How to Start an S Corp in California
Starting an S corporation (S corp) in California is easy, and electing an S corp tax designation could potentially save your business money in taxes. Our guide will walk you through the process of starting your California S corporation and provide you with tips on maintaining your S corp.
Want to form an S corp elsewhere? Check out our other How to Start an S corp guides to learn more.
We recommend using a professional formation service like Tailor Brands to get your S corp up and running in no time.
Factors to Consider Before Starting an S Corp
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
- 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.
Businesses that elect S corp status will need to hire payroll and accounting services.
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 not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.
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 Tailor Brands 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.
Find a Domain Now
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.
Note: California has waived LLC formation fees from July 1, 2022, to June 30, 2023.
OPTION 1: File Online With the California Secretary of State
- OR -
OPTION 2: File Form LLC-1 by Mail or in Person
State Filing Cost: $70, payable to the Secretary of State (Nonrefundable)
Secretary of State
Business Entities Filings
P.O. Box 944260
Sacramento, CA 94244-2600
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.
OPTION 1: File Online With the California Secretary of State Portal
- OR -
OPTION 2: File Form LLC-12 by Mail or In Person
Fee: $20 online and by mail; $35 in person (Nonrefundable)
Secretary of State, Statement of Information Unit
P.O. Box 944230
Sacramento, CA 94244
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
After you’ve successfully formed your business and selected an S corp tax designation, it’s important that you follow the laws to ensure that your business remains compliant and can continue to operate in good standing. All California S corps will need to file a Statement of Information every two years and file Form 100S each year.
California Statement of Information
Your California S corp must file a Statement of Information with the California Secretary of State. These reports are due every other year, so if your business was registered in an odd year, you will file this report on every following odd year but not on even years. The filing deadline is based on your business’s registration date.
California S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and California S corp owners can expect to pay the following taxes:
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
California Franchise Tax
California has a franchise tax, and S corporations must still pay this franchise tax. All California S corporations must file Form 100S each year and pay the California franchise tax. The California franchise tax rate is 1.5% on net income, and the minimum franchise tax rate by default is $800. Meaning, your S corp will need to pay at least $800 each year even if it is inactive or loses money.
Form 100S is due by March 15th each year and should be filed with the secretary of state. The California franchise tax applies to the S corporation, and you will be responsible for paying this in addition to state income taxes.
California Income Taxes
California has some of the highest income tax rates in the country. Similarly to federal income taxes, the California state income tax rate varies based on your yearly income and whether you file as an individual or with your spouse. While the lowest rates start at 1%, the highest tax rates can be over 10%. A 10% state income tax rate is significantly higher than that of other states, and you should keep this in mind when deciding if California is the best place for you to do business.
California Sales and Use Tax
The California statewide tax rate is 7.25%. California retailers must register with the California Department of Tax and Fee Administration to ensure that they pay taxes on goods sold. While 7.25% is the statewide tax rate, it should be noted that many cities have their own sales tax that will need to be paid in addition to the statewide rate.
California Local Taxes
Be sure to check with your local community to make sure your business complies with local laws. Whether your business is in Los Angeles, San Francisco, or a smaller city in the state, each local municipality may have their own taxes your business is required to pay.
Start an S Corp FAQ
What is an S corp?
An S corporation (S corp) is a tax classification for which an LLC or a corporation can apply.
Are taxes for LLCs and S corps the same?
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.
What is a reasonable salary for an S corp?
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.
What is a distribution?
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.
Can I still use my DBA name if I elect to be an S corp?
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.