S-Corporations are a popular entity choice because they do not directly pay Federal income taxes in most circumstances. They do pay 1.5% tax to the California Franchise Tax Board and the net taxable income flows from the the S-Corporate tax return to the individual shareholders via Schedule K-1. The individual shareholder will then pay tax on their personal tax returns for the taxable income from the S-Corporation based upon their individual tax rate.
It is much easier to withdraw cash from an S-Corporation without the double taxation that a C Corporation shareholder may experience and in some circumstances a S Corporation can make non-taxable distributions.
Shareholder / employees of an S-Corporation are required to draw what the IRS considers a reasonable salary. Once the reasonable salary obligation is met a shareholder may take the non-taxable distributions mentioned earlier.
The California Franchise Tax Board recently passed Assembly Bill 150 that allows S Corporations to pay the state tax via a tax credit instead of the individual shareholders. This creates a a tax planning opportunity for many S-Corporation shareholders.
Before carrying out any of these or other transactions you will want to consult a tax professional to be sure you are in compliance with Federal and State tax law and also maximizing all the benefits of operating as an S-Corporation.