Forming a corporation in California requires serious thought. But the most important decision is choosing between a California “C Corporation Tax Designation” and an “S Corporation Tax Designation.” You may want to consult a lawyer for help with choosing the best tax designation.
Learn About C Corporation and S Corporation Tax Designations
You will find similarities between the C Corporation and the S Corporation. These similarities relate to rules regarding corporation compliance, structure, management and personal liability. However, there are some specific things to note.
To form an S Corporation, you must file IRS Form 2553 no later than 45 days after incorporating. You can qualify for this tax designation only if your business:
– qualifies as a domestic corporation
– provides no more than one class of shares
– has 100 or fewer shareholders; and
– shareholders must be estates, trusts or individuals
In a C Corporation, shareholders report and pay taxes on their earnings from the business. The shareholders are a separate entity from the corporation. But in an S Corporation, the shareholders have more of a partnership with the business. Business income or losses can pass to shareholders to report on their personal income tax returns. This allows business losses to offset income on shareholders’ personal tax returns. The corporation’s owners are taxed at an individual tax rate and are not required to pay taxes on their share of business profits.