

– Corporation’s legal address

– Name of person filing Articles of Incorporation and their address

– Name and addresses of Directors of the corporation

– Business purpose of the corporation

– How many shares and the value of those shares

6. Pay the filing fee required by the Secretary of State of California for incorporation and file the Articles of Incorporation.

7. Apply for S corporation status with the Internal Revenue Service using Form 2553. When a corporation receives S corporation status, California recognizes it as an S corporation for state purposes as well.

8. During the first six-month period, California requires a Statement of Information and a fee.

Detailed Step-by-Step Formation Process

When learning how to form an S corp in California, follow these expanded steps:

  1. Select and Reserve Your Business Name
    • Conduct a name search through the California Secretary of State’s online database.
    • Ensure the name is distinguishable and includes a corporate identifier such as “Corporation,” “Incorporated,” “Company,” or an abbreviation.
    • You can reserve your chosen name for 60 days by filing a Name Reservation Request Form and paying the applicable fee.
  2. File Articles of Incorporation
    • Submit Form ARTS-GS (for general stock corporations) to the California Secretary of State, including details such as the corporate name, registered agent, share structure, and corporate address.
  3. Appoint a Registered Agent
    • Must be a California resident or a registered corporate agent authorized to do business in the state.
  4. Prepare Corporate Bylaws
    • Although not filed with the state, bylaws are required for internal governance and should outline shareholder rights, meeting procedures, and officer roles.
  5. Hold an Organizational Meeting
    • Elect directors, appoint officers, adopt bylaws, and issue stock certificates.
  6. Obtain an EIN
    • Apply with the IRS for an Employer Identification Number, necessary for tax filings, opening a business bank account, and hiring employees.
  7. File Initial Statement of Information
    • Submit within 90 days of incorporation, detailing officers, directors, and the corporate address.
  8. Elect S Corporation Status
    • File IRS Form 2553 within 75 days of incorporation (or by March 15 of the current tax year for existing corporations). All shareholders must consent in writing.
  9. Register for California Taxes
    • Depending on your business activities, you may need to register with the California Department of Tax and Fee Administration for sales tax, employment taxes, or other state taxes.

Advantages of S Corporation

For federal tax purposes, an S corporation designation is a pass-through entity. This means that there are only taxes levied on shareholder returns and not on corporate income. California computes the tax slightly differently than the federal government. California taxes income at corporate level.

Then the income is taxed a second time, by the state of California, when it is passed through to shareholders.

Taxation Rules Specific to California S Corporations

While S corporations are treated as pass-through entities for federal tax purposes, California’s rules differ:

  • Franchise Tax: All S corporations must pay the greater of $800 or 1.5% of net income annually to the California Franchise Tax Board.
  • Pass-through income: Net income after corporate-level tax passes to shareholders, who report it on their individual tax returns.
  • Shareholder withholding: If there are nonresident shareholders, the corporation must withhold and remit tax on their distributive share of California-source income.
  • Estimated payments: Both the corporation and its shareholders may need to make quarterly estimated tax payments to avoid penalties.

Understanding these differences is key to avoiding surprises at tax time.

Estimated Tax Payments

Each quarter a portion of the estimated tax payment is required. The dates are April 15, June 15, September 15, and December 15. If an S corporation fails to file their return by the due date, and they have paid their tax liability, a seven-month extension is automatically received.

Then the S corporation can submit payment for taxes owed through Franchise Tax Board form 3539 with payment by the due date.

Withholding Agent

An S corporation that pays, controls, has custody of, disposes of, or has California source income is considered a withholding agent. Being a withholding agent requires that the corporation withholds tax from all California source income paid to non-resident payees. There are waivers available, and sometimes, a smaller tax is negotiated with the state. The first $1500 in payments does not require any withholding.

In California, unless specifically excluded, an S corporation must withhold and remit to the IRS, then they must also do so to California’s Franchise Tax Board. Also, if an S corporation distributes California source taxable income to a corporation shareholder who is not a resident of California, then the S corporation may be required to withhold taxes.

Annual and Ongoing Compliance Obligations

Maintaining your California S corporation status requires ongoing compliance:

  • Annual Statement of Information: Filed every year in the anniversary month of incorporation.
  • Franchise Tax Payment: Due by the 15th day of the 4th month after the beginning of the tax year.
  • Corporate Records: Keep updated minutes of shareholder and board meetings, stock issuance records, and bylaws.
  • Payroll Compliance: If you pay salaries to shareholder-employees, ensure compliance with California payroll tax and reporting rules.
  • Licenses and Permits: Maintain any professional or local business licenses required for your operations.

Failure to meet these obligations can result in late fees, penalties, or suspension of corporate status by the California Secretary of State.

Frequently Asked Questions

  1. How long does it take to form an S corp in California? It typically takes 2–4 weeks, depending on Secretary of State processing times, but expedited service is available for an additional fee.
  2. Can an LLC elect to be taxed as an S corp in California? Yes. An LLC can file IRS Form 2553 (and possibly Form 8832 first) to elect S corp taxation if it meets eligibility requirements.
  3. When is the deadline to file IRS Form 2553? Within 75 days of forming the corporation or by March 15 of the current tax year for existing corporations.
  4. What is the California S corp annual tax? The greater of $800 or 1.5% of net income, plus potential withholding obligations for nonresident shareholders.
  5. Do California S corps still need bylaws? Yes. Even though bylaws are not filed with the state, they are critical for internal governance and compliance.

If you need help with a patent or patent licensing, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.