Forming a California S Corporation
Are you ready to set up a California S corporation? You've probably come to the right place.
This web page both describes the process for setting up an S corporation in California (you've got a couple of ways you can do this). And the web page provides the links you can use to download one of our free California S corporation kits.
Note: Because we used to sell these kits and because of the way our servers work, you need a discount code to download a free kit. Don't worry. Here's the discount code: stephenlnelsoncpa
In any event, the first thing you need to know is this: Setting up an S Corporation in California is pretty easy. Basically you take three relatively straightforward steps...
Step One: Form an Eligible Entity
A subchapter S corporation is not really a corporation. Rather, a subchapter S corporation is an entity that has made an election with the Internal Revenue Service to use a set of rather "business friendly" tax accounting procedures. The state of California lets you use these rules, too, once the IRS gives you permission.
Accordingly, you set up an eligible entity as your first step when creating an S corporation.
Now, traditionally, businesses used a regular, old fashioned corporation as the entity that would use these business friendly accounting rules. More recently, however, people have tended to use limited liability companies as the entity because LLCs allow for easier administration.
In either case, however, the entity formation process works the same: The business owner files a simple one or two page form with the California Secretary of State in Sacramento.
Tip: the Secretary of State's website provides free forms you can use for just this purpose.
Step Two: Obtain a Federal Employer Identification Number
After the California Secretary of State processes entity formation paperwork, the new LLC or corporation applies for an employer identification number (EIN) from the Internal Revenue Service.
The EIN application requires completion of the one-page SS-4 form. This form requires a bit more effort than the California articles of formation or articles of incorporation forms. But many savvy business owners can complete the form successfully by following the IRS instructions.
Step Three: Elect to Use the Subchapter S Rules
After the new LLC or corporation gets its EIN, the business files a form 2553 with the IRS service center in Ogden, Utah. This form, available for free at www.irs.gov, allows the IRS to determine whether the small business can legally make an S corporation election and also documents that the business followed correct procedures.
Assuming the LLC or Corporation correctly makes its election, the IRS approves the application and then sends out an acceptance letter a few weeks later. At this point, the LLC is treated as a "subchapter S" LLC or the corporation is treated as a "Subchapter S" corporation.
Getting One of Our Free California S Corporation Kits
As a promotional gimmick (for our accounting firm and the accounting firms that help us maintain the kits), we give away a couple of do-it-yourself S corporation kits for California small businesses wanting to set up an S corporation.
These kits provide you with detailed step-by-step instructions. And the kits come with some stuff (sample legal documents, completed example forms, and so on) that you can't get online.
As hinted at earlier, though, you nee to choose one of two routes for setting up a California S corporation...
Free DIY Kit #1: S Corporation Based on LLC
Okay, we recommend you set up an S corp in California by first forming a limited liability company and then second by making the Subchapter S election to have the limited liability company treated for income tax purposes as an S corporation.
The LLC version of California S Corporation kit, which is really a short 20pp e-book and then a set of word-processer-ready documents, provides easy-to-follow instructions for doing this. And predictably the kit includes examples of the completed California and IRS forms so you know exactly what your completed documents should look like.
The LLC version of the California S Corporation also comes with two sample limited liability company operating agreements, one for single member limited liability companies and one for multiple member limited liability companies. You will need an operating agreement for an LLC-based S corporation... (Note: You can't get free operating agreements from the California Secretary of State's website.)
Table of Contents
- Advantages of a California LLC
- Disadvantages of an California LLC
- Detailed Procedures for Forming California LLC
- Licensing a California Business
- Obtaining Employer Identification Number for LLC
- Making Subchapter S Election for LLC
Free DIY Kit #2: S Corporation Based on Regular Corporation
As an alternative to the "LLC route" to S corporation status, you can also set up a traditional corporation and then make the Subchapter S election for the corporation. We are not big fans of this approach, but the approach may be exactly right when you want a corporation for credibility or "branding" reasons. For example, if you want to use the word "corporation" or the acronym "inc" in your business name, you form a regular corporation as the platform for your S corporation and not a limited liability company.
The slightly longer "corporation" version of the California S Corporation Kit (roughly 35 pages) discusses and describes the benefits of creating an S corporation using a regular, traditional corporation and then provides step-by-step instructions for incorporating, getting your EIN, and then electing Subchapter S status.
Note: After reading the kit document, you may decide to skip the Subchapter S election and leave your corporation taxed as a regular corporation, or C corporation. C corporations do deliver some unique tax benefits to their owners, as discussed in the kit.
The regular-corporation version of the California S Corp Kit includes sample corporate bylaws, which you or an attorney can use as a starting point for creating your own, personalized corporation bylaws.
Table of Contents
- Advantages of Incorporation
- Disadvantages of Incorporation
- Corporate Tax Primer
- Detailed Procedures for Incorporating in California
- Licensing a California Business
- Obtaining Employer Identification Number for Corporation
- Making Subchapter S Election for Corporation
- Sample By-laws for California Corporation
Additional Information You May Find Useful
If you want additional information about how to maximize the tax savings related to running a business or investment venture, you may also be interested in one of our downloadable e-books (see descriptions below). Each book covers a category of tax planning topics that easily save a business owner significant amounts of income or self-employment taxes (potentially thousands of dollars a year) and is instantly downloadable.
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