Why Choose an S-Corporation for Your Contracting Business?

To qualify for federal S-Corporation status, the business generally must:

• Be a domestic corporation or other eligible domestic entity.
• Have no more than 100 shareholders.
• Have only eligible shareholders, such as individuals, certain trusts, and estates.
• Have no nonresident-alien shareholders.
• Issue only one class of stock, although differences in voting rights can be permitted.
• Not be an ineligible corporation, such as certain financial institutions or insurance companies.

Once eligible, the corporation files IRS Form 2553. All required shareholders must consent to the election.

For a corporation, an owner is generally called a shareholder because ownership is represented by shares of stock. A shareholder may also serve as a director, officer, or employee, but each role has different responsibilities. Owning shares does not automatically make someone an employee.

Yes. A corporation may have one shareholder, and California permits the same person to serve in multiple officer roles. The corporation must still maintain required records, observe corporate formalities, file tax returns, and satisfy all S-Corporation eligibility rules.

Federal S-Corporation eligibility rules do not impose a general minimum ownership percentage for each shareholder. Ownership percentages should be documented through properly issued shares, and each shareholder must be eligible. Tax items are generally allocated based on share ownership during the tax year.

An ITIN by itself does not establish whether you are eligible to be an S-Corporation shareholder. The key issue is federal tax residency: nonresident aliens generally cannot be shareholders, while a qualifying U.S. resident alien may be eligible even if using an ITIN. Because immigration status, tax residency, and identification numbers are different concepts, consult a licensed tax professional about your specific circumstances before filing Form 2553.

A California corporation must generally have a chairperson of the board or president (or both), a secretary, and a chief financial officer. One person may hold multiple offices unless the corporation’s Articles or Bylaws provide otherwise. A shareholder who performs more than minor services and receives or is entitled to compensation is generally treated as an employee for federal employment-tax purposes.

For federal income-tax purposes, profits and losses generally pass through to shareholders and are reported on their individual returns. A shareholder who works in the business generally must receive reasonable wages subject to payroll taxes before taking non-wage distributions. California also imposes a 1.5% S-Corporation tax on California-source income, and the corporation may be subject to the $800 minimum franchise tax and annual state filing requirements.

You do not generally need to be a California resident to own a California corporation. However, the corporation must provide its required business addresses and designate an agent for service of process. If the agent is an individual, the agent must have a physical California street address. A qualified California registered corporate agent may be used instead.

Form 2553 generally must be filed no later than two months and 15 days after the beginning of the tax year when the election is intended to take effect, or during the preceding tax year. Late-election relief may be available when IRS requirements are satisfied.

No. Potential savings depend on the business’s net income, the shareholder’s reasonable salary, payroll and administrative costs, state taxes, and the owner’s complete tax situation. A licensed tax professional should evaluate whether an S-Corporation election is appropriate for your business.