Forming an S corporation in California can be a strategic move for business owners, offering liability protection and tax benefits. However, navigating the process can be complex, involving multiple steps and requirements. To help guide you through this process, we'll break down the key steps to form an S corp in California.
Step 1: Choose a Business Name and Conduct a Name Search
Before filing any paperwork, it's essential to choose a unique and available business name for your S corp. California law requires that the name of your corporation must be distinguishable from the names of other businesses on file with the Secretary of State. You can conduct a name search on the California Secretary of State's website to ensure your desired name is available.
Once you've identified a suitable name, you can reserve it for 60 days by filing a Name Reservation Request form with the Secretary of State. This will prevent other businesses from using the same name while you complete the incorporation process.
Requirements for S Corp Names in California
- The name must contain the word "corporation," "incorporated," "company," or an abbreviation of one of these words (e.g., "Corp.," "Inc.," or "Co.").
- The name cannot be the same as or too similar to an existing business name on file with the Secretary of State.
- The name cannot contain language that implies the corporation is a financial institution or a professional corporation (unless it is a professional corporation).
Step 2: File Articles of Incorporation with the California Secretary of State
To officially form your S corp in California, you'll need to file Articles of Incorporation with the Secretary of State. This document provides essential information about your corporation, such as its name, purpose, and structure.
You can file the Articles of Incorporation online or by mail. The filing fee is currently $100, and the processing time can take several days or weeks, depending on the workload of the Secretary of State's office.
Required Information for Articles of Incorporation
- Corporation name and address
- Purpose and scope of the corporation
- Number of authorized shares and par value (if applicable)
- Name and address of the incorporator(s)
- Name and address of the registered agent
Step 3: Obtain an EIN and Open a Business Bank Account
After filing your Articles of Incorporation, you'll need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This unique number is required for tax purposes and will be used to open a business bank account.
To apply for an EIN, you can submit Form SS-4 online or by mail. The application is free, and you'll receive your EIN immediately after submitting the form.
Once you have your EIN, you can open a business bank account in the name of your S corp. This will help you keep your personal and business finances separate and make it easier to manage your corporation's taxes.
Step 4: Prepare and File Form 2553 with the IRS
To elect S corp status with the IRS, you'll need to file Form 2553, also known as the Election by a Small Business Corporation form. This form must be filed within two months and 15 days of the beginning of the tax year you want the S corp election to take effect.
You can file Form 2553 online or by mail, and there is no filing fee. However, it's essential to ensure that all shareholders sign and date the form, as the IRS requires unanimous consent from all shareholders to elect S corp status.
Step 5: Obtain Any Necessary Licenses and Permits
Finally, you'll need to obtain any necessary licenses and permits to operate your S corp in California. This may include:
- Business licenses from the city or county where your corporation is located
- Professional licenses (if your corporation is a professional corporation)
- Sales tax permits (if your corporation sells products subject to sales tax)
- Employer identification numbers from the California Employment Development Department (if your corporation has employees)
It's essential to research and comply with all licensing and permitting requirements to avoid penalties and fines.
What is the difference between an S corp and a C corp?
+The main difference between an S corp and a C corp is the way they are taxed. C corps are taxed on their profits at the corporate level, and then shareholders are taxed again on dividends received. S corps, on the other hand, are pass-through entities, meaning that profits are only taxed at the individual level.
Can I convert my existing business to an S corp?
+Yes, it is possible to convert an existing business to an S corp. However, this may require filing additional paperwork and meeting certain requirements. It's recommended that you consult with a tax professional or attorney to ensure a smooth transition.
What are the benefits of forming an S corp in California?
+Forming an S corp in California can provide several benefits, including liability protection, tax savings, and increased credibility. Additionally, S corps can help business owners separate their personal and business finances, making it easier to manage taxes and financial reporting.
In conclusion, forming an S corp in California requires careful planning and attention to detail. By following these five steps, you can ensure a successful incorporation process and take advantage of the benefits that S corp status has to offer. Remember to consult with a tax professional or attorney to ensure compliance with all requirements and regulations.