Understanding the California Corporation
A California corporation is considered the default model for businesses. A corporation protects the assets of owners, like a California LLC. However, differences exist between these models regarding taxation, management, and ownership. Educating yourself on the details of your options and working with an experienced California incorporation lawyer is essential to making the right choice.
Corporations were first established over a century in the past. As a result, firm guidelines exist regarding taxation, ownership, management, and other formalities for California corporations. While such rigidity can restrict the options of entrepreneurs, they can also make corporations a more desirable choice for investors, making it easier to generate capital.
There are many additional reasons to opt for a California corporation. For example, a corporate structure is ideal if you plan to make your business public, meaning you will make an initial public offering (IPO). IPO indicates the first time you offer stock and interest in your company for the public to purchase.
There are two main types of California corporations: S – corporations and C – corporations. These forms of California corporations are very different, and are not suitable for the same needs. While a C – corporation is the default model, with further research you may find that a California S – corporation is ideal for your business.
California Corporation Taxation
Taxation is one of the primary differences between California S – corporations and California C – corporations. Detailed distinctions are given in sections California S Corporation Taxation, and California C Corporation Taxation.
California Corporation Operation, Management, and Ownership
Corporations have a rigid management and ownership structure that is not flexible or easy to manipulate. This is one of the largest differences between a California corporation and a California LLC. Both S and C California corporations must maintain certain operational elements, such as:
- Shareholders (owners)
- Board of directors. The board of directors of a California corporation, elected by the shareholders, takes care of big-picture issues and important decisions.
- Officers. Elected by the board of directors, officers oversee day-to-day activity.
While rigid structural requirements may deter some entrepreneurs, keep in mind that the flexibility of California LLC management and operation can result in legal confusion, and can deter potential investors.
Formalities Required for California Corporations
In addition to adhering to structural requirements, both types of California corporations must observe certain formalities, such as:
- Holding annual meetings with shareholders, as well as those employed or elected by the corporation to hold a position of influence
- Drafting and adopting by-laws
- Paying annual California corporation fees
- Issuing stock
- Filing annual informational reports
Despite limited flexibility, these formalities offer guidelines that can help you run your California corporation without complications, while making the business appear secure and attractive to potential investors.
Establishing a California Corporation
With the exception of the S – corporation requirement to file for pass-through taxation, detailed in the section California S – Corporation: Overview, both types of corporations are set up in the same way. This requires filing California incorporation documents with the state, and paying all associated fees, a process with which an experienced California incorporation lawyer will be familiar.
California corporation owners are also required to perform several tasks to legally maintain a corporation of any type. These requirements include:
- Business license: You must obtain and maintain a business license for your California corporation.
- Employment Identification Number (EIN): California corporations must obtain and maintain an EIN, described in the California LLC Operation, Management, and Ownership section.
- Corporation tax: Corporations must pay a franchise tax each year of at least $800, with the exception of the first year of existence after undergoing California incorporation.
- Statement of Information: California corporation owners must file a Statement of Information within the first six months of existence. The Statement of Information is accompanied by a $25 fee.
- Maintenance of important documents: California corporations are required to maintain certain documents in the place where business occurs, which must be within California. These documents include notes and minutes from meetings held by shareholders and directors, as well as California corporation by-laws. By-laws are similar to the operating agreement of a California LLC. Corporate by-laws generally define things like how directors and officers will be elected, as well as the tasks these individuals will perform, how meetings will be conducted, and more. By-laws are distinct from Articles of Corporation in that by-laws do not denote structure and stock details.
- Taxes: California Corporations must pay annual taxes, at the corporate and/or individual level, depending on the corporation type.