When business owners discuss the numerous types of business structures available, the phrase “S corporation” frequently comes up. But have you ever considered the meaning of the term “S corp”? The “S” in question really refers to the Internal Revenue Code’s “Subchapter S,” which enables eligible small enterprises to choose to be taxed as pass-through entities. Small business entrepreneurs prefer S corporations because of their tax benefits, limited liability protection, and adaptability in management and ownership.
S corporations and LLCs are two of the most common company entities in California. Both provide limited liability protection, which shields an owner’s private assets from debts and obligations incurred by their businesses. There are some distinctions between the two, though. One difference between S corporations and LLCs is that S corporations are restricted to having a maximum of 100 stockholders. S corporations must also have a board of directors and have regular meetings, but LLCs are exempt from these restrictions.
The manner they are taxed is another distinction between a S corp and a single-member LLC. Single-member LLCs are classified as “disregarded entities” by the IRS, which means that the owner’s personal tax return must include information about the business’s income and expenses. However, despite filing a separate tax return, S companies are exempt from paying federal income tax. Instead, the shareholders receive a pass-through of the business’s profits and losses, which they then declare on their personal tax returns.
In California, forming a S company often requires a little more time than forming an LLC. Depending on the complexity of the firm and any required state and local authority approvals, the process can take a few weeks to a few months. You must file articles of incorporation with the Secretary of State, receive all required business licenses and permits, and choose S corporation status with the IRS by submitting Form 2553 in order to establish a S corp in California.
In California, there are a number of distinctions between LLCs and S corporations, including the number of shareholders permitted, the requirements for management and ownership, and taxation. Both structures provide limited liability protection, but before selecting which is best for your company, it’s crucial to grasp their differences. In the end, speaking with an experienced lawyer or accountant can help you make a wise choice and make sure you are abiding by all relevant rules and regulations.