How to Start an S-Corp in California: A Step-By-Step Guide

The formation of a Subchapter S-corporation or S-corp in California entails several steps and legal requirements, including filing articles of incorporation, appointing directors, drafting by-laws, and submitting Form 2553 to the Internal Revenue Service (IRS) to choose S-corp tax status. 

This guide will walk you through the key steps in detail, so you know exactly what you need to do if, like many small business owners, you’re thinking about establishing an S-corp in California to lower your federal tax liability, enjoy limited liability protection, raise business capital through stock sales, and take advantage of other benefits that an S-corporation can provide.

The lawyers at Gallagher Krich, APC have lots of experience setting up, maintaining, and dissolving different corporate entities in California. Please contact us online or by phone at (858) 926-5797 if you need assistance starting an S-corporation or have any other legal inquiries about your business.

3 Key Steps to Take in California When Starting an S-Corporation

  • Prepare and File Articles of Incorporation

Before we continue, it is important to understand that an S-corp is a tax status rather than a type of business structure like a corporation or Limited Liability Company (LLC).

The first step in obtaining the S-corporation tax designation is to officially register your company as an LLC or a corporation with the California Secretary of State by completing and submitting the Articles of Incorporation

In the Articles of Incorporation-General Stock form, which can be found here: http://www.sos.ca.gov/business/be/forms.htm, you’ll give essential information about your S-corp, including:

  • The proposed corporation’s name. When naming your firm, the name you select should be distinct from other businesses to prevent any future trademark concerns, and not be misleading (your name cannot imply that you sell a product or service that you don’t supply).

Once you’ve decided on a name, you may use the California Secretary of State business database to see if it’s available.

  • The corporation’s official address
  • Business purpose statement
  • Name and address of a registered agent. This is a person who has consented to accept crucial tax and legal documents on your company’s behalf. To receive notices in person, they must be accessible during regular business hours.
  • The lifespan of the corporation, if its existence is not meant to be perpetual.
  • Name and addresses of the incorporators (the individual or individuals who founded the business).
  • The quantity and kind of stock shares that the company can issue.
  • Signature(s) of the incorporator.

In California, there is an Articles of Incorporation filing fee of $100 and submissions can be made online, through mail, or in person.

The Articles of Incorporation will be reviewed by the California Secretary of State after your filing, and assuming they’re not too busy, they should approve it in a few days. 

The state will issue you a certificate of formation, proving your business is a legitimate corporation, if your application is accepted.

  • Acquire a Federal Tax ID Number

Forming a S-corp requires the acquisition of a Federal Tax ID number if you don’t currently have one.

Comparable to an individual’s Social Security number, the Federal Tax ID Number, also known as the Employer Identification Number (EIN), is a unique nine-digit number provided by the Internal Revenue Service to identify your business entity for tax purposes.

It is used in all state and federal tax returns filed by your firm, and opening a business account with a bank also requires you to have an EIN. Additionally, to pay your invoices, certain businesses you deal with could want your Federal Tax ID Number.

Following your business registration, you may apply for a Federal Tax ID Number by fax, mail, or online through the IRS EIN Assistant (online application is usually the fastest method), for free.

You’ll be asked for personal and business details in the application; once verified, your EIN will be made available to you right away.

  • Get S Corporation Status

When starting an S-corp in California, this is the most crucial step to do.

After completing it, your business will be regarded as an S-corporation for federal tax purposes, resulting in significant tax savings. This process must be completed within 75 days after incorporating an LLC or C-corp.

To perform it, you’ll file Form 2553, Election by a Small Business Corporation with the IRS to convert the California corporation you formed in step one to an S-corp. 

The following details regarding your S-corporation are necessary for you to finish this step:

  • Name, address, social security number, and signature of all stakeholders
  • Corporation name and address
  • Company EIN 
  • Business officer title and signature
  • State of incorporation 
  • The incorporation date

When Form 2553 has been filled out, you can mail or fax it to the IRS. The IRS has several standards that must be met to qualify for the S-corp classification, including having a maximum of 100 shareholders, being a U.S. citizen, issuing just one class of stock, and obtaining approval from every shareholder. However, there is no filing fee.

Upon finishing this stage, your company can start operating as an S-corp while you wait for the IRS to give it S-corporation status, which could take several months.

To set up and manage your S-corporation, you must, however, fulfill additional legal requirements, which include:

  • Obtaining Necessary Permits and Licenses

You may require different federal, state, and municipal licenses and permits, depending on the nature of your business and where it is located. 

For example, businesses in Los Angeles, California, must apply for a business license from the city.

For information on what licenses and permits you require, to lawfully operate your company in California, see the California Governor’s Office of Business and Economic Development (GO-Biz) portal. 

  • Creating Corporate Bylaws

Bylaws are internal regulations controlling the management and operation of an S-corporation.

They contain details about things like the number and qualifications of directors, the voting rights of shareholders, the duties of directors and officers, dispute resolution procedures, and guidelines for shareholder and board meetings.

  • Appointing Directors

In California, S-Corps are required to have a minimum of one director, whose roles and responsibilities include announcing developments pertaining to the corporation at the annual general meeting, formulating the mission of the S corp—which is typically expressed as a mission statement—establishing corporate policies, making sure the S corp complies with all legal and financial requirements, and evaluating the management’s performance at the company.

The founder directors, who are usually named in the Articles of Incorporation, manage the S-corp until the first shareholders’ meeting when shareholders have the power to vote to continue with or replace them.

Don’t Navigate the Complexities of S-Corp Formation in California Alone!

 

It can be challenging to start an S-Corp in California, but Gallagher Krich, APC is here to help you get through the process with ease.

With over thirty years of combined experience in business law, our S corporation attorneys can guide you through every stage of the process, from preparing and filing the Articles of Incorporation with the California Secretary of State to drafting your company’s bylaws and guaranteeing compliance with state and federal rules.

Our work doesn’t end after formation. To ensure the success of your S-Corp, Gallagher Krich, APC, can also provide ongoing legal counsel. This includes assistance with matters such as shareholder agreements, employment contracts, intellectual property protection, and tax optimization, which can save you a significant amount of money by maximizing business deductions and minimizing tax obligations.

For a free consultation regarding your company’s legal objectives and how to get your S-Corp off to a good start, so you can concentrate on what you do best – building your business, call Gallagher Krich, APC today at (858) 926-5797 or fill out our online contact form!

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