What is an S-Corporation?

The letter S laying on concrete, symbolic of answering the question: what is an S-corporation?

Everything You Need to Know About S-Corporations

If you’re in business, you’ve heard of S-corporations (or S-corps). You probably even have a lot of people in your life that have strong opinions on whether you should be an s-corporation or not.  But what exactly is an S-corporation and how does the structure affect how you run your business? Or, simply put: what is an S-Corp?

S-corporations entered the small business scene in 1958 when the federal government passed legislation allowing their formation.  Now, by IRS estimates, there are over 5 million S-corporations in existence. Read on to learn everything you need to know about S-Corps.

Benefits of Forming an S-corporation

Pass-Through taxation.

One of the biggest benefits of s-corporations is that the taxation of the company’s profit passes through to the owner.

In a regular corporation (or “C-corporation”), the business’ profit is taxed at the business level.  If the shareholders want to take money out of the company, they must either do so by taking a salary which is subject to payroll taxes or taking a dividend.  In the case of a dividend, that income has already been subject to the corporate tax rate and then is taxed again on your personal return.  The income being taxed on the corporate level and personal level is known as double taxation.

In an s-corporation, this double taxation is avoided because the profit of the corporation is passed through to the shareholder and only taxed at the individual level.

You only pay payroll taxes on your salary.

If you are actively involved in a partnership or the owner of a sole proprietorship, the company’s profit is all subject to self-employment taxes.  As the owner, you are responsible for both the employee and employer portion of payroll taxes which currently are 15.3%. 

In an s-corporation, you are required to pay yourself a reasonable salary.  The term reasonable salary is not defined by any IRS regulations, so this amount is open to interpretation and you should consult your accountant to discuss a reasonable salary for your business.

That being said, you only pay payroll taxes on the salary you pay yourself.  The remaining profit after paying yourself and all your other expenses is not subject to the payroll taxes which can yield significant tax savings.

S-corporations provide liability protection.

The s-corporate structure provides liability protection for the shareholders.  The shareholders’ assets are protected from the business creditors for claims rising from contracts or litigation.

Drawbacks of Forming an S-corporation

There is the initial setup cost and ongoing taxes.

There are several initial fees including the registration fees with the state and state taxes that the corporation is subject to.  If you operate in multiple states, you’ll need to review each state’s requirements and determine which states you need to register with. 

In California, s-corporations are subject to an annual $800 minimum tax although it may be  waived in the first year of operation depending on your profit.  There are annual Statement of Information filings required by the Secretary of State.  You should obtain local businesses licenses to ensure compliance with local regulations as well. 

Having a third-party filing your initial paperwork can cost thousands of dollars depending on which firm you use, but is often worth it to ensure that the paperwork is filed correctly and you have properly set up your corporation to receive the benefits listed above.

You are required to pay yourself a reasonable salary.

As noted above, you are required to pay yourself a reasonable salary. The reasonable salary can vary and should be discussed with your accountant.  However, the salary requirement requires you to have a payroll processing company or process the payroll yourself.  Payroll requires quarterly and annual filing (such as W-2s) and has stiff penalties for missing required payment dates. 

Your best bet is to use an online system to process payroll or work with a professional payroll processor, however the fees add up for either of these services.

You can only have one class of stock.

Distributions to shareholders must be made in proportion to the stock ownership.  So, if one personal owns 75% of the company, they must receive 75% of all distributions.  Distributing funds in a non-proportional manner creates a second class of stock which is not allowed under the s-corporation rules. 

Limitation on the number of shareholders.

Though this is not a problem for most small companies, the number of shareholders for an s-corporation is limited to 100.  In this case, married couples can be counted as single shareholder when calculating the limitation. 

You must use a calendar year.

Like the limitation on the number of shareholders this is usually not a problem for most people who are used to thinking about finances on an annual basis. An s-corporation is required to have a fiscal year that is the same as the calendar years ending on December 31.  C-corporations have the option of selecting a fiscal year end which may serve them better based on seasonal fluctuations in business. 

A woman stands on top of a hill with her arms outstretched, like you might if you just started an S-Corp!
It’s time to take on the world and start that S-Corporation at last!

How to Start an S-corporation

Register your corporation with your state.

Each state has their own policies and procedures when it comes to corporate formation.  The first step to establishing an S-corporation is to register as a corporation and then you file the s-election.

For California, you need to file your Articles of Incorporation with the Secretary of State (SoS).  You can create your own document for the filing as long as it meets the SoS guideline or you can use the form available only.  While the SoS required paper documents to be filed, it has recently changed its policy to allow online submission of the Articles.  Processing times still take a few weeks, so you need file weeks before you need to be up and running.

Register for an EIN.

Once your corporation hs been registered with your state, you need to head over to the IRS website and obtain an EIN.  The EIN (Employee Identification Number) is required for banking, paying employees, and filing your tax returns.  The IRS process for obtaining an EIN is relatively straightforward and you can obtain your EIN letter immediately online.  One item to note is that the IRS EIN website is only available during certain hours of the day and only on weekdays. 

You also do not want to get the EIN prior to receiving approval for your state corporate filing because it’s possible that the state will reject your corporate filing because of a name conflict in which case your EIN will have the wrong name associated with it.  You can fix an incorrect name, but it requires extra paperwork (and starting up a business takes enough paperwork, as is, so there’s not need to add more!)

File the S-election (Form 2553) with the IRS.

Form 2553 is an election to be taxed an S-corporation.  The form is straightforward and requires the business and owner’s information.  All owners of the corporation must sign the election.  If any owners are in a community property state (such as California) the spouse is also required to sign the election even if they are not listed as a shareholder.  The s-election needs to be filed within 2 months and 15 days of incorporation or the start of the tax year in which the corporation wants to make the election.  The IRS does allow late elections in some circumstances, but it’s always best to file timely paperwork.

While the submission process is easy, wait times for approval can vary.  It can take 2-3 months for the election to be approved and you to receive your approval letter.

Set up payroll services if they’re not already in place.

With the s-election’s tax savings comes the requirement for paying yourself a reasonable salary as discussed above.  To ensure that you’re following these rules, you should establish a payroll service for yourself if you don’t already have payroll set up through a processing company or online system.  There is no rules about when the payroll needs to be paid during the year, so you have until the end of the year to get this set up, but you don’t want to be scrabbling at the end of the year.


Have more questions about S-Corps, or anything else about business or accounting for that matter? Reach out to us at My OC Bookkeeper. We provide bookkeeping, accounting, and outsourced CFO services to businesses all over Southern California. Want to learn more about starting a business in CA in general? This post will teach you everything you need to know about starting a new business in CA, or if you are a visual learner take a look at the video below.

One final great resource: check out the CA Secretary of State website to learn directly from the source. Always good to supplement your learning by spending a few minutes with the CA SOS.

Is the Name I Want for My CA Business Available?

A building with a sign saying "Your Name Here", symbolic of the process of checking to see if the name you want for your business is available.

How to Do a Business Name Search in CA

So you are ready to setup your great new California business when it occurs to you: how do I find out if the business name I want is available? Don’t worry, there’s actually a pretty easy process for this. Why is there a process in the first place? That’s because the state of California – like other states – doesn’t want multiple businesses using the same name, which seems pretty reasonable to us.

In addition to ensuring your name is unique, you’ll also need to follow the CA Business Naming Guidelines. (Don’t worry, this is pretty easy to do.)

So, just follow our step by step process below and soon you’ll have a shiny new business name.

Step 1: Follow the CA Business Name Guidelines

Suffice it to say, if the name you want is illegal, well then it’s not available.

  • If you are forming a Limited Liability Company, “limited liability company”, “L.L.C.”, or “LLC” must be part of your name. (But if you don’t like any of those you can always setup a dba with a different name. For more on dbas check out our detailed guide on setting setting up a business in CA.)
  • Using certain words in your business name such as “University” or “Doctor” or “Attorneys at Law” may necessitate further registrations and regulatory steps. Obviously, if you aren’t a doctor or a bank CA doesn’t want you implying you are via your name.
  • Don’t use words that imply that your business is a government agency like the FBI or CIA. The government doesn’t like this.
  • If you want to go deep into the weeds on this issue, you can read the CA Secretary of State business name regulations here.

Step 2: Do a CA Business Name Search on the CA Secretary of State Website

This is where things start to get exciting. The CA Secretary of State website is actually pretty user friendly, so this process should be pretty easy.

  • Go to the CA SOS search page.
  • Depending on whether you want to start a Corporation, LLC, or LP, select the appropriate business type in the Search Type field and search for the name that you want.
The CA Secretary of State Business Name Search Portal
The portal on the CA SOS website where you search for your desired business name.
  • Hopefully there won’t be a business using your desired name. If there is, be sure to check the status column. If it says dissolved, then depending on how long they have been out of operation you may be able to get the name after all. (Reach out to the CA SOS for the latest rules in that regard.) If not, you’re out of luck – but hopefully you have a good backup in mind.
  • If you click on a name that comes up after running a search, you can obtain further information about the company such as its location, when it was registered, and whether it has completed its basic ongoing regulatory requirements. This may not be very helpful now, but after setting up your company you may want to come here periodically to ensure you haven’t fallen behind on anything. (And believe me, MANY companies fall behind. It’s a headache, and can be expensive. Don’t fall behind.)
  • If you don’t see the name you desire than you are likely good to go, but there is a slight chance there is a very similar name that didn’t come up. In rare cases, for example, a pre-existing business may have used the plural form of a word while you may have used the singular. (Cat LLC vs. Cats LLC.) If this is the case you won’t be able to get your name because your name won’t be considered unique. To avoid this you can fill out a Name Availability Inquiry Letter and send it in to the Secretary of State’s office. They will let you know with complete authority whether the name you desire is currently available. Keep in mind though that even if the name which you thought was available actually isn’t, the CA SOS office will simply tell you this when you attempt to register it, so you’ll find out eventually one way or another.

This is a simple and quick step that can help you avoid headaches down the road. If someone already has a strong web presence either with the name you want or something similar to it, it may be worth considering coming up with something different. Depending on what you do, competing with another website may be something to avoid, even it they are out of state. Not only that, if someone has a website with the name you want they may have already registered the name with the state of CA (or may be in the process of doing so) – so take extra care when searching the CA SOS website.

In addition to a basic Google search, you can pop into GoDaddy to see if someone owns the URL desired, and if not that is where you can buy the URL.

Step 4: Reserve the Name You Want If Necessary

If you’re not quite ready to setup an LLC but want to ensure that the name you want will be available you can reserve it for 60 days by filling out a Name Reservation Request. There is a $10 fee and the request must be either mailed or dropped off at the Secretary of State’s office in Sacramento. If need be you can re-reserve the name but there must be at least a one day break between each 60 day reservation and you must refill out the form.

Optional Bonus Step: Check the Trademark Directory and/or Trademark Your Name

Most small to medium sized businesses aren’t too worried about trademarks. But if you want to be extra cautious you can check the US Patent and Trademark Office database. If you find a name similar to yours in the database you probably will be best served to choose something different. If you don’t want to do that then you should speak to a lawyer before proceeding. If you are planning on creating a brand that will be national in scope than you may want to trademark the name, otherwise there are likely better ways to spend your money. If you decide you do want to get a trademark, follow the instructions on the USPTO website. It’s not a terribly difficult process and shouldn’t take more than a couple of hours of work.

A man smiles and reaching out his arms while confetti falls, symbolic of the excitement of getting the name you want for your business.
Yay! The name you want for your business is available! Now on to building the business…

Step 5: Setup Your Business with the Desired Name

If everything has gone smoothly so far than you should be good to go. Now all you need to do is determine the kind of business structure you want to use and go through the steps necessary to set it up. For help with choosing the appropriate business structure and setting them up, check out this great post on setting up a business in CA. Whatever you choose, proceed with confidence that the name you want is available. (Unless of course someone takes it just before you, which is a bummer, but quite unlikely – and if it happens the state of CA will let you know.)


There you have it, 5 steps (plus an optional bonus step) to answer the oft-burning question: Is the Name I Want for My CA Business Available? Need more help with your business? My OC Bookkeeper is Southern California’s premier bookkeeping, accounting, outsourced CFO and business consulting firm. We can help you with everything from day to day bookkeeping to setting up your initial accounting processes to building complex financial models. If it has to do with accounting or business finance, we know how to do it.

Want to learn everything you could ever want to know about setting up a business in CA? Watch the video below.

How Do You Setup a Sole Proprietorship in CA?

A glass shop door with an open sign, symbolic of setting up a sole proprietorship in CA.

Everything You Need to Know About Setting Up a CA Sole Prop in 5 Simple Steps

Before starting a new business in California, you first need to decide what type of business entity you want to form. In general, a Sole Proprietorship is easy to establish in CA. In fact, you don’t even need to register with the California Secretary of State to set it up.

Be aware though. Sole Proprietorships are risky. This type of business does not provide the owner with any protection against business liabilities. This means that you will be personally liable for all of your business’s debts.

Here are the five simple steps you should take to start a Sole Proprietorship in California.

Step 1: Choose a Name for Your CA Sole Prop

In California, you can choose any name for your Sole Proprietorship as long as it is not the same or similar to an already registered business name, providing it isn’t misleading to the public. For example, you cannot choose a business name that contains the word government. To check the availability of a name, check the California Secretary of State website.

That having been said, the default name of a Sole Prop is the legal name of the owner. In most cases, however, business owners choose to use a different business name. (Obviously a good business name can help your customers understand the type of product or service your Sole Prop provides.) In order to change the name you need to file a dba. How do you do it? Read number 2.

Step 2: File a Fictitious Business Name Statement

This process is also called filing for a DBA or “doing business as”. The owner of a Sole Proprietorship must file for a DBA if they do not intend on using their surname. In California, you can file a Fictitious Business Name Statement in the county recorder’s office where your business is located.  

The filing fees are $26. From the start date of your business, you will have 40 days to file a DBA statement. To complete the process, you must follow the county’s requirements for publicizing your new business name. This often involves a predetermined list of local papers where you have to publish the information. Just ask the clerk for some info on this and they’ll provide it.

A street sign of California Ave with palm trees in the background, symbolic of starting a sole prop business in California.
How do you setup a sole proprietorship in CA? Simple, just keep reading and you’ll know.

Step 3: Obtain Required Licenses, Permits, and Zoning Clearance

This step depends on the nature of your Sole Proprietorship. Some businesses need to obtain one or more licenses or permits from the state. Fortunately, California provides a comprehensive database of every license and permit required for any kind of Sole Prop. This will guide you through the process and help you better understand the required documents for your Sole Proprietorship.

Just visit the California Governor’s Office of Business and Economic Development CalGold website. Type in your county and city and you will get a list of all the required permits and licenses for your business activity. You will also find useful information that will help you file and obtain these documents.

Step 4: Obtain an Employee Identification Number (If Necessary)

As a Sole Proprietorship owner, you will not automatically need an Employer Identification Number (EIN). However, under certain circumstances, you might need to obtain one. For example, if you want to hire employees, you’ll need to have an EIN.

You might also need this nine-digit number for tax reporting purposes or to open a bank account. Check with the tax authorities in California to learn if your Sole Proprietorship is required to take this step. Registering for an EIN is done through the IRS. This process can be completed online at the IRS website.

Step 5: Do the Things Any New Business Owner Should Do

Anyone starting a new business, regardless of if it is a sole prop or something else, should consider setting up a bank account, obtaining any necessary insurance, and potentially setting up a business credit card and or line of credit. These are basic for most businesses regardless of the type of entity or industry.

That’s it! Now, you’re ready to start your new business and will never ask yourself how do you setup a sole proprietorship in CA again! (Although if you do you can just come back and reread this article…) Want to learn even more about setting up a business in California? Check out this awesome blog post which breaks down everything you need to know about starting a business in CA, including the difference between all of the business types (Sole prop, LLC, etc.)


Starting a new business in California? We’ve got your back! You can count on My OC Bookkeeper for the best bookkeeping, accounting, outsourced CFO, and business strategy services in California. Reach out to us now and let’s do great things together!

Want to learn everything you could want to know about starting a business in CA? Watch the video below. It’s great, trust us we know, we made it. (We’re not biased, it really is great.)

How Do You Setup an LLC in CA?

The California coastline lined with palm trees, symbolic of setting up an LLC in beautiful CA.

Our Guide to Setting Up an LLC in California

Setting up an LLC in California will take your entrepreneurial idea to the next level. It will add legitimacy to your business and provide important legal and tax benefits. In general, starting a business can be a difficult, costly task that requires a lot of paperwork. But do not worry, we are here to help and guide you each step of the way.

LLCs are considered one of the easiest, quickest forms of business to set up in California. You just need to know exactly what to do. That is why we will provide you with a complete guide to make the process less confusing for you. First, let’s learn more about LLCs and all the benefits they provide.

What is an LLC?

“Limited Liability Company,” that is what LLC stands for. It is a type of legal entity that can be formed to own and run a business. Unlike other business types, LLCs offer liability protection and tax advantages. That is why LLCs are very popular in California and across the US.

Many business owners in California also prefer LLCs as they combine the best parts of corporations, sole proprietorships, and partnerships. An LLC offers liability protection, management structure flexibility, and some tax advantages. LLCs are also much simpler and cheaper to form and operate. You do not need to have officers, directors, and other administrative burdens that come with forming a corporation.

Why Should You Choose the LLC Business Type?

  • Limited Liability: As an LLC owner, you will not be personally liable for any debts incurred by your business. This means creditors or people whole file lawsuits against your LLC will not be allowed to collect against your personal assets. They can only collect their money from your LLC assets or LLC bank account. Your personal car, home, and bank accounts will be safe.
  • Pass-Through Taxation: The profits or losses of the LLC will pass through to the owner’s personal tax return. This means your LLC profits will be taxed at your personal tax rates.
  • Flexibility: Unlike other business types, an LLC provides huge flexibility. First, there is ownership flexibility. There are no minimum or maximum limits on the number of owners or members when it comes to LLCs. Your LLC can have only one member or hundreds of them. There is also management flexibility.The LLC can be managed by all the members, or you can choose to designate one or more managers to run the business. The designated managers can be members, non-members, or a combination of both.

Who Should Setup an LLC?

Whether you are starting a business or currently running one, you should consider setting up an LLC. It does not matter what type of business you have. LLCs can be used to own and operate almost all kinds of businesses. You can also set up an LLC for a business of any size. That is why LLCs are the most common legal form used to own and run a business in California.

A woman holding a large mug that says, "like a boss", symbolic of how you can be the boss if you setup an LLC in California.
If you start a new business in CA, you can finally be the BOSS. Very exciting…

What Are the Steps in Setting Up an LLC in CA?

Starting an LLC in California is relatively easy. It does not require using a lawyer. You can form the LLC yourself. Our step-by-step guide will help you go through the LLC setup process smoothly from start to finish.

Step 1: Name Your CA LLC

The first step of setting up an LLC is to choose a name for it. You need to make sure the name complies with the business name regulations of California. These are some of the most important naming requirements to keep in mind:

  • The name of the business must include the phrase “limited liability company,” or one of its abbreviations, like LLC, L.L.C., Limited, Ltd., Company or Co.
  • Your business name cannot contain words, such as FBI, State Department, Treasury, etc. These words can make people confuse your LLC with a government agency.
  • Some restricted words such as bank, university, attorney, lawyer, etc., may require additional paperwork and a licensed individuals to be part of the LLC.
  • Your LLC name must differ from all existing businesses in the state of California. To make sure the name you want is not already taken, you can conduct a search on the Secretary of State’s website.

We recommend also choosing a name that is easily searchable for your potential clients. Even if your business will not currently need a website, it probably will in the future. So, make sure to buy the domain name you want for your LLC from the start. Otherwise, it might be taken by somebody else.

Step 2: Choose Your Registered Agent

“Agent for Service of Process” is the common name for a registered agent in California. Every LLC in California is required to appoint an agent for service of process. This can be a person or a business entity. They will be your LLC’s point of contact with the state. Your agent for service of process will be authorized to receive official legal documents, government correspondence, and notices on behalf of your LLC.

Any agent for service of process must be either a full-time resident of California or authorized to conduct business in the state of California. It can be a person or an entity. You can even choose yourself or an employee of your LLC to be your agent for service of process. In all cases, the agent for service of process must meet the following criteria:

  • Entities must provide registered agent services.
  • Must have a physical street address in California.
  • Must be available on-site to accept documents on behalf of your LLC, during regular business hours.

Step 3: File CA Articles of Incorporation

To officially create an LLC in California, you must file Articles of Organization using Form LLC-1. This form must include your LLC’s name, purpose, management structure, address, and registered agent information. As the person forming the LLC you must also sign the form.

The Articles of Organization can be submitted to the California Secretary of State online or via mail. You can also hand-deliver the form to the office of the California Secretary of State. The online filing fee is $70. Once you file the form, the Secretary of State will review it. If it gets approved, you will receive a certificate that confirms your LLC formally exists. You can use this certificate to obtain an Employer Identification Number (EIN), business licenses, and a business bank account.

A large "Open" sign in a shop window, symbolic of starting a new business in CA.
Thinking of opening a new business in CA? Do some reading, thinking, and planning, and reach out to My OC Bookkeeper if you need help!

Step 4: File a Statement of Information with California

Within 90 days of filing the Articles of Organization, you will be required to file an Initial Statement of Information (Form LLC-12). This ensures you retain the name of your LLC and its status with the state. The Statement of Information is also filed with the Secretary of State. Just like the Articles of Organization, it can be done online, in-person, or by mail. The online filing fee for the Statement of Information is $20

Any Statement of Information should include:

  • Name and mailing address of your LLC
  • LLC’s California Secretary of State file number
  • LLC’s agent name and address
  • LLC’s principal business activity
  • Name and business or residence address of the LLC manager or chief executive officer

Before filing your LLC Statement of Information, remember that all the information in it will be open for public record.

Step 5: Create an LLC Operating Agreement

This legal document should outline the ownership and operating procedures of your LLC. In California, it is required for an LLC to have an operating agreement, even a single-member LLC. However, it is an internal document. The operating agreement does not have to be filed.

Having a comprehensive operating agreement in place is important for various reasons. It could be used to settle financial or managerial disputes that may arise in the future. An operating agreement should include:

  • The LLC name, address and purpose
  • Duration of the LLC
  • Members of the LLC and their contribution
  • Management structure of the LLC
  • How the profit/loss will be divided
  • Contacts of the registered agent
  • Information about the Articles of Organization
  • Liability clauses

Step 6: Apply for an Employer Identification Number (EIN)

The EIN is basically the Social Security number for your LLC. It is what the US Internal Revenue Service (IRS) uses to identify and tax any business. Your LLC can apply and obtain the EIN for free by mail or online through the IRS.

Receiving an EIN is a necessary process for any LLC. It allows you to open a business bank account. The EIN is also required to hire employees for your LLC.

Other Resources for Starting a Business in CA

Setting up your LLC in the state of California comes with many benefits. California is not just a place of sunny weather and great beaches. It is also a thriving market filled with exciting businesses. Feel free to use the resources below to learn even more about how to join them.

California Secretary of State – this is the go-to website to start a business in California. It includes all the essential information to get you started.

California Franchise Tax Board – here, you will find all the information you need to handle your personal and business income taxes in California.

You can also learn even more about Setting Up a Business in Orange County, California (including more detail on the differences between the major business types) through our previously published blog post. (Just click the link above.) Or, check out our video guide on how to start your business in California. Both are great resources.

Have a friend or family member who is wondering, “How do you setup an LLC in CA?” – send them here!


To successfully start a new business in California, you need to find all the support you can get. At My OC Bookkeeper, you will find the best bookkeeping, accounting, and business strategy experts in California. Reach out to us now and let’s do great things together. Click on the surfers to learn more!