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Is an S corporation the preferred entity form for my business?

Many Californians would like to go into business for themselves by creating an entity or purchasing a business that is already established. One of the key decisions that a prospective business owner or current business owner must make is what entity formation to use. One option is an S Corporation. Understanding how an S Corporation works and its tax requirements is key before deciding on this entity form.

With an S corporation, the entity or a corporation that has been formed decides that it will be taxed under Sub-S corporation status in the tax code. The S corporation provides protection for owners against liability. The profits and losses of the S corporation will extend to the owners whether they are shareholders, partners or members. The debt obligations are contingent on the kind of S corporation the business is, such as a limited liability company (LLC), a partnership or a corporation.

There is a limit to the types of owners there can be with an S corporation, and it cannot go beyond 100 shareholders. There is no federal income tax with an S corporation. In California, there is a tax of 1.5 percent on the net income. Shareholders are responsible for paying the taxes on the proportional (pro rata) share of the income, deductions and credits. There must be a separate bank account and separate records with an S corporation. An S corporation is generally used so the shareholders and other owners can avoid being double-taxed as they otherwise might be with a different business formation.

There are four installments to pay taxes with an S corporation and they must be paid in the following manner: 30 percent due April 15; 40 percent due June 15; there is no installment payment for the third installment due September 15; and 30 percent due December 15. With a C corporation, the business will face a business tax and the shareholders and owners will face taxes on their dividends. This is not the case with a S corporation, as it is not taxed on profits.

Business formation can be a confusing matter to those who are considering purchasing a business or starting one of their own. An S corporation can be useful if the circumstances warrant it. Before making any decisions, is may help to discuss the situation with a professional. A law firm with experienced in business and commercial law can help with entity formation and all the factors that go along with the business.

Source: ftb.ca.gov, "S Corporation," accessed on Jan. 15, 2018

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