SBDC Podcast Episode #2 - S-Corporations Explained

 

Ever wondered if an S-corporation is right for your California business? You've heard they offer tax benefits and shield you from personal liability, but the setup process seems daunting. Fear not, aspiring S-corp owner, because this guide unravels the mystery and empowers you to take control.

What is an S-Corporation?

An S-corporation, also known as a Subchapter S corporation, offers a unique blend of legal and tax benefits. It separates personal liability from business liability, similar to a C-corporation, but typically avoids double taxation and provides pass through taxes like that of a sole proprietorship or partnership.

However, there are some key characteristics to keep in mind:

• Limited shareholders: Only 100 shareholders are allowed, and they must be U.S. citizens or resident aliens.
• Single stock class: All shares must have the same rights and privileges.
• Ineligible corporations: Certain entities like financial institutions and insurance companies cannot be S-corporations.

Getting Started: Before You File

Before diving into the official paperwork, designate a registered agent. This individual or company receives legal documents on your S-corp's behalf. This is especially helpful for home-based businesses who want to keep their address private.

Forming Your S-Corporation

File online: Head to https://bizfileonline.sos.ca.gov/ and choose "Register a Business" under "Business Entities."
Fill out the information: This includes your business name, address, directors (optional), and the number of shares you're issuing. Pay the processing fees and submit.
Statement of Information: Within 90 days, file this form to finalize details in your articles. As of this recording, the filing fees are $100 for Articles and $25 for the Statement.

Additional Steps:

• Create bylaws outlining how your corporation operates. You can use a template or consult a lawyer.
• Hold an initial directors' meeting to elect officers and vote on crucial aspects like bank accounts.
• Obtain an Employer Identification Number (EIN) to open a business bank account.

Converting to an S-Corp (Form 2553)

The steps above create a regular C-corporation. To unlock the tax benefits of an S-corp, you need to convert it. Download and complete Form 2553 from the IRS website (https://www.irs.gov/forms-pubs/about-form-2553). This form requires information about your corporation, shareholders, and taxable year.

Maintaining Your S-Corp:

Annual Filings: Keep your corporation updated with yearly statements of information and board meeting minutes.
Taxes: While S-corps avoid double taxation federally, California imposes a 1.5% S-corporation tax. However, you still enjoy tax savings by receiving a "reasonable salary" and a share of the profits. An accountant can help determine your reasonable salary.

Filing Taxes:

Federal: Use Form 1120S to file federal taxes. You'll need your financial statements and the K section of the form (used to generate K1s for shareholders) for personal federal taxes. Consider consulting a licensed accountant, especially with multiple directors.
California: File state taxes with Form 100S, which also generates K1s for your personal tax filing.

The Final Word

Setting up and maintaining an S-corporation involves various steps and considerations.This is just a basic overview.The process can be complex, and seeking professional help from lawyers and accountants is highly recommended, especially for intricate aspects like tax filing. They can also help you determine if an S-corp is the best fit for your specific business needs.

Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.