An S corporation is a hybrid business entity. It is a separate legal entity and generally offers liability protection to its owners (shareholders).
Key Features
- An S corporation must register with the California Secretary of State before conducting business operations and file appropriate paperwork.
- An S corporation must create bylaws (e.g., how the corporation will operate) that cover items such as stockholder meetings, director meetings, number of officers, and their responsibilities.
- A corporation must elect to be treated as an S corporation and is limited to 100 owners (shareholders).
- The S corporation pays a reduced tax rate on its net income (currently 1.5 percent for California) and is a conduit similar to a partnership.
- The profits and losses "flow down" from the S corporation to each shareholder through the Schedule K-1. Each shareholder is responsible for paying taxes on their distributive share.
- Based on the corporation’s separate legal entity status, the owners of the corporation are not liable for the losses of the business and creditors may only look to the corporation and their business assets for payment.
- A separate bank account and separate records are required with this form of entity.
- The owners have ultimate control of the corporation; but must elect directors who in turn elect officers for the company. The directors make the major decisions, while the officers make the day-to-day decisions.
- An S corporation’s life is perpetual in nature.
Filing Guidelines
- S corporations that organize in California, register in California, conduct business in California, or receive California source income, must file California Form 100S.
- The S corporation must provide each shareholder with a schedule K-1 that states the shareholder’s allocation of tax items.
- The return due date is the 15th day of the third month after the close of the taxable year.
- An S corporation is taxed on its net income at a rate of 1.5 percent, with a minimum tax of $800.
Estimated Tax
- The estimated tax is payable in four installments.
- Installments are due and payable on April 15th, June 15th, September 15th, and December 15th.
- Corporations complete Form 100-ES to report their estimated taxes.
- For taxable years beginning on or after January 1, 2009, corporations are required to pay 30 percent of the estimated tax liability for the first and second required installments and 20 percent of the estimated tax liability for the third and fourth required installments. Prior to this law change, each installment was 25 percent of the total estimated tax due.