What is an S Corp?

An S Corporation (“S Corp”) is known as a pass-through tax entity because business profits are only taxed at one level: the owner’s personal tax returns. Partnerships and LLCs may elect to be taxed as an S Corp, but corporations’ profits are taxed pursuant to the owner’s personal tax returns and the corporation pays its own taxes. This feature makes an S Corp an attractive business entity for those considering formation.

S Corp

An S Corp is an entity formed under California civil law. An S Corp generally offers the same liability protections to shareholders as any other business entity. The actual liability of the owners for debts and obligations of the business will depend on what type of entity the S Corp is formed under, as will the entity’s  management structure.

To form an S Corp in California, an entity must file a California Form 100S, a California S Corporation Franchise, or an Income Tax Return. Prior to this, the entity will have to be properly formed, meaning that all required documents were filed with the California Secretary of State.

Once an entity’s directors or shareholders have approved the election of S Corp status, it is usually necessary to prepare the minutes over one or two weeks, and then send them to all the directors or shareholders for their signature.

S Corp Taxation

A business entity that elects to be taxed under Subchapter S for federal tax purposes will also be treated as an S corporation for California tax purposes. After deducting its business expenses, an S Corp passes through all of its net income to its shareholders as profit distributions. The S Corp is not itself taxed at the federal level, like a corporation is taxed. At the state level, California does require an S Corp to pay a 1.5% tax on net profits, subject to an $800 annual minimum.