Small businesses in California may benefit if they start an S-Corp in California. Although an S-Corp is a great business entity, there are things worth considering first.
All corporations must convert to an S-Corp. The state also requires its own form for you to complete before operating an S-Corp in California. Here are the twelve steps to start an S-Corp in California.
What is an S Corporation?
An S-Corp is a corporation that is taxed as a pass-through entity. A corporation can elect to become an S-Corp to operate as a pass-through entity. This means that credits, deductions, income, and losses flow from the S-Corp to its shareholders.
For your corporation to become an S Corporation, it must:
- Be a domestic corporation
- Have no more than 100 shareholders
- Have only allowable shareholders
- Have only class of stock
- Not be an ineligible corporation (certain financial institutions, insurance companies, and domestic international sales corporations)
Allowable shareholders may be certain trusts and estates, but it may not be corporations, non-resident shareholders, or partnerships.
S Corporation Requirements in California
On top of the federal requirements to start an S-Corp in California, there are requirements for S-Corps that are unique to the state.
You’ll file Form 100S if your business is:
- Doing business in California
- Incorporated in California
- Receiving California source income
- Registered to do business in California with the Secretary of State
There are additional requirements that apply to new S Corporations. S Corporations will pay the $800 minimum franchise tax, and S Corporations with California source income will have a tax of 1.5%.
Newly formed S Corporations filing an initial return for their first taxable year may have the minimum franchise tax waived if it’s registered with the Secretary of State.
If the S Corp isn’t registered with the Secretary of State for the first taxable year, it will still be subject to the minimum franchise tax and the 1.5% tax rate.
How to Start an S-Corp in California
There are twelve steps to start an S-Corp in California.
Step 1: Check Name Availability
The first step to start an S-Corp in California is to check name availability.
Your business name will be checked against the same business entities registered with the Secretary of State when checking your name availability. You can see if your business name is available through the Business Search database.
You have the option to reserve your business name for 60 days for a fee of $10. After 60 days, you can renew the first name reservation, but there must be at least one day between name reservations.
Step 2: Choose Business Name
After searching to see if your business name is available, you’ll choose a business name. You can choose a business name which is:
- Distinguishable in the records from other corporations of record, or
- Reserved with the California Secretary of State; and,
- The name is not likely to mislead the public.
Step 3: Obtain an EIN
Third, if you don’t have an EIN, you’ll do so in this step. There are three options available to receive an EIN. You can receive your EIN by fax, by mail, or online, and each option is free:
- You’ll receive an EIN the fastest if you apply online.
- If you apply by fax, it will take up to four days to receive your EIN if you provide a phone number.
- If you apply by mail, it will take up to four weeks to receive your EIN.
Step 4: File Articles of Incorporation
The fourth step to start an S-Corp is to file Articles of Incorporation. You’ll complete the Articles of Incorporation-General Stock form and send it to the Secretary of State. Within the Articles of Incorporation, you’ll provide your S-Corp’s:
- Name of proposed corporation
- Address, city, state, and zip code
- Agent for Service of Process
- Number of shares corporation can issue
- Purpose statement
- Signatures (of each incorporator)
There’s a fee of $100.00 to file Articles of Incorporation, and you have the option of completing the form online.
Step 5: Registered Agent
The fifth step to start an S-Corp in California is to work with a registered agent. Registered agents are also known as an agent for service of process in California. The agent for service of process will accept court papers if your S-Corp is sued.
There are three things to consider for agents for service of process in California:
- An agent for service of process can be a corporation or an individual.
- If the agent for service of process is a corporation, it must have previously completed Form 1505, Registered Corporate Agent for Service of Process Certificate.
- If the agent for service of process is an individual, the individual must live in California.
A business entity won’t be able to act as its own agent for service of process in the state of California.
Step 6: Corporate Bylaws
The sixth step to start an S-Corp in California is to form corporate bylaws. Your corporate bylaws will establish how your corporation will operate.
Your S-Corp’s corporate bylaws should contain basic information about your S-Corp, such as:
- Designation of corporation (public or private)
- Fiscal year of corporation
- Principal place of business
It should also contain information about important functions of your S-Corp. This may include information about:
- Board of directors
- Director functions
- Meeting procedures
- Shareholder meetings
Step 7: Appoint Directors
Next, you’ll appoint your S-Corp’s directors. Shareholders elect directors who will serve on a board of directors, deciding on behalf of the S-Corp. Some duties and responsibilities the directors will have are:
- Directors will announce corporation-related developments at the annual meeting.
- Directors will create the mission of the S-Corp, often as a mission statement.
- Directors will ensure the S-Corp meets its financial and legal obligations.
- Directors will review the actions of corporate executives and set policies.
Step 8: Meeting Requirements
Eighth, you’ll keep track of the meeting requirements. There are a few meeting requirements to know before starting an S-Corp in California.
First, the boards of directors will keep meeting minutes. Second, there are no rules regarding what to include in meeting minutes. There are also no rules outlining how to track these minutes.
It may be helpful for your meetings to contain an outline, which can resemble:
- Agenda for approval (the board can approve additions)
- Minutes of the last meeting for approval
- Reports from committees and executives
- Old business (carried over from a previous meeting)
- New business
- Comments and announcements
- Adjournment (with time)
- Next meeting date set
Step 9: Issue Stock
The ninth step to start an S-Corp in California is to issue stock. An S-Corp can issue only one class of stock to its shareholders.
Step 10: Statement of Information
One of the last steps you’ll do to start an S-Corp in California is to complete the Statement of Information. An S-Corp’s Statement of Information requirements differs from other business entities in the state:
- You must file a complete Statement of Information within the first 90 days of filing the Articles of Incorporation.
- After filing the Articles of Incorporation, a Statement of Information is due every year.
- You can file subsequent Statements of Information online.
There’s a fee of $25.00 to complete the Statement of Information.
Step 11: Form 2553
The penultimate step to start your S-Corp is to file Form 2553. This is the form to convert your corporation to an S-Corp at a federal level.
You’ll need information about your S-Corp to complete this step:
- Address, name, and signature of each shareholder
- Business address and name
- Company EIN
- Company officer signature and title
- Company’s state of incorporation
- The address and name business address
- The date of incorporation
After completing Form 2553, you can fax or mail it to the IRS.
Step 12: Form 100S
The last step to start an S-Corp in California is to file Form 100S. This form will allow you to operate your S-Corp within California.
In this step, you’ll need to provide several pages of information about your S-Corp, so make sure to have everything you need in advance.
There’s one state requirement to be aware of as you start an S-Corp in California.
All S-Corps in California will pay a franchise tax. The minimum franchise tax of $800 is due in the first quarter of each accounting period.
You’ll pay this tax whether your corporation is active, inactive, operates at a loss, or files a return for a short period (under 12 months)
California waives 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 Secretary of State.
Every S-Corp will pay an additional 1.5% tax from their California source income, even if it’s the S-Corp’s first year in operation.
Let Us Help You Start Your California S-Corp
Starting a corporation in California may be right for you. If you want to start an S-Corp in California, it can be a great decision.
When it’s time to start your S-Corp in California, it should never be confusing or stressful. Work with the experienced professionals at 1-800Accountant to form your S-Corp in California.