Key Takeaways

  • To form an S corp in CA, you must first register as a C corporation and then elect S corp status with the IRS using Form 2553.
  • California requires S corporations to file Form 100S and pay a 1.5% franchise tax on net income, with a minimum tax of $800 (after the first year).
  • California does not conform to all federal S corp provisions—S corp income is subject to California state tax.
  • Additional filings like the Statement of Information (Form SI-550) and estimated tax payments may be required.
  • Failure to meet California's compliance requirements can lead to penalties and suspension of corporate status.

California S corporation tax is the state income tax charged to an S corporation, along with annual franchise taxes and other fees. An S corporation is simpler to operate but less flexible than a C corporation, with limits as to the number and type of shareholders. Businesses and foreign nationals cannot hold shares, and the S corporation must use the annual calendar year rather than a fiscal year.

An S corporation that provides its shareholders with health insurance can deduct this cost as a business expense, but it is taxed at the individual level as part of shareholder compensation. Many small businesses opt to form an S corporation because of the tax benefits and limited liability protection this structure offers.

To form an S corporation in California, you must create a traditional corporation and then elect S taxation status with the IRS by filing Form 2553. If you want to be treated as an S corp for tax purposes, your articles of incorporation must indicate that only one class of stock is offered.

With an S corporation, profits are not taxed at the corporate level but pass through to shareholders, who report income and losses on their individual tax returns. Although the S corp does not pay income taxes as an entity, it must file an annual informational return.

An S election is permanent unless the shareholders agree to dissolve the corporation or transform it to another entity. However, the S status can be revoked if the eligibility requirements are not consistently fulfilled.

S Corporation Taxes

S corporation shareholders report their share of business profits and losses on Schedule K-1 at tax time. In addition, the corporation must file Form 1120S as an informational return. Losses allocated to an individual shareholder are limited to his or her investment in the company.

In addition to federal taxes, California S corporations are subject to a franchise tax at a rate of 1.5 percent on net income with an annual minimum of $800 after the first year of existence. This is in addition to individual state income taxes. This differs from the tax treatment of these corporations in states where the federal S status is automatically accepted.

All S corporations that were established or conduct business in California must file their franchise taxes using Form 100S by March 15 or by the third month, 15th day after the close of the fiscal year for companies that do not use the calendar year.

In addition to the avoidance of double taxation at the federal level, California S corporations have the following tax considerations:

  • Before S corporation profits can be distributed, owners that work for the company must be paid reasonable salaries from which FICA (Social Security and Medicare) taxes are withheld. Distributions that are paid to the shareholder after this reasonable salary has been paid are not subject to self-employment tax, which is a great benefit of an S corporation.
  • The corporation's losses can be used to offset the shareholder's income on their individual tax returns.
  • Profit and loss distributions are proportional to the ownership percentage of each shareholder, while other business structures such as the limited liability company (LLC) provide flexibility.

California Franchise Tax and Fee Requirements

In California, S corporations must pay an annual franchise tax of 1.5% of their net income, with a minimum tax of $800, except in their first taxable year. This tax is due even if the business does not generate profit. California does not fully align with the federal S corporation treatment—unlike the IRS, the state taxes S corporations at the entity level.

Additional filing responsibilities include:

  • Form 100S: Annual return due by the 15th day of the 3rd month after fiscal year-end (typically March 15 for calendar-year corporations).
  • Estimated Tax Payments: Required if the estimated tax due is more than $500. Corporations must make payments using Form 100-ES on a quarterly schedule.
  • California S Corporation Fee: While California does not charge a separate S corp fee beyond the franchise tax, late filings or underpayments may result in penalties and interest.

Failure to file on time or pay required taxes can lead to loss of good standing or suspension by the Franchise Tax Board (FTB).

Electing S Corp Status in California

California S corporations do not have to make the election at the state level to have their status recognized. After you form a C corporation by filing articles of incorporation, you must enact bylaws, issue shares, and hold the initial shareholders meeting before making your S corp election. This must be done within 45 days of incorporation or you will have to wait until the next tax year to elect S corp treatment.

Corporations that do not elect S corp taxation are subject to a 15 percent corporate income tax on the first $50,000 in profits and 25 percent on additional profits. This also applies to earnings that are reinvested into the business. In addition to this corporate income tax, shareholders must pay capital gains tax on these earnings when they receive them as dividends, either 10 percent or 15 percent depending on the individual's tax bracket. It's important to consult a tax attorney when forming an S corporation in California.

Steps to Form an S Corp in CA

To successfully form an S corp in CA, follow these essential steps:

  1. Choose a Business Name: It must be distinguishable from existing entities and meet California naming requirements.
  2. File Articles of Incorporation: Submit Form ARTS-GS with the California Secretary of State and pay the filing fee.
  3. Appoint a Registered Agent: Must be a California resident or a qualified business entity available during business hours.
  4. Create Bylaws: These are internal rules governing your corporation’s operations and governance.
  5. Hold an Initial Board Meeting: Elect officers, adopt bylaws, and issue stock certificates to shareholders.
  6. Apply for an EIN: Obtain an Employer Identification Number from the IRS.
  7. File IRS Form 2553: This form must be filed within 75 days of formation or the beginning of the tax year to elect S corp status.
  8. File Statement of Information: Submit Form SI-550 within 90 days of incorporation and then biennially.
  9. Register with the FTB: File Form 100S annually and remain compliant with tax payment obligations.

Common Pitfalls When Forming an S Corp in California

Businesses often run into issues when forming an S corp in CA due to the following missteps:

  • Missing the S Election Deadline: Failure to file Form 2553 within 75 days of formation may delay S corp treatment until the following tax year.
  • Offering More Than One Class of Stock: S corporations are only permitted to issue one class of stock.
  • Non-qualifying Shareholders: Only U.S. citizens, certain trusts, and individuals may own shares—no partnerships or corporations.
  • Failing to File the Statement of Information: Neglecting to submit this form on time can lead to penalties or suspension of status.
  • Improperly Calculated Compensation: The IRS requires S corp owners to pay themselves a “reasonable salary” before receiving tax-free distributions. Failing to do so could result in reclassification of income and penalties.

Frequently Asked Questions

  1. What forms are required to form an S corp in CA?
    You must file Articles of Incorporation (Form ARTS-GS), Statement of Information (Form SI-550), IRS Form 2553, and CA Form 100S annually.
  2. How much does it cost to maintain an S corp in California?
    After the first year, expect to pay a minimum of $800 annually in franchise tax, along with any applicable filing fees.
  3. Do I need to file taxes for an S corp in California?
    Yes. You must file Form 100S annually and may also need to make estimated payments using Form 100-ES.
  4. What is the deadline to elect S corp status?
    Form 2553 must be filed within 75 days of incorporation or the start of the tax year.
  5. Can I have multiple shareholders in a California S corp?
    Yes, but no more than 100 shareholders are allowed, and all must meet eligibility requirements (e.g., individuals, certain trusts).

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