Any business owner in California will tell you that there’s no feeling that compares to starting your own business. It’s an experience that’s both exciting and terrifying at the same time. On one hand, there’s the feeling of finally taking your destiny in your own hands and paving the path to your professional destiny. On the other hand, there’s the fear that you might skip a crucial step when starting your own business. One of these things is filing for an S corp.
The most popular business entities for a young company in California are Subchapter S Corporations (S-Corps) and Limited Liability Companies (LLCs). While similar in certain regards, they are different in other significant ones.
Depending on the type of business you run, you may or may not be able to file as one or the other. For example, a dentist, psychiatrist or psychologist in California cannot register as an LLC but has to be taxed as an S-Corporation instead.
To give you a better understanding of how and why you should register your professional business as an S-Corp in California, we spoke to the experts at David York’s Tax Service to give you this useful rundown.
What Constitutes A Professional Corporation In California
Any corporation formed in order to provide professional services in California can be considered a professional corporation. These include mainly those professions that require a state license including accountants, lawyers, dentists, veterinarians, pharmacists, psychologists, etc.
The professions that are required and eligible to form a professional corporation are:
- Language Pathologists
- Clinical Social Workers
- Dental Hygienists
- Physician Assistants
- Marriage and Family Therapists
How Is S-Corp Defined
Any corporation designated as a Subchapter S by the IRS is considered an S-Corp. You need to be recognized as a corporation in California before you can file for an S-Corp.
IRS recognizes these corporations as entities separate from their owners. This, in turn, limits the monetary liability of the owner.
An S-Corp is considered a business entity separate from the business owner, and as such both losses and profits pass through to the personal tax returns of the shareholder. This means that only the shareholders are taxed and not the business. However, if any of the shareholders is employed by the said corporation, he must receive reasonable compensation from the company or himself or herself if they are the owner of the company.
Benefits Of An S-Corp
The main benefit of being taxed as an S-Corp is that you and your business will make large tax savings. While corporations filed as LLC are taxed on their entire net outcome, with S-Corp only the wages of the employed shareholders are taxed. This means that any additional income is not taxed.
However, the shareholder needs to be compensated reasonably. If you set your salary too low compared to market standards, the IRS might flag your corporation to prevent fraud.
With an S-Corp, your business can be separate from you personally. This means that if you leave the company, sell it or pass away, the S-corp can remain in operation. By having your business exist as a separate corporate entity, you can protect the shareholders by setting a clear line between them and the business.