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
Frequently Asked Questions
A corporation is a legal business entity that is separate and distinct from its owners, known as shareholders. One of the primary benefits of choosing this business structure is the limited liability it offers to shareholders, meaning their personal assets are typically protected from the company's debts and legal liabilities. Corporations also have the advantage of easier access to capital through the sale of stock, making it an attractive option for raising funds. Additionally, corporations often have perpetual existence, meaning they can continue to operate even if shareholders change. From a tax perspective, corporations may benefit from certain deductions and tax planning strategies not available to other business structures. Furthermore, corporations can establish clear governance structures and centralized decision-making processes, making them well-suited for larger, more complex organizations. Overall, the choice of a corporation can provide enhanced liability protection, financial flexibility, and growth opportunities for your company.
Our law firm specializes in guiding clients through the intricate process of forming a corporation, providing comprehensive support at every step. We begin by conducting an in-depth consultation to understand your specific business needs and goals, offering tailored advice on the most suitable type of corporation, such as C-corporation or S-corporation, based on your circumstances. Our experienced attorneys draft and customize all the necessary legal documents, including the Articles of Incorporation and corporate bylaws, ensuring they adhere to state-specific regulations and align with your corporate governance structure. We assist in registering your corporation with the relevant state authorities and securing federal Employer Identification Numbers (EINs). Furthermore, we provide ongoing support to ensure your corporation remains compliant with annual reporting, tax requirements, and other obligations. Our mission is to streamline the formation process, minimize legal risks, and empower your corporation to thrive while adhering to the necessary legal and regulatory standards.
In a corporation, the legal responsibilities and roles are distinct for corporate officers, directors, and shareholders. Corporate officers, such as the CEO, CFO, and Secretary, are responsible for the day-to-day operations and management of the company, ensuring it operates in accordance with its bylaws and applicable laws. Directors are typically responsible for making high-level strategic decisions and overseeing the officers' actions. Shareholders, on the other hand, own shares in the company and may vote on important matters like electing directors and amending bylaws. Our attorneys play a vital role in providing guidance on corporate governance and compliance by helping clients draft and maintain bylaws that define these roles and responsibilities clearly. We offer advice on best practices for corporate decision-making, facilitate board meetings, and ensure compliance with state and federal regulations. Additionally, we help corporations stay abreast of changing laws and industry standards, offering strategic counsel to mitigate legal risks and maintain good standing. Our objective is to assist clients in establishing effective corporate governance structures that promote transparency, accountability, and legal compliance.
Operating a corporation entails various tax implications, and our firm is well-equipped to assist clients in understanding and optimizing their corporate tax strategy. Corporations are subject to corporate income tax at the federal and, in some cases, state levels. This tax is separate from the individual income tax of shareholders. However, corporations can employ tax strategies to minimize their tax liability, such as deductions for business expenses, strategic use of tax credits, and structuring compensation packages for officers and employees. Our experienced attorneys work closely with clients to develop a tax-efficient strategy tailored to their specific circumstances, maximizing deductions and credits while ensuring full compliance with tax laws. We also provide guidance on complex tax matters like transfer pricing, mergers, acquisitions, and international taxation, helping corporations make informed decisions that optimize their tax position and promote financial growth.
A corporation protects personal assets from business liabilities by creating a legal separation between the individual owners (shareholders) and the company itself. This separation is often referred to as the "corporate veil" and shields shareholders from being personally responsible for the company's debts and legal obligations. To maintain this protection, corporate owners should adhere to several key steps. Firstly, they must ensure that the corporation is properly formed and registered with the state authorities, complying with all legal requirements. Secondly, it's crucial to maintain corporate formalities, such as holding regular shareholder and director meetings, keeping accurate records, and managing the corporation's finances separately from personal finances. Commingling personal and business funds should be strictly avoided. Additionally, shareholders should act in the best interests of the corporation and avoid using the company for fraudulent or illegal activities. By diligently following these steps and seeking legal counsel when necessary, corporate owners can help ensure that their personal assets remain shielded from potential business liabilities.
The process for making changes to an existing corporation, whether it involves amending bylaws, issuing new shares, or merging with another company, typically starts with careful planning and legal compliance. Amending bylaws requires drafting and adopting the proposed changes, often through a vote by the board of directors or shareholders, as specified in the existing bylaws and state laws. Issuing new shares involves compliance with securities regulations and shareholder approval. Mergers require a detailed merger agreement, approval from shareholders of both companies, and often regulatory filings. Our firm provides comprehensive assistance in these matters by offering legal expertise and guidance throughout the process. We help draft and review all necessary documents, ensuring they meet legal requirements and protect our clients' interests. Additionally, we assist in obtaining necessary approvals and compliance with state and federal regulations, ultimately striving for a seamless transition while adhering to all legal standards.
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 consultation with one of our attorneys, simply call us at (916) 848-0080, or use the contact form below.