You have a new California Corporation, What Now? Part I dealt with an overview on your California Corporation, withdrawing corporate funds, taxes & accounting and books and records. I’ll continue to address the advantages that your Corporation will enjoy as a S Corporation.
As you probably know, an “S Corporation” is a Corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. There can be some tax advantages to making the “S election” choice. The Corporation itself will not pay income taxes. Instead, the Corporation’s shareholders will report the Corporation’s profits and losses on their individual tax returns. Please note that the shareholders, you will have to pay taxes on the Corporation’s income even if the Corporation does not distribute any dividends. It is generally a good idea to make sure that the Corporation has enough cash to distribute to the shareholders to cover these taxes.
To qualify for the S election, the Corporation may have no more than 100 shareholders. With a few exceptions, each shareholder must be an individual who is a U.S. citizen or a permanent resident alien. If a disqualified person such as an LLC or a nonresident alien becomes a shareholder, the Corporation will lose its election. This can result in adverse tax consequences.
- Franchise Fee: Your Corporation must pay an $800 minimum franchise fee each year.
- Payroll Tax Withholdings: If your Corporation hires any employees, it will be required by law to withhold payroll taxes and FICA contributions for each employee. If your Corporation fails to withhold these taxes, those persons who had the authority to make the contributions but failed to do so—i.e., the officers—will be personally liable for the full amount. Please contact your tax advisor with any questions you might have.
- Employment Issues: If the Corporation hires any employees, it will also be subject to an array of California and federal laws governing workplace safety, minimum wages, unlawful discrimination, and harassment, to name a few. It can be difficult to navigate these laws and regulations.
- Insurance: Your Corporation needs to obtain insurance coverage in its own name. You should meet with your insurance agent to discuss the Corporation’s operations and recommended coverage.
- Securities: The sale or transfer of the Corporation’s shares of stock is heavily regulated under California and Federal securities laws. It is essential to comply with these securities laws to minimize the risk of liability to the Corporation and its shareholders.
- Close Corporation Status: Unless the Corporation has elected to be a “Close Corporation” under California law, it must hold annual meetings of shareholders and directors. If the Corporation fails to hold these meetings, this could be used against it in an attempt to pierce the corporate veil.
- Annual Statement of Information: Your Corporation is required to file an Annual Statement of Information with the California Secretary of State together with a $25.00 fee. The Secretary of State will mail annual reminders to you. If you do not file the Statement of Information, the Corporation may be suspended, meaning that it loses all of its corporate powers and must pay a fine to be reinstated.
- Fraud Alert: Your Corporation may receive official-looking correspondence asking you to pay several hundred dollars to prepare and file your corporate minutes and annual statement of information. This is a fraud. The Secretary of State does not accept corporate minutes for filing—instead, corporate minutes (should you choose to have them) are kept in your corporate record book.
- Business License: Your Corporation may need to obtain a business license. Many municipalities provide licensing information and any required application on their municipal websites. Check your local municipality.
Conclusion: If you have additional questions about whether your Corporation should be designated an S-Corporation or a different designation, I’d be happy to discuss this with you.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with me about your situation, please email me at: firstname.lastname@example.org or call (925)-217-3255.