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S Corporation in California

A California corporation and S corporation are, for the most part, formed the same way. An S corporation, however, is a California corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (IRC sections 1361-1379). By making this election, an S corporation is taxed like a partnership. There is no double-taxation as in a general California Corporation. Income and expenses are “passed through” to its shareholders in the same way partners in a partnership and members of a limited liability company (LLC) are treated for tax purposes. An S corporation, therefore, benefits from the advantages of a general corporation and the flow- or pass-through benefits of an LLC or partnership.

California imposes a 1.5% franchise tax on an S corporation’s net taxable income. The profits pass-through to the shareholders and are taxed at the shareholders’ individual rates. Below are some of the requirements to forming a California S corporation

California S Corporation Formation Requirements

  • 100 Shareholder Limit – A California S Corporation cannot have more than 100 shareholders. However, all members of a family (up to six generations from a common ancestor) are counted as one for purposes of the 100 shareholder limit.
  • Limitations on the kind of shareholders permitted – only the following are allowed as shareholders in a California S Corporation: people who are United States citizens or resident aliens; estates; certain kinds of trusts; an S Corporation if it is the sole shareholder; a partnership under certain circumstances; and charitable organizations.
  • One class of stock (except for voting rights)
  • S-Election Requirement – the S Corporation election must be filed no later than 2 months and 15 days after the beginning of the taxable year. For new S Corporations, the beginning of the taxable year is when it has shareholders, when it acquires any assets, or when it starts business, whichever happens first.

Please feel free to download our COMPLIMENTARY Side-By-Side Comparison Chart of the advantages and disadvantages of California LLCs, corporations, s-corporations, and sole proprietorships HERE. If you would like to read a more in-depth report about the different business entity forms, please click HERE.

And do not hesitate to contact us if you need help forming a California S Corporation or have any other business concern. The Tagre Law Office offers Modesto Business Attorney services for your corporation in California.

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