A subchapter S election with the IRS turns a qualifying corporation (subchapter C Corporation) into a pass-through entity, which means that the corporation pays no federal corporate income tax. Instead, each year, shareholders pay tax on the corporation’s profit. Partnerships are also pass-through entities. The weakness of the partnership entity is that partners share in the businesses liabilities. A Limited Liability Company is a partnership with the limited liability of a corporation.
NOTE: The S Corporation pays a California Corporate tax of 1.5% with a minimum tax of $800. Remember, this tax is only on profits. In contrast, LLCs pay an $800 tax plus a fee on total income attributable to California according to the following schedule (this fee is on total income rather than on profits):
|$250,000 - $4,999.99||$900|
|$500,000 - $999,999.99||$2,500|
|$1,000000 – 4,999,999.99||$6,000|
|$5,000,000 or more||$11,790|