Why Choose an
S-Corporation for Your
Contracting Business?
Registering as an S-Corporation (S-Corp) for contractors involves forming a corporation and then electing S-Corporation tax status with the IRS. An S-Corp is a pass-through entity for federal income tax purposes, meaning business income, deductions, and credits are reported on the owner’s personal tax return, rather than being taxed at the corporate level.
S-Corporations may provide potential savings on self-employment taxes because owner-employees are required to pay themselves a reasonable salary subject to payroll taxes, while additional profits may be distributed and are generally not subject to self-employment tax.
To set up an S-Corporation in California, you must file Articles of Incorporation with the California Secretary of State, file a Statement of Information, obtain an Employer Identification Number (EIN) from the IRS, and file IRS Form 2553 to elect S-Corporation tax status. This structure provides limited liability protection, separating personal assets from business liabilities, when corporate formalities are properly maintained.
Note: California S-Corporations are subject to additional state filing requirements and taxes, including an annual franchise tax.
We can help you get incorporated for as low as $497.00
Why Choose an
S-Corp: Tax Savings
and Protection
Advantages:
-
Pass-Through Taxation: Profits and losses pass through to shareholders’ personal tax returns, avoiding corporate-level income tax. -
Liability Protection: Shareholders’ personal assets are generally protected from business debts and liabilities when corporate formalities are followed.
-
Potential Payroll Tax Savings: Owners must pay themselves a reasonable salary that is taxed through payroll, while remaining profits may be taken as distributions that are not subject to self-employment tax.
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Credibility: Operating as an incorporated business can enhance credibility with clients, lenders, and vendors.
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Continuity: The corporation can continue to exist even if ownership changes, subject to S-Corporation eligibility requirements.
Disadvantages:
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Complexity and Costs: S-Corporations are more complex and costly to set up and maintain than sole proprietorships or partnerships. -
Ongoing Formalities: S-Corporations must maintain corporate records, follow compliance requirements, and observe corporate formalities.
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California Franchise Tax: In California, corporations are subject to annual state tax and filing requirements, regardless of business activity.
FAQ
What are the requirements to qualify for an S-Corporation in California?
To qualify for S-Corporation tax status, your business must meet IRS eligibility requirements, including:
- Domestic Corporation: The business must be incorporated in the United States (including California).
- Shareholders: The corporation may have up to 100 shareholders. Shareholders must generally be U.S. citizens or U.S. resident aliens and meet IRS eligibility rules.
- Stock Structure: The corporation may issue only one class of stock.
- Eligible Businesses: Certain entities, such as some financial institutions and insurance companies, are not eligible for S-Corporation status.
Once these requirements are met, S-Corporation status is elected by filing IRS Form 2553 after the corporation is formed
What is the difference between a shareholder and an owner in an S-Corporation?
In an S-Corporation, ownership is represented by shares of stock.
- A shareholder is an individual or eligible entity that owns shares in the corporation.
- The term owner is commonly used to describe a shareholder’s overall interest in the business, including profit participation and decision-making authority.
In practice, all owners of an S-Corporation are shareholders.
Can I form an S-Corporation if I am the only owner?
Yes. An S-Corporation may have a single shareholder, and many S-Corporations are owned by one individual.
Do I need to own a certain percentage of the S-Corporation?
No. There is no minimum ownership percentage required. Shareholders may own varying percentages of the corporation, as long as there is only one class of stock.
Can I elect S-Corporation status if I have an ITIN
S-Corporation shareholders must meet IRS eligibility requirements. Generally, shareholders must be U.S. citizens or U.S. resident aliens. Eligibility is determined by tax residency status rather than the type of taxpayer identification number alone. It is recommended to consult a tax professional to confirm eligibility.
What titles do I need to hold in an S-Corporation?
S-Corporations typically have officer roles such as President, Secretary, and Treasurer. In many small or single-owner S-Corporations, one individual may hold all officer positions.
How will I be taxed as an S-Corporation?
An S-Corporation generally does not pay federal income tax at the business level. Instead, profits and losses pass through to the owners' personal tax returns. Owners who work in the business are required to pay themselves a reasonable salary that is subject to payroll taxes, while additional profits may be taken as distributions that are generally not subject to self-employment tax.
Incorporate as an S‑Corp today with Contractors Intelligence School
Why Choose an
C-Corporation for Your
Contracting Business?
Registering as a C-Corporation (C-Corp) for contractors means setting up a business structure that provides the liability protection of a corporation. Unlike S-Corps, C-Corps are subject to double taxation; the corporation pays taxes on its profits, and shareholders pay taxes on any dividends received. However, this structure offers significant benefits, such as the ability to have an unlimited number of shareholders and to issue multiple classes of stock. Additionally, C- Corps can attract more investment due to these flexible ownership structures. To register, you'll need to file articles of incorporation with your state, obtain an Employer Identification Number (EIN) from the IRS, and comply with any state-specific requirements. This structure also offers liability protection, separating your personal assets from business debts and obligations.
We can help you get incorporated for as low as $497.00
C-Corp for
Contractors: When
to Choose It
Advantages:
-
Liability Protection: Shareholders' personal assets are protected from business debts and liabilities.
-
Unlimited Shareholders: Can have an unlimited number of shareholders, allowing for easier capital raising.
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Multiple Classes of Stock: Can issue multiple classes of stock, providing flexibility in ownership structure.
-
Credibility: Being incorporated can enhance the credibility of your business with clients and customers.
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Perpetual Existence: The C-Corp continues to exist even if the owner leaves or sells their shares.
Disadvantages:
-
Double Taxation: Profits are taxed at the corporate level and again at the individual level when dividends are paid to shareholders.
-
Complexity and Costs: More complex and costly to set up and maintain compared to sole proprietorships or partnerships.
-
Ongoing Formalities: Required to hold regular meetings, maintain corporate records, and follow other corporate formalities.
FAQ
What are the requirements to qualify for an S Corporation in California?
- Domestic Corporation: Your business must be incorporated in California.
- Shareholders: There is no limit to the number of shareholders, and they can be from any country
- Stock: Your corporation can issue multiple classes of stock.
- Eligible Businesses: Most types of businesses are eligible to become C Corporations.
As an individual contractor, you would need to ensure your business structure meets these criteria. Additionally, make sure all necessary documentation and filings are completed with the California Secretary of State and the IRS.
What is the difference between a shareholder and an owner in an S-Corporation?
- Shareholder A shareholder is an individual or entity that holds shares of stock in the S- Corporation. Shareholders have a financial interest in the company and may receive dividends based on their share ownership.
- Owner: An owner is also a shareholder in the context of an S-Corporation. The term "owner" emphasizes the individual's or entity's stake in the business, highlighting their role in decision-making and profit-sharing.
In essence, all owners of an S-Corporation are shareholders, as ownership is represented by holding shares in the corporation.
Can I obtain a C-Corporation if I am the only owner?
Yes, an individual can form a C Corporation as the sole owner.
Do I need to own a certain percentage of the C-Corporation?
No, there is no minimum ownership percentage required to qualify as a C Corporation.
Shareholders can own varying percentages of the corporation.
Can I apply for a C-Corporation with an ITIN?
Yes, C-Corp shareholders can be from any country, and an Individual Taxpayer Identification Number (ITIN) can be used if the shareholder is not eligible for a Social Security Number (SSN).
What title of the entity do I need to hold?
Titles within a C Corporation typically include roles such as President, Secretary, and Treasurer. In a C Corporation, all of these titles can be held by the same person.
How will I be taxed?
As a C Corporation, the business itself is taxed at the corporate level. Shareholders then pay taxes on any dividends received, leading to double taxation. However, this structure can provide other tax advantages and opportunities for reinvestment of profits.
What is the main difference between a C-Corporation and an S-Corporation?
The primary difference lies in taxation. A C Corporation is subject to double taxation, where the corporation pays taxes on its profits, and shareholders also pay taxes on any dividends received. In contrast, an S Corporation enjoys pass-through taxation, avoiding double taxation as profits and losses are reported on the shareholders' personal tax returns.
What is an Agent of Service of Process?
An Agent of Service of Process, also known as a Registered Agent, is a person or entity designated to receive legal documents on behalf of the corporation. This role is crucial for ensuring that the corporation can be properly served with legal notices and other important documents.
Do I need to have a California address to obtain an entity?
If you are forming a C Corporation in California, you do not need a California address if you use a California Agent for Service of Process. This agent can receive legal and official documents on behalf of your corporation.
Incorporate as an C-Corp today with Contractors Intelligence School
Why Choose an LLC for Your Contracting Business?
Registering as a Limited Liability Company (LLC) for contractors means setting up a business structure that combines the liability protection of a corporation with the tax efficiencies and operational flexibility of a partnership. LLCs are not subject to double taxation; instead, profits and losses pass through to the members' personal tax returns. This structure offers significant benefits, such as ease of formation, flexible management structures, and fewer compliance requirements compared to corporations.
To register, you'll need to file articles of organization with your state, obtain an Employer Identification Number (EIN) from the IRS, and comply with any state-specific requirements. This structure also offers liability protection, separating your personal assets from business debts and obligations.
We can help you get incorporated for as low as $497.00
Opening an LLC:
What Contractors
Should Know
Advantages:
-
Liability Protection: Members' personal assets are protected from business debts and liabilities.
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Pass-Through Taxation: Profits and losses usually pass through to members' personal tax returns, avoiding double taxation.
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Flexibility: Can be managed by members or appointed managers, providing operational flexibility.
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Credibility: Being an LLC can enhance the credibility of your business with clients and customers.
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Fewer Formalities: Compared to corporations, LLCs have fewer ongoing formalities, such as no requirement for regular meetings or extensive record-keeping.
Disadvantages:
-
Self-Employment Taxes: Members may need to pay self-employment taxes on their share of the profits.
-
Complexity and Costs: More complex and costly to set up and maintain compared to sole proprietorships or partnerships.
California-Specific Requirements for Contractors:
$100,000 LLC Employee/Worker Bond
A $100,000 surety bond (in addition to the $25,000 contractor bond) is required for the issuance of both active and inactive licenses, reissuance, reinstatement, reactivation, and renewal of an LLC license for the benefit of any employee or worker damaged by the LLC’s failure to pay wages, interest on wages, or fringe benefits, as well as other contributions. (B&P Code section 7071.6.5)
$1 Million Liability Insurance Minimum
Liability insurance with a cumulative limit of at least $1 million for licensees with five or fewer persons listed as members of the personnel of record is required. An additional $100,000 is required for each additional member of the personnel of record, not required to exceed $5 million total. (B&P Code section 7071.19)
FAQ
What are the requirements to qualify for an LLC in California?
- Domestic LLC: Your business must be organized in California.
- Members: There is no limit to the number of members, and they can be from any country
- Filing Requirements:: You must file articles of organization with the California Secretary of State and obtain an EIN from the IRS.
How will I be taxed?
As an LLC, the business itself is not taxed at the federal level. Instead, profits and losses pass through to the members' personal tax returns. Members pay taxes on their share of the income, and self-employment tax may apply to their earnings.
What is an Agent of Service of Process?
An Agent of Service of Process, also known as a Registered Agent, is a person or entity designated to receive legal documents on behalf of the LLC. This role is crucial for ensuring that the LLC can be properly served with legal notices and other important documents.
Do I need to have a California address to form an LLC?
If you are forming an LLC in California, you do not need a California address if you use a California Agent for Service of Process. This agent can receive legal and official documents on behalf of your LLC.
What is the difference between a member and a manager in an LLC?
In an LLC, members are the owners of the LLC. Managers are appointed by the members to handle the day-to-day operations. Members can also be managers, and an LLC can be managed by its members or by appointed managers.
Can an individual form an LLC as the sole owner?
Yes, an individual can form a single- member LLC.
Do I need to own a certain percentage of the LLC?
No, there is no minimum ownership percentage required to form an LLC. Members can own varying percentages of the LLC.
Incorporate as an LLC today with Contractors Intelligence School
Foreign Corporations & LLC's Registration
If you are an out-of-state corporation or LLC and wish to conduct business in California, you will need to register as a foreign corporation or LLC. The registration process is similar to registering a new corporation or LLC, with some additional requirements. You'll need to complete a different form and provide a Certificate of Good Standing from the state where you are currently registered.
We can assist you in registering your foreign corporation or LLC in California for as low as $497.00
Registering a
Foreign Entity: Stay
Compliant in CA
Foreign LLC Requirements (For Contractors):
$1,000,000 Liability Insurance:
Required to have liability insurance with a cumulative limit of at least $1 million.
$100,000 Bond
Required to have a $100,000 surety bond in addition to the $25,000 contractor bond.
FAQ
What are the requirements to register a foreign corporation or LLC in California?
- Certificate of Good Standing: You must provide a Certificate of Good Standing from the state where your business is currently registered.
- Registration Form: You must complete the appropriate form for foreign registration (Form LLC-5 for LLCs or Form S-CORP-550 for corporations).
- Compliance with State Requirements: You must comply with California-specific requirements, including obtaining necessary bonds and insurance.
Do I need to have a California address to register a foreign corporation or LLC?
No, you do not need a California address if you use a California Agent for Service of Process. This agent can receive legal and official documents on behalf of your corporation or LLC.
What is an Agent of Service of Process?
An Agent of Service of Process, also known as a Registered Agent, is a person or entity designated to receive legal documents on behalf of the LLC. This role is crucial for ensuring that the LLC can be properly served with legal notices and other important documents.
What is the purpose of a Certificate of Good Standing?
A Certificate of Good Standing is a document issued by the state where your business is currently registered. It confirms that your business is compliant with all state regulations and has paid all necessary fees and taxes.
What are the insurance and bond requirements for a foreign LLC in California?
Foreign LLCs are required to have liability insurance with a cumulative limit of at least $1 million. Additionally, they must have a $100,000 surety bond in addition to the $25,000 contractor bond.
Can a foreign corporation or LLC have multiple owners or members?
Yes, there is no limit to the number of owners or members a foreign corporation or LLC can have. They can be from any country and can own varying percentages of the corporation or LLC.
What is an Agent of Service of Process?
An Agent of Service of Process, also known as a Registered Agent, is a person or entity designated to receive legal documents on behalf of the corporation or LLC. This role is crucial for ensuring that the business can be properly served with legal notices and other important documents.
How will my foreign corporation or LLC be taxed in California?
Foreign corporations and LLCs are subject to California state taxes on income earned from business conducted within the state. It is recommended to consult with a tax professional to understand the specific tax obligations for your business.
