How to Start an S Corp in California
If you’re considering forming an S corporation (S corp) in California, you may have heard about the potential tax savings it offers.
This guide will take you through the process of setting up an S corp in California and help you determine if it’s the right choice for your business.
Keep reading to explore how a California S corp could benefit your company.
Pro Tip: Get a free consultation with a tax professional to determine if an S corp is right for you.
Factors to Consider Before Starting an S Corp in California
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Why a limited liability company (LLC) is the best structure for S corp tax status
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and a maximum of 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by an LLC or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a California S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S Corp tax calculator.
Pro Tip: Get a free consultation with a tax professional to determine if an S corp is right for you.
How to Form a California S Corp
If you’re considering forming an S corp, you should know that an S corporation is a tax classification under Subchapter S of the Internal Revenue Service (IRS). S corp business owners elect this tax status for either an LLC or a corporation, since it provides tax benefits. You can form your California S corp by completing and filing Form 2553 with the IRS. In California, an S corp has a franchise tax of 1.5%.
Corporations with a C Corp IRS tax classification have double taxation (business is taxed and shareholders are taxed again on business distributions) and LLCs have pass-through taxation (all profits, credits, distributions, deductions, and losses pass directly to the owner). An S corp requires business owner(s) to have a reasonable salary based on their position and the appropriate market compensation to qualify for this type of tax classification, which results in more IRS scrutiny. Sole proprietorships and partnerships do not qualify for S corp tax status since they are informal business structures.
The following are some S corp tax advantages:
- S corps are not taxed at the business level (as opposed to C corps). S corps pass through earnings, losses, and deductions to the owner(s). However, California S corps pay a 1.5% franchise tax or an $800 minimun.
- Business owner(s) pay employment taxes and income tax on their salary
- Distributions, which are net profits (profits after operational costs, deductions, credits, income), only pay income tax on each individual owner’s income tax return within their respective tax bracket. This is where the tax savings occur since there is no employment tax paid on this portion!
S corps are required to have no more than 100 shareholders who are U.S. citizens or permanent resident aliens, among other restrictions.
There are Two Main Ways to Form an S Corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps to Form an LLC and Elect S Corp Tax Status in California
Starting a California LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are six basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: File Initial Statement of Information
Step 5: Create an Operating Agreement
Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in California.
Be sure to choose a name that complies with California naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a California LLC:
- Your name must include the phrase “limited liability company,” or one of its abbreviations (LLC or L.L.C.)
- Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
- The name cannot include the following words: bank, trust, trustee, incorporated, inc., corporation, or corp.
- The name cannot include the words “insurer” or “insurance company” or any words suggesting that it is in the business of issuing policies of insurance and assuming insurance risks.
- The name must be distinguishable from any other LLC registered with the Secretary of State. You can read more about what makes a name distinguishable on the California Secretary of State website.
You can also read the California state statute about LLC naming guidelines for more information.
2. Is the name available in California? You can use the business entity search on the California Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don’t plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your California Registered Agent
You must elect an agent for service of process, also known as a registered agent, for your California LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC’s behalf. You will list your registered agent when you file your LLC’s Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the California LLC Articles of Organization
The California LLC Articles of Organization is used to officially register an LLC.
File Your California Articles of Organization
OPTION 1: File Online With the California Secretary of State
File Online– OR –
OPTION 2: File Form LLC-1 by Mail or in Person
Download FormState Filing Cost: $70.
Mailing Address:
Secretary of State
Business Entities Filings
P.O. Box 944260
Sacramento, CA 94244-2600
Office Address:
Secretary of State
1500 11th St.
Sacramento, CA 95814
Step 4: File Initial Statement of Information
You must file an Initial Statement of Information (Form LLC-12) with the California Secretary of State. You can do this in-person, online, or via the mail — but no matter what, it must be done within 90 days of formation.
File the Initial Statement of Information
OPTION 1: File Online With the California Secretary of State Portal
File Online– OR –
OPTION 2: File Form LLC-12 by Mail or In Person
Download FormFee: $20 (Nonrefundable)
Mailing Address:
Secretary of State, Statement of Information Unit
P.O. Box 944230
Sacramento, CA 94244
Office Address:
California Secretary of State Sacramento Office
1500 11th Street
Sacramento, CA 95814
Step 5: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our California LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 6: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your California S corp for you, so you can focus on the things that matter most — growing your business.
Keep Your California S Corp Compliant
You must comply with state and federal regulations to ensure your business remains in good standing. Here’s a guide to maintaining compliance for your California S corp.
File the BOI Report
Federal regulations require that S corporations disclose their ownership details to the government by filing a Beneficial Ownership Information (BOI) report with the Financial Crimes Enforcement Network (FinCEN). This report helps maintain transparency about who owns and controls your business.
You can file the BOI report through the FinCEN website.
Open a Business Bank Account
Keeping your business and personal finances separate is crucial for protecting your California LLC’s liability shield. Establishing a dedicated business bank account is essential for managing your company’s finances clearly and legally.
Check out our guide on the Best Banks for Small Business to find banking options that meet your needs.
Secure Necessary Business Licenses and Permits
In California, you may require various licenses and permits based on the nature and location of your business. Compliance with these licensing requirements is mandatory to operate your business legally and avoid fines or lawsuits.
For guidance on what licenses and permits you may need, refer to our California Business License guide.
Understand S Corp Tax Obligations
California imposes a state franchise tax on LLCs, which includes a minimum tax of $800 per year. Additionally, California LLCs must file Form 100S and pay the appropriate taxes based on their net income. Besides state taxes, your LLC also will be subject to federal tax obligations — including paying income taxes on shareholder distributions.
For more information about tax obligations, visit the California Franchise Tax Board website.
Collect and Remit Sales Tax
If your California S corp sells taxable products or services, you must collect sales tax and remit it to the state. Registering with the California Department of Tax and Fee Administration (CDTFA) is necessary to handle sales tax.
To get started with sales tax registration and compliance, visit the CDTFA website.
Start a California S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
Unlike most states, California requires businesses to file a report — called a Statement of Information — every two years. While this report may not be called an annual report, it contains the same information.
The state of California requires business entities to pay a franchise tax. This tax will either be $800 or 1.5% of your business’s annual income (whichever is greater). You must file Form 100S each year in order to account for and pay this tax.