Subchapter S Corporations in California

For businesses trying to make enough profit to stay alive in California, the road is very difficult. Every business owner knows the extensive permitting, which is never made easy by the bureaucrats, rules, regulations, insurance requirements, notice posting requirements, door width requirements and much, much more that makes every day a gamble.

When deciding what style of a protective entity is best for your business, keep in mind that California saw you coming.

If you choose a general partnership, then you are personally liable for not only all of the business debt, but the debts of your partners. Never a good idea.

All other types of entities bear the “Franchise Tax” (a tax on the privilege of doing business in such a great place), of $800.00 per year, the highest in the country. Let’s look at those other entities.

A limited partnership with you as the General Partner, again, exposes you to liability for both the business debts but can extend liability for other people’s debts to you. Also, not good.

An LLC (limited liability company) in California is not very protective because of the version of the Uniform LLC law that we use in this state AND a special tax on GROSS CASH FLOW, beginning at the $250,000 level, which can be as much as $11,000+ dollars, each year.

So, many businesspeople simply decide to use a Subchapter S corporation, instead. Whoops. California imposes a “special tax” on ALL of the profit of a Sub-S corporation. That tax is 1.5% of the profit, whether it is distributed or not.

So, if your small business corporation, electing Subchapter S, makes $100,000 in profit this year, the COMPANY will owe the Great State of California the $800 franchise tax plus $1,500 in Subchapter S tax for a total of $2,300 just for existing in California. That amount is NOT deductible, either by the corporation or by the shareholders. Then, each shareholder will owe ordinary income tax at the 10.3% level, or higher on the distributed profit.

Makes you want to cry!!

Categories: Business Law