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Form a New Type of California Corporation

Webmaster — Sat, 28 Jan 2012 23:13:29 +0000

The Legislature has authorized the California Secretary of State to let entrepreneurs form 2 new “hybrid” California Corporation subtypes starting in January, 2012. We can help you form these new California Corporation subtypes.

The two new types of corporations you can form in California are the “Flexible Purpose Corporation” and the “Benefit Corporation”. Designed to help investors and entrepreneurs, newly authorized corporate subtypes let individuals form stock corporations to pursue both economic and social objectives.

“Free-form” Articles of Incorporation are required to form a Flexible Purpose California Corporation or a California Benefit Corporation. No standardized form has not been setup by the State. Paralegal Plus can include this in our California Incorporation services.

When you form a Flexible Purporse Corporation in California, the Articles of Incorporation must include the unique purposes for the specific entity
type. See Flexible Purpose Corporation (California Corporations Code sections 2500-3503)

To form a California Benefit Corporation Articles of Incorporation must include the statement: “This corporation is a benefit corporation.” Refer to California Corporations Code sections 14600-14631 and the statutory stock purpose clause required by Corporations Code section 202(b).

California Subchapter S Corporation, CA S Corporation, CA S Corp.

Webmaster — Tue, 06 Dec 2011 00:09:04 +0000

Subchapter S Corporations in California

The California subchapter S Corporation is a corporation that passes profits and losses through to its owners in the same manner as a Partnership. The subchapter S Corporation is often referred to as an “S Corporation” or “S” Corp. The subchapter S election is made either at the time of formation or later down the road with the IRS. Note that a California S Corporation is governed just like a California “C” Corporation. The only differences are the tax treatment and the ownership structures allowed.

Roles of Principals

The CA S Corporation is owned by its shareholders, controlled by the directors, and managed by officers just like a C Corporation. However, this type of California Corporation can only issue one class of securities namely common stock.

You should remember that the California S Corporation limits the amount of investors to a maximum of 75 shareholders of which none can be a non-resident alien. Also, banks, insurance companies, domestic international sales corporations, and certain other businesses cannot obtain subchapter S status. Shareholders of a CA S Corp may freely transfer their interests to others, but they may also sign agreements (usually called “buy-sell” or “stock restriction” agreements) to restrict the transferability of their shares.

Running an “S Corp.”

Just like a C Corporation, forming a California S Corporation is done by filing the articles of incorporation with the state and by adopting bylaws for its operation. To obtain S Corporation status, form 2553 must be filed and accepted by the IRS.

The CA S Corporation has perpetual existence meaning that they survive the death or withdrawal of any given investor. Just like the C Corporation, the CA S Corporation requires more administrative formalities. Director meetings must be held on a timely basis and recorded. The S Corporation must also file an annual Statement of Information (annual report) with the state in which it is incorporated.

Reduced Exposure to Principals

The shareholders, officers, and employees of California S Corporations enjoy reduced liability meaning that they are not personally responsible for the debt and obligations of the corporation. The S Corporation’s veil can be pierced by illegal activities where officers and directors can be held accountable. There are also situations when the veil can be pierced if the S Corporation is deemed an alter ego of the owner.

Who Can Own the California S Corp.

The CA S Corporation has some restrictions in terms of ownership that makes it more difficult to raise funds that for a C Corporation. This includes the limitation of non-resident alien ownerships, a limit of the number of owners (75), as well as its inability to issue debt or common stock.

“Pass Through” Status

All California Subchapter S Corporations are “pass-through” structures. This means that a CA S Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. Instead, the CA S Corporation issues K-1 statements to its shareholders in proportion to that shareholders ownership percentage. The shareholders then report this K-1 income on their 1040 statements.

The biggest benefit of this feature is that the shareholders of a CA S Corporation avoid double taxation. Just be aware that once a Corporation elects subchapter S status, it becomes difficult to switch back to C Corporation status down the road (it can be done though).

California (CA) Corporation

Webmaster — Fri, 18 Nov 2011 01:18:37 +0000

A California Corporation is the business entity that most people associate with a large corporation. This business entity is often associated with the abbreviation CA Corporation, CA Corp or CA Inc. A California Corporation is a separate legal entity, chartered under state (not federal) laws, with a perpetual existence independent of its shareholders, managers, or directors. Since a California Corporation is its own legal entity, the corporation can enter into contracts, obtain debt, and pay taxes. The primary disadvantage of a CA Corporation is the issue of double taxation of dividends.

Ownership

A CA Corporation is owned by its shareholders, controlled by the directors, and managed by officers. There is no restriction on the number or type of owners a corporation may have; it may be owned by a single individual or by several shareholders, and other business entities. A CA Inc or CA Corp can issue several classes of securities which usually are freely transferable and traded between investors. The primary place where the stock in public Corporations is traded is the various stock exchanges.

Maintenance

A California Corporation is formed by filing articles of incorporation with the state and by adopting bylaws for its operation. The CA Corp has perpetual existence meaning that they can survive the death or withdrawal of any given investor. The corporation requires more administrative formalities. Director meetings must be held on a timely basis and recorded. The corporation must also file an annual Statement of Information (annual report) with the state in which it is incorporated.

Liability

The shareholders, officers, and employees of a CA Corporation enjoy limited liability meaning that they are not personally responsible for the debt and obligations of the corporation. This corporate veil can be pierced for unauthorized or illegal activity of officers or directors. There are also situations when the veil can be pierced if the corporation is deemed an alter ego of the owner.

Funding

Since a CA Corp or CA Inc can issue several classes of securities (common and preferred stock, debt obligations, options, warrants etc), raising capital is relatively easy. Moreover, securities are easily transferred between investors making ownership in a CA Corporation more attractive to investors. Since the CA Corporation has perpetual existence, it also has an easier time obtaining debt financing from financial institutions.

Taxation

The biggest drawback of a CA Inc or CA Corp is the way a CA Corporation is taxed. Since the business is considered a separate legal entity, the corporation itself pays taxes. But the dividend is taxed on the individual level as well. Hence shareholders of a corporation are subjected to double taxation. Income is taxed at the corporate and at the shareholder level. Stock dividends receive fairly unfavorable tax treatment by the Internal Revenue Service, and so are often avoided in smaller corporations, especially where the owners work daily in the company’s operations and so can receive bonuses in prosperous years. There are no special allocations of tax items in California Corporations. Contributions on the formation of the corporation are taxable unless the transferors meet the 80% control test of Section 351 of the Internal Revenue Code. Shareholders may not deduct corporate losses.