California S Corporation Requirements
The attorneys of Theta Law Firm are familiar with the formation, maintenance, and dissolution of various business entities in California. For advice on how to form your business or other legal questions relating to your business, please feel free to give us a call or send us an email.
An S corporation is just a corporation that elects to be treated as a pass-through entity for purposes of federal taxes. In other words, S corporations do not pay federal income taxes.
Information on how to form an S corporation can be found here: www.thetafirm.com/articles.
Shareholders of S corporations report the income and losses of the S corporation on their personal tax returns. As a result, S corporations are able to avoid double taxation on the S corporation's income.
Criteria for California S Corporations:
In order to qualify for S corporation status with the IRS, though, a corporation must meet several requirements:
- The S corporation must be a domestic (US) corporation;
- S corporations can only have certain kinds of shareholders:
- Individuals, certain trusts, and estates may be shareholders of an S corporation.
- Partnerships, corporations and non-resident alien shareholders may not be shareholders of an S corporation. In other words, S corporation shareholders must be a U.S. citizen or resident.
Filing Requirements for Forming an S Corporation in California:
In addition to the documents/filings necessary to form a corporation, an S corporation must also properly elect its S corporation status. This requires meeting both federal and state requirements:
Federal: In order to elect S corporation status with the IRS, the corporation must submit Form 2553, Election by a Small Business Corporation, which can be found at the IRS website (or click here: http://www.irs.gov/uac/Form-2553,-Election-by-a-Small-Business-Corporation.) Generally, you should get this election form on file right away, as there are specific time deadlines that apply. In addition, the S corporation must provide each shareholder with a Schedule K-1 that states the shareholders' pro rata share of the S corporation's income, deductions, and credits.
California: In addition, California S corporations must also file California Form 100S, which is the California S Corporation Franchise or Income Tax Return form.
Other Restrictions on S Corporations to Consider:
Restrictions applicable to S corporations in California include, but are not limited to:
- S corporation profits and losses can only be allocated in proportion to each shareholder's percentage interest in the corporation.
- An S corporation shareholder cannot deduct corporate losses that exceed the shareholder's basis in the corporate stock.
- S corporations cannot deduct the cost of fringe benefits provided to employee-shareholders who own more than 2% of the corporation.
- S corporations must satisfy the formalities applicable to any other corporation.
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