Most people have heard of an S-Corporation or an S-Corp, but not many people really know what it really is and more importantly, what it isn’t.
I get asked a lot by potential clients, if I can form an S-Corp for them. I have to inform them that you do not form an S-Corp, you elect it.
To be more specific, when you create a corporation under California law, the letter S never comes into play. You have to look at this at two levels. First is the entity creation at the state level. California code regulates entity formation in our state. So if a corporate form of entity is what you want (as opposed to limited liability companies, partnerships, etc.) you form a regular corporation or a statutory close corporation (if your company qualifies).
Once the corporation is formed, you or your incorporator will then file for a Federal Employer Identification Number, or EIN/FEIN. You will tell the IRS what form your business is, and then whether you will elect to tax your corporation under Subchapter S of the IRS code, as opposed to Subchapter C (which is why you will hear the term C-Corp). Subchapter S of course being the pass through treatment whereas income is taxed at the corporate level but no taxes are paid, the income “passes through” to the owners and tax is paid at the shareholder level. Thus, S-Corps are treated almost like partnerships, with some differences.
This was created because many small businesses are owned by very little people, making the formal C-corp treatment very tedious, as well as wanting to see the inherent double taxation of C-Corps eliminated for small businesses.
