Brendon Pack | How to Start an S Corporation in California [2024]

 

There are numerous benefits to forming your California small business as an S corporation (S corp). Whether you're actively taking the steps to operate as a California S corp or just making your plans, there are some things to consider before you do.

 

 

Use this blog to understand what an S corp is, the requirements unique to the state of California, and a detailed, multistep guide that will help you through the S corp entity formation process.

 

How to Start an S Corp in California: Key Takeaways

California requires you to complete and file a form exclusive to the state to operate your small business as an S corp. To help you navigate the process, we’ve compiled a comprehensive 12-step guide to successfully starting your S corp in California. Brendon Pack

 

The steps increase in complexity and include:

 

Check name availability, choose a business name, and obtain an EIN

File articles of incorporation, registered agent, and corporate bylaws.

S corp director election, meeting requirements, and issuing stock.

Statement information, Form 2553, and Form 100S.

What Is an S Corporation?

An S corp is a corporation that is taxed as a pass-through entity, which it can elect to become. Pass-through taxation means that credits, deductions, state income tax, and losses flow from the S corp to each shareholder. Brendon Pack

 

To qualify as an S corp, your business must meet these federal requirements:

 

Be a domestic corporation

Have no more than 100 shareholders

Have only allowable shareholders

Have only a class of stock

Not be an an ineligible corporation (certain financial institutions, insurance companies, and domestic international sales corporations)

Allowable shareholders may be certain trusts and estates, but they may not be corporations, non-resident shareholders, or partnerships.

 

S Corporation Requirements in California

In addition to federal S corp requirements, California has materials and requirements that are unique to the state, such as Form 100S. You’ll file Form 100S if your business is:

 

Operating 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 your new California S corp, including:

 

Paying the $800 minimum franchise tax

Being subject to the California 1.5% S corp tax rate

New S corps 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 your 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

Follow these 12 detailed steps to form your small business as an S corp in the state of California.

 

Step 1: Check Name Availability

After you've created a list of prospective business names, three or four candidates are appropriate to start; you'll check to see if they are available.

 

Your business name will be checked against the same business entities registered with the Secretary of State when you search via 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 each reservation.

 

Step 2: Choose a Business Name

Once you've identified available business names, you must choose one. Choose a business name that is:

 

Distinguishable in the records from other corporations of record

Reserved with the California Secretary of State

The name is not likely to mislead the public

Finding a unique brand name and (normal-looking) domain to go with it can be a time-sink for a new business owner. This free tool from Business Name Zone generates name and domain combos for you based on your input – and it only takes a few minutes.

 

Step 3: Obtain an EIN

There are three options available to file for your Employer Identification Number (EIN). You can receive your FEIN or Federal Employer Identification Number 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, receiving your EIN with a provided phone number will take up to four days

If you apply by mail, receiving your EIN will take up to four weeks

Schedule a call to see how we can help you obtain your EIN.

 

Step 4: File Articles of Incorporation

You'll need to file your Articles of Incorporation to start your California S corp. 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 the proposed corporation

Address, city, state, and zip code

Agent for service of process

Type of corporation

Number of shares the corporation can issue

How long the corporation will last if the goal is not to exist perpetually

Purpose statement

Signatures of each incorporator

The fee to file Articles of Incorporation is $100, and you can complete the form online.

 

Step 5: Registered Agent

Registered agents are also known as an agent for service of process in California, and you'll need to select one for your S corp. The agent for service of process will accept legal documentation on your business's behalf, such as court papers, if your S corp is sued.

 

Consider these three points for registered agents for service of process in California:

 

An agent for the 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 the 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 the service of process in the state of California.

 

Step 6: Corporate Bylaws

Corporate bylaws establish how your corporation will operate and prove its legitimacy.

 

The main difference between corporate bylaws and Articles of Incorporation is that the Articles of Incorporation should be filed externally, while bylaws are mainly used for internal operations.

 

Your corporate bylaws should contain basic information about your S corp, such as:

 

Address

Designation of the corporation (public or private)

The fiscal year of the corporation

Name

Principal place of business

Your bylaws should also contain information about important functions of your S corp. This may include:

 

Board of directors

Director functions

Meeting procedures

Shareholder meetings

Step 7: S Corp Director Election

Shareholders elect directors who will serve on a board of directors, acting on behalf of your S corp. Duties and responsibilities they will have include:

 

Directors will annoucne 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 executive and set policies.

Step 8: Meeting Requirements

Before starting an S corp in California, you should become familiar with and keep track of a few meeting requirements.

 

First, the board of directors will keep meeting minutes. Second, there are no rules regarding what to include in meeting minutes or outlining how to track these minutes.

 

It may be helpful for your meetings to contain an outline that 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)

The next meeting date set

Step 9: Issue Stock

To start an S corp in California, you must issue stock. An S corp can issue only one class of stock to its shareholders.

 

Step 10: 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

You must file Form 2553 to convert your California corporation to an S corp at the federal level. You’ll need information about your S corp to complete this step, including:

 

• 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

Filing Form 100S will allow you to operate your S corp within California.

 

In this step, you’ll need to submit several pages of information about your S corp, so make sure you've completed the previous steps in advance of completing and filing this form.

 

Other Requirements: California Franchise Tax

All S corps owners in California will pay a franchise tax. The minimum franchise tax for S corp status is $800, 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 corps 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 first year in operation.

 

Conclusion: Let Us Help You Start Your California S Corp

Converting your California small business entity to an S corp is a great decision that provides numerous advantages. However, the process can be complex and time-consuming for busy owners, which is why they trust 1-800Accountant, America’s leading virtual accounting firm for small businesses, for their California S corp needs.

 

Whether it's entity formation for an S corp, C corporation (c corp), or limited liability company (LLC), or any of our professional accounting services, we have the affordable solutions you need to ensure your business remains compliant. Schedule a quick consultation–usually 30 minutes or less to learn more.