There are different types of corporate structures that you can create in order to provide your business with liability protection. California corporations are governed by Corporations Code Sections 100-2319. One of the main differences between a corporation and an LLC, is that a corporation generally has more corporate formalities, such as the requirement to draft bylaws, have a board of directors, conduct shareholder meetings, the filing of articles of incorporation and the filing of a statement of information. The board of directors is usually responsible for authorizing the issuance of shares, adopting the bylaws and formalizing board meeting minutes in writing. Generally, corporations are either “for profit” governed by California General Corporation Law Corp. Code Section 100-2319, or “nonprofit” which is governed by California Corporations Code Sections 5000-10841. Additionally, corporations can be structured as a c corporation or an s corporation.
C Corporations vs. S Corporations:
C corporations pay federal and state taxes, whereas S corporations pass through taxation to the shareholders which in turn pay via their personal taxes. C corporations allow for multiple classes of shares with different types of rights for different shareholders, whereas S corporations can only have 100 shareholders, and one class of stock.
S Corporation Requirements:
In order to form an S corporation, it also requires a special election be made under Subchapter S of the Internal Revenue Code.
In order to qualify as an S corporation under Internal Revenue Code Section 1361(b), the corporation must have the following:
(a) less than 100 shareholders;
(b) shareholders can only be individuals (no estates, tax-exempt organizations or qualified trusts, partnerships);
(c) shareholders must be US citizens;
(d) one class of stock (different voting rights are allowed);
(e) cannot be for an insurance company, foreign corporation or domestic international sales corporation.
C corporations generally incur income tax liability on its taxable income and it is paid at the entity level. When the corporation makes distributions to its shareholders, these distributions are also subject to tax at the shareholder level as dividends or capital gains. C corporations have what they call “double taxation” because of this. Under the Tax Cuts and Jobs Act, the federal corporate tax rate was reduced from 35% to a flat 21%, and the alternative minimum tax was eliminated. A C corporation is generally preferred if your corporation wishes to becomes a public company.
However, many small business that do not need different classes of stock, or over 100 shareholders elect to go with an S corporation wish to avoid double taxation. S corporation shareholders incur the income tax liability of the corporation, and the shareholders pay taxes resulting from taxable income of the S corporation. Additionally California generally has a 1.5% franchise tax on the net taxable income of an S corporation.
Public Benefit Corporations:
In California, any corporation can also elect to be a benefit corporation, with a corporate purpose to create a general public benefit. This requires the corporation to produce a positive impact on society and the environment, such as providing for low-income individuals, environmental preservation, or promoting the arts and sciences.
A professional corporation structure is limited to professional services, under a certificate of regulation issued by the government agency regulating the particular profession, which include:
- Clinical social work
- Licensed midwife
- Marriage and family therapy
- Naturopathic doctors
- Physical therapy
- Physician assistants
- Registered dental hygienists
- Shorthand court reporters
- Speech language pathology and audiology
Corporate Formation Attorney
If you need legal assistance with forming a California corporation, Real Estate Law Corporation has highly experienced entity formation attorneys that serve business owners and real estate investors in the greater Sacramento area and all over California. To schedule a free consultation with one of our attorneys, simply call us at (916) 767-0000, or use the contact form below.