A corporation is an entity formed under state civil law that is a separate legal entity owned by shareholders. A corporation is generally taxed under Internal Revenue Code, Subtitle A, Chapter 1, Subchapter C, unless it elects to be taxed under Subchapter S. Corporations taxed under Subchapter C ("C corporations") are taxed annually on their earnings, and the shareholders are taxed on these earnings when distributed as dividends. If the corporation is a service corporation by an employee-owner, see FTB 1123, Forms of Ownership, for more information regarding personal service corporations.
- A corporation must register with the California Secretary of State before conducting business operations and file appropriate paperwork.
- A 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.
- If formed as a corporation, the owners of the corporation are not liable for the losses of the businesses and creditors may only look to the corporation and the business assets for payment.
- A separate bank account and separate records are required.
- 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.
- A corporation’s life is perpetual in nature.
- Ownership is easily transferred through the sale of stock, and new owners can be easily added by the issuance of additional stock. For entities that are not civil law corporations, the ownership interests are generally treated as "shares of stock" for tax purposes.
- This form of ownership is more costly to set up and maintain than a sole proprietorship or partnership. Consult an attorney for guidance on setting up your corporate entity.
- S corporations that are corporations or LLCs under civil law corporations must pay the annual $800 minimum franchise tax.
- Corporations taxable as a C corporation that organize in California, register in California, conduct business in California, or receive California source income must file California Form 100, California Corporation Franchise or Income Tax Return. Other entities that elect to be taxable as a C corporation must file California Form 100 if they receive California source income.
- The return due date is the 15th day of the 3rd month after the close of the taxable year.
- A C corporation is taxed on its net income at a rate of 8.84 percent. Entities formed as corporations under civil law and LLCs that elect to be taxable as a C corporation are subject to a minimum tax of $800.
- The minimum franchise tax ($800) is due the first quarter of each accounting period and must be paid whether the corporation is active, inactive, operates at a loss, or files a return for a short period of less than 12 months. The minimum tax is waived on newly formed or qualified corporations filing an initial return for their first taxable year. However, any first-year net income is still subject to the 8.84 percent tax rate.
- The estimated tax is payable in four installments. (See Instructions for California Form 100-ES, Corporation Estimated Tax, for additional information and applicable rates.)
- Installments are due and payable on April 15, June 15, September 15, and December 15.
- Corporations complete Form 100-ES to report their estimated taxes.
- Shareholders may have to make estimated tax payments for their own reporting purposes.