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Last Updated: May 21, 2024

Thinking about forming an S corporation in California? An “S corp” stands for S corporation, a special tax designation that can be applied to both LLCs and corporations, potentially reducing your overall tax liability. In this article, we’ll guide you through the process of establishing an S corp in California, highlighting the specific considerations unique to the Golden State.

Electing S corp status could be particularly beneficial for limited liability companies (LLCs) in California, as it might result in lower self-employment taxes under certain circumstances. Similarly, for corporations initially classified as C corporations (C corps), transitioning to an S corp allows the business to bypass the issue of double taxation on federal income taxes, offering a more tax-efficient structure.

Requirements and Limitations of S Corps

Before you form an S corp in California, you need to be aware of the S corp filing requirements and limitations. Specifically, to qualify for S corporation status, an entity must:

  • Be a domestic corporation or LLC (“domestic” here refers to the business having been formed within the state of California)
  • Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
  • Have only one class of stock
  • Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
  • Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

Not all business entities are eligible for S corp classification. However, if your business entity meets these requirements, you can apply for an S corp election.

S Corp in California Considerations

When an LLC or C corp elects to be taxed as an S corp for federal income tax purposes, most states apply state income tax in the same way. In other words, the business doesn’t pay federal or state income tax at the business level, just the individual level.

California is different, though. An S corp pays state income taxes at both the business and individual levels. Here are some other differences for S corps in California:

  • S corporations in the state must pay a minimum California franchise tax every year, which is 1.5% of the corporation’s net income or $800, whichever is greater. This minimum franchise tax is due the first quarter of each accounting period regardless of whether your corporation is active, inactive, operates at a loss, or files a return for a short period (less than 12 months). California does waive the minimum tax on newly formed or qualified S corporations filing an initial return for their first taxable year if they’re registered with the California Secretary of State.
  • The S corporation is allowed tax credits and net operating losses.
  • The computation of tax on built-in gains and excess passive income.

How to Start an S-Corp in California

To have a California S corporation, you’ll need to create either a limited liability company (LLC) or a C corporation (the default form of corporation) if you haven’t already done so. Then, you’ll file an election form with the Internal Revenue Service (IRS).

If you’re ready to learn about filing as an S corporation in California, we’ll walk you through it. First, we’ll show you how to form an LLC in California and how to form a Corporation in California. Then we’ll explain how to file for S corp status as either an LLC or corporation.

S-Corp Election Steps for LLCs

For detailed formation steps, see our California LLC formation guide.

  • Step 1 – Register a business name
  • Step 2 – Get an agent for service of process in CA
  • Step 3 – File California Articles of Organization
  • Step 4 – File California Statement of Information
  • Step 5 – Create an operating agreement for S corporation election
  • Step 6 – Apply for an EIN
  • Step 7 – Apply for S Corp status with IRS Form 2553

S-Corp Election Steps for Corporations

For detailed formation steps, see our California Corporation formation guide.

  • Step 1 – Decide a business name
  • Step 2 – Choose a California agent for service of process
  • Step 3 – File the California Articles of Incorporation
  • Step 4 – Hold the first meeting and choose directors
  • Step 5 – Create Corporate bylaws and a shareholder agreement
  • Step 6 – Issue shares of stock for your California corporation
  • Step 7 – Obtain an EIN and review California tax requirements
  • Step 8 – File the California Statement of Information
  • Step 9 – Open a business bank account for your California corporation
  • Step 10 – Apply for S Corp status with IRS Form 2553

File Form 2553 for S Corporation Election

Submit the form to apply for S corp status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corp status. 

The IRS requires that you complete and file your Form 2553 with the IRS: 

  • Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

  • At any time during the tax year preceding the tax year the election is to take effect.

One caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

For more information on when and how to file Form 2553, visit the IRS website.

S Corp Tax Deadline in 2025

For S corporations in California, the tax filing deadline for the year 2025 is March 15. It’s essential for S corporations to file their tax returns by this date to report their income, deductions, and credits from the previous year. Filing on time helps avoid late penalties and helps ensure compliance with state and federal tax regulations. 

Corporations should prepare their financial statements and gather all necessary documentation well in advance of the deadline to ensure a smooth filing process. This deadline is particularly crucial for those who need to reconcile their accounts and distribute any required K-1 forms to shareholders, enabling them to meet their own tax filing obligations.

California S Corp: Startup Costs and Fees

Starting an S corporation in California comes with specific financial obligations and filing fees, including a state-mandated 1.5-percent tax on the corporation’s earnings. All S corporations must pay at least a minimum of $800 annually in franchise tax. This minimum tax applies regardless of the corporation’s operational status — whether active, inactive, operating at a loss, or even if the corporation files a tax return for a short year (less than 12 months). 

This consistent tax requirement underscores the importance of financial planning for anyone considering forming an S corporation in California. It’s crucial for potential business owners to account for these taxes when estimating their startup costs and ongoing operational expenses to help ensure adequate funding and compliance from the outset.

Pros and Cons of Filing as an S Corp in California

While S corp classification does come with a number of tax benefits for some businesses, making this election might not be right for all business types. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corp election would be best for your business.

Advantages of S Corp Status for California LLCs

The advantages of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. The benefits of S corp election for an LLC have to do with self-employment tax. This takes some explanation, but for certain LLCs, it could save a lot in taxes.

Self-Employment Tax Explained

The members of a standard LLC are considered self-employed for state and federal tax purposes. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment tax (Social Security and Medicare, which adds up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

But when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Of course, the members will still pay income and all other applicable taxes on their share of the profits.) Money paid out as salary is a tax-deductible expense for the business. 

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. 

Disadvantages of S Corp Status for California LLCs

Having an LLC with S corp status can have some drawbacks over a traditional LLC:

  • Stricter membership requirements: S corps can’t have more than 100 members, and those members can’t be partnerships, corporations, or nonresident aliens. LLCs don’t have those requirements.
  • More IRS scrutiny: The “reasonable salary” requirement for paying yourself means that the IRS tends to watch LLCs filing as S corps more closely (that is, there’s a higher audit chance). 
  • Extra bookkeeping: Paying yourself as an employee requires more complex bookkeeping, so hiring professional help may be helpful.
  • Higher administrative costs: Hiring an accountant to manage payroll incurs additional fees.

Advantages of S Corp Status for California Corporations

If you have a C corporation (the default form of corporation), filing as an S corp does have its advantages:

  • Pass-Through Taxation: A C corporation is subject to double taxation, where the profits are taxed once at the business level and again at the shareholder level when dividends are paid out. But S corporations are subject to pass-through taxation, avoiding that problem. Note: in California, this benefit only applies for the federal income tax; S corps are still subject to state franchise taxes, which doesn’t change on account of pass-through taxation. 
  • Writing Off Losses: S corp owners are allowed to write off business losses on their personal returns, while C corporation shareholders cannot.
  • Qualified Business Income Deduction: S corp owners can take advantage of the qualified business income tax deduction, which lets you deduct up to 20% of your business income on your personal return. C corporations can’t.  

Disadvantages of S Corp Status for California C Corporations

Filing for S corp status as a C corporation also has its downsides:

  • Shareholder Limits: S corporations cannot have more than 100 shareholders. This limit could cause problems if a C corporation wanted to go public or make a significant expansion.
  • Limited Types of Shareholders: Every S corp shareholder must be a U.S. citizen or a certain trust or estate, potentially limiting a C corporation’s potential to expand both domestically and internationally. 
  • One Class of Stock: An S corp doesn’t allow you to offer preferred stock, which can make it more difficult to attract investors. 
  • More IRS Scrutiny: S corps tend to be audited more frequently.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the IRS, but they may also be able to help you find additional tax savings.

California S Corp vs C Corp, S Corp vs LLC — The Main Differences

Understanding the distinctions between an S corp, a C corp, and an LLC is crucial when forming a business in California. Each option has unique implications for taxation, liability, and management structure that can significantly impact your business operations and financial health.

California S Corp vs C Corp

A C corporation is a legal entity recognized separately from its owners. Owners, who are shareholders, are thus protected from personal liabilities associated with the business. C corporations are unique in that they are subject to double taxation; the corporation itself is taxed on its profits, and dividends distributed to shareholders are also taxed at the individual level on personal tax returns. C corporations file their taxes using Form 1120 and can benefit from a broader range of tax deductions and credits.

Conversely, an S corporation is a tax designation that can be used by both LLCs and corporations. Electing S Corp status allows profits, and losses to pass directly to shareholders without being subject to corporate tax rates, thereby avoiding the double taxation faced by C corporations. This pass-through taxation, where income is reported on personal tax returns, potentially results in significant tax savings. However, S corporations are subject to certain limitations, such as restrictions on the number of shareholders (100 maximum) and the types of shareholders (only individuals, certain trusts, and estates are permitted).

S Corp vs LLC in California

An LLC, or limited liability company, in California provides liability protection similar to that of a corporation but is distinguished by its flexible tax structure. California LLCs can choose between being taxed as a partnership or as a corporation, allowing for strategic financial planning based on business needs and goals. LLCs can be managed by one or more managers or directly by the members (owners), offering significant operational flexibility.

The choice between an S corp and an LLC primarily involves considerations around tax implications. Like S corporations, LLCs benefit from pass-through taxation, meaning the business’s income is taxed only once at the individual owner’s level. However, LLC members are generally subject to self-employment taxes on the entire profit of the LLC, which covers Social Security and Medicare. 

In contrast, S corporations provide a potential tax advantage in that shareholders can receive dividends and other distributions that are not subject to self-employment taxes, provided they receive a “reasonable” salary, which is subject to employment taxes. This structure can offer savings on self-employment taxes, making it an appealing choice for many business owners in California.

Get help establishing a California LLC with S corp tax election

Forming a business can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form a California LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward.

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California S Corp FAQs

  • An S corp is not a business structure. It’s a tax classification that either an LLC or a corporation can apply for with the IRS if it meets the criteria. For a corporation, S corporation election allows the corporation to avoid double taxation on federal income.

    For an LLC, S corp status has the potential to save the members on federal self-employment tax (Social Security and Medicare).

    Unlike most states, California taxes S corporation profits at both the business level and individual shareholder levels when it comes to state income taxes.

    If you want to form an LLC with S corp status, our S corp service can help you do just that. Plus, we offer other services to help you run and grow your business and stay in compliance with federal and California laws.

  • As we mentioned earlier, California is unusual because it doesn’t treat S corporation income the same way the federal government does.

    An S corp in California pays state income taxes at both the business and individual levels.

    For other differences in how California treats S corporations, see the S Corp in California Considerations section.

  • For a corporation, one of the biggest advantages is being able to avoid double taxation on the business’s income at both the entity and individual levels, thereby benefiting from pass-through taxation.

    For an LLC, when the members elect S corp status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee.

    Once they do that, they only pay employment taxes (Social Security and Medicare) on their salary and not the profits they receive (other taxes still apply). For some limited liability companies, this can add up to savings on self-employment taxes.

  • Before formally registering a business name, you should first search the California business entity records to make sure that you don’t select one that’s already in use by another business.

    That aside, however, you can typically name your California S corporation nearly anything you want as long as you comply with any applicable state naming regulations.

  • S corp status may not be right for all businesses. If you’re not sure whether to identify your LLC as an S corp or keep the default status, be sure to consult with an experienced business law attorney or accountant in your state.

  • Calculating taxes can be confusing, but you can check out our S corp tax guide to learn more about navigating taxes for your California S corporation. A certified tax professional can give you more definitive information for your circumstances.

  • Sorry, but our S corp service is only for applying for S corp status when you form your LLC with us.

  • According to the IRS website, you’ll be notified of whether or not your S corp election is accepted within 60 days of filing Form 2553.

  • If you’re a new LLC, you must apply for S corp status within 75 days of the formation of your LLC or no more than 75 days after the beginning of the tax year in which the election is to take effect.

    For an existing business, you would file at any time during the tax year preceding the tax year it is to take effect.

  • An LLC is a legal business entity, whereas an S corp is a tax filing status with the IRS. You can learn more about the similarities and differences between LLCs and S corps for California.

  • Yes, you can establish an S corp for yourself in California, but you must first either form a corporation or an LLC within the state. After setting up your corporation or LLC, you can elect S corp status to potentially benefit from tax advantages, such as pass-through taxation, which can help avoid double taxation on business income.

  • No, S corporations do not receive 1099 forms, regardless of whether they operate as an S corp or a C corp. The IRS typically does not require 1099s for corporations; these forms are instead generally issued to sole proprietors, partnerships, and unincorporated contractors to report payments for services rendered to a business.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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