If you’re no longer wondering how to start a business in San Diego, perhaps you’re ready to take more concrete steps. Although many entrepreneurs, sole proprietors, and business owners underestimate the advantages of incorporating their business as an S corporation, this could be the road for you to take. Overall, it’s an easier and less costly process than many people think.
Each state has its own guidelines for registering different business entities. Consulting with specialists who offer top-rated business formation services could help. But first, read on for a brief guide to setting up an S corp in California. Afterwards, you can decide whether you’d need to hire S corp formation services in San Diego or go it alone!
What is an S Corp?
The S corporation is one of two types of corporations recognized by the Internal Revenue Service (IRS)—C corporation is the other. An S corp differs from a C corp in that it offers a special tax status with the IRS that allows the business to avoid corporate income tax (and thus double taxation on earnings). Shareholders in an S corp file individual tax returns and pay income tax on the profits they receive from the business.
S Corp Advantages
There are essentially three key benefits to starting an S corp:
An S corp is a pass-through tax entity that eliminates the potential for double taxation by “passing through” profits and losses from the business level to personal taxes. In a C corp, income from dividends is taxed at both the corporate and shareholder level.
Easy Conversion to C Corp
If an LLC owner wishes to convert their business to a C corp, the process is relatively painstaking and involves paperwork with the secretary of state where the business was formed and in any other states of operation. An S corp, on the other hand, is simply a federal tax election that is easy to terminate and override.
Limited Liability Protection
Whenever you’re doing business at a high level, it’s imperative to shield your personal assets from debt or a lawsuit. An S corp provides the same limited liability protection of a C corp or LLC.
S Corp Incorporation: how to set up an S Corp in California?
Step 1: Choose a Business Name
California law (and common sense) prohibits you from registering a business name that is too similar to an already existing corporation’s name. Use the California Secretary of State website to do a search of registered businesses in the state, along with the U.S. Patent & Trademark Office to avoid any potential trademark issues when naming your business.
Note that an S corporation is a tax category and not a registration category, meaning that you will establish your corporation as a C corp and then apply for S corp status with the IRS. This makes starting an S corp in California really simple. That means more time to enjoy San Diego’s Mission Bay or even the Giant Dipper, and less time to worry about your new business!
Step 2: Appoint Directors and a Registered Agent
You’ll need to appoint directors for your corporation—at least three if there will be three or more shareholders, or as many directors as shareholders if there will be fewer than three shareholders. Your directors can be your shareholders, and they do not have to be California residents.
You will also be required to appoint a registered agent to receive all official communications for your corporation. When it comes to setting up an S corp, the registered agent must be a California resident.
Step 3: Draft Articles of Incorporation
The California Secretary of State website provides sample Articles of Incorporation forms. You can use one of their templates or your own to draft your document, which should include the following:
- Corporation name and legal address
- Registered agent and contact info
- Directors and contact info
- Name and address of person filing
- Business purpose
- Shares issued
- Signature of each incorporator
Step 4: File
Once your Articles of Incorporation are complete, you will then file them with the California Secretary of State. The fee ranges from $30 to $100, depending on the type of business.
Step 5: Draft Bylaws
How you run your company is up to you—that’s the beauty of being a business owner. However, California law requires that you do indeed have actual bylaws that outline how your company is governed. That is one of the reasons for a growing demand for business incorporation services for startups in San Diego.
Step 6: Get S Corporation Status
The last step, once your corporation is officially registered, is to make the switch from the default C corp to S corp. To do this, you will file Form 2553 with the IRS. There is no filing fee, but you will have to meet certain requirements, such as having fewer than 100 shareholders and getting consent from all shareholders to pursue the status. You will also have to make your S corp election within 2 months and 15 days after the first day of the taxable year to elect.
Registering and starting an S corp in California can be somewhat confusing, especially for new business owners who are balancing the many challenges and responsibilities that come with entrepreneurship. The easiest way to go about it is to have a tax professional do it for you. Click the link to see how David York’s Tax Service can get your business filed and functional in three easy steps.
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