Incorporations – Attorney Alternative can assist you with incorporating in California, or in any other State!
The benefits of incorporating are substantial, and include:
• Limitation of personal liability for any business debts or judgments
• Potentially favorable tax treatment
• The ability to set up corporate retirement and profit-sharing plans far superior to those available to an individual
• Flexibility of transfer of ownership
• Perpetual existence if certain corporate formalities are followed
• Limited liability of directors and officers for debts of the corporation
• and many more!
Below you will find some general information about corporations, partnerships, LLC’s and the advantages and potential disadvantages of each. Please consult with your attorney to determine which, if any, of these corporate structures may be suitable for you.
Then call Attorney Alternative and we will help you complete all the necessary paperwork to get your corporation off to a flying start!
Advantages of Incorporating
• Separate Legal Identity – A corporation is a separate legal entity existing under authority granted by state law. It has its own identity separate and apart from its shareholders/owners.
• Wide-Ranging Powers – As a separate legal entity, a corporation has the power to act in any way permitted by law and by its own corporate charter. For example, a corporation can enter into contracts, buy and sell both real and personal property, sue and be sued, and can even be responsible for breaking the law (i.e. committing a crime).
• Court Appearances – In most jurisdictions, any officer or director or employee can appear in small claims court on behalf of the corporation. However, in civil or other courts, and attorney is necessary to represent the corporation, as the corporation is not allowed to represent itself.
• Separate Identity – Separate Debts – As a separate legal entity, a corporation is responsible for its own debts. Normally, shareholders, directors, and officers are not responsible for corporate liabilities. If the corporation suffers losses, the corporation itself must bear those losses to the extent of its own resources.
• Limited Liability of Shareholders – In most cases, the personal assets of the individual shareholders, officers, directors and employees are not at risk. This is one of, if not the, most attractive aspects of a corporate business form.
*Note – However, that shareholders, directors, and/or officers may be held liable for the debts of the corporation where the court imposes "alter-ego liability" or where the individual has personally guaranteed the corporate debt. Consult with your legal counsel for more information on what constitutes “alter-ego liability” and how to potentially avoid it.
• A Corporation Has Perpetual Life – A corporation is capable of continuing indefinitely. Its existence is not affected by the death or incapacity of shareholders, directors, or officers of the corporation.
• Time of Corporation Life Compared to LLC – An LLC has a limited existence. Absent a contrary agreement, a limited liability company (LLC) is dissolved upon the death, withdrawal, or bankruptcy of a member unless the business is continued by unanimous vote of the remaining members. Although the operating agreement can be drafted to avoid such a result, the life of the LLC is still limited to a termination date drafted into the Articles of Organization.
Disadvantages of Incorporating
• Corporate Formalities – A California corporation can be created only by compliance with General Corporation Law of California. This requires filing of Articles of Incorporation with the Secretary of State, payment of the requisite state fees and taxes, and completion of the Statement by Domestic Stock Corporation.
It is mandatory that a corporation have a board of directors, corporate officers, annual shareholders meetings, and it must maintain separate books and records.
Compliance with these formalities is SERIOUS! Failure to properly observe them may result in the personal liability of shareholders for corporate debts. Where the corporation has only one shareholder, California allows that one shareholder may act as director and all officers (President, Secretary, and Treasurer).
In WHICH State to Incorporate?
State laws governing corporations vary from state to state. However, if the corporation will have significant business or shareholder contacts (a.k.a. "presence") within a state, there is usually not much reason to incorporate outside of that state. For example, forming a California corporation for a business centered in California is usually the logical choice for the following reasons:
• Filing Fees – An out-of-state corporation that will be conducting business in California must "qualify" to do business in California. This "qualifying" requires the corporation to pay filing fees to the California Secretary of State in addition to whatever filing fees were paid in the state of incorporation.
• State Taxes – An out-of-state corporation doing business in California must register as a “foreign corporation” with the Secretary of State in order to conduct business in California. As such, the corporation must pay franchise taxes to California on the business it conducts in California. The corporation may also have to pay franchise taxes in its state of incorporation (even if the corporation is not conducting business in that state). Thus, if all the corporate business is in California, the corporation will probably pay California State tax on all its earnings, anyway.
• Securities Laws – The California Corporate Securities Laws apply to any offer or sale of a security "in this state" regardless of the issuer’s state of incorporation.
• Corporate Rules – Regardless of where the corporation is formed, many provisions of the California Corporation Law, for example, apply if the corporation has a sufficient "presence" in California.
• Corporate Operating Formalities – To fully retain the benefits of incorporating, you must observe corporate formalities, even where the corporation is operated by a single shareholder / director / officer. These include conducting regular Board meetings, maintaining accurate and current corporate books and minutes and conducting the business of the corporation with good judgment and responsibility.
Frequently Asked Questions about Corporations
Is my Corporate Name available?
Attorney Alternative has an account with the California Secretary of State, and we can check the availability of a corporate name and reserve it for you immediately if it is available. However, please remember that the final determination is made by the state officials; thus, never rely on a corporate name check until AFTER you have received a copy of your filed Articles of Incorporation, stamped with the state’s approval.
How long does the process take?
Processing times for incorporating a company vary, and change constantly depending on the workload at the state office. A current approximation of the processing time for Articles of Incorporation within California is 4-8 weeks.
Why do I need a Registered Agent?
California requires that the corporation designate a registered agent for service of process. This is the person who is authorized by the corporation to accept the service of legal documents on the corporation. The agent does not necessarily have to be an employee of the corporation, but the agent must have a street address in California (NO P.O. BOXES).
What are Articles of Incorporation?
A Corporation’s "Articles of Incorporation" is the main filing document which begins the corporation’s existence under California law. Once filed, the corporation comes into existence.
California requires that the Articles of incorporation must contain, at a minimum, information about the Corporate Name, the Registered Agent, the Corporation’s business address, the purpose for which the corporation is formed, and the number and class of shares of stock that the corporation is authorized to issue.
Failure to provide the necessary information to the Secretary of State will result in your Articles being returned to you. You must then resubmit revised Articles of Incorporation, and the processing time clock begins all over again.
What are Bylaws?
Bylaws serve as the internal operating document for the corporation. Generally, Bylaws detail the responsibilities, rights, and duties of directors, shareholders and officers as well as outlining corporate operating procedures and policies. Currently California does not require that Bylaws be filed; however, the lack of bylaws in a corporation is not good corporate policy, and may indicate that the corporation is not following the proper formalities.
What is a Corporate Director?
The Board of Directors is essentially the management and policy-making body for the corporation.
Responsibilities of the Board of Directors include establishing all business policies and approving major contracts and undertakings. In addition, the Board may also elect the President. Ordinary business practices of the corporation are carried out by the Officers and employees under the directives and supervision of the Directors.
The Directors must act collectively for their votes and decisions to be valid. That’s why Directors may only act at a Board of Directors meeting. This, however, requires certain formalities. One such formality is that the Directors must all be notified of a forthcoming meeting in a prescribed manner, although this can be waived or provided for in the corporation’s Articles of Incorporation or Bylaws.
For a Directors’ meeting to be valid, there must also be a Quorum of Directors present. A Quorum is usually a majority of the Directors then serving on the Board; however, the Bylaws may specify another minimum number or percentage.
The Board of Directors must meet on a regular basis (at least annually.) These are the regular Board meetings. The Board may also call Special Meetings for matters that may arise between regular meetings. In addition, boards may call a special shareholders’ meeting by adopting a resolution stating where and when the meeting is to be held and what business is to be transacted.
The first meeting of the Board of Directors is important because the Bylaws, the Corporate Seal, Stock Certificates and Record Books are adopted.
Board members, like officers, have a fiduciary duty to act in the best interests of the corporation and cannot put their own interests ahead of the corporation’s.
The Board must also act prudently and not negligently in the management of the affairs of the corporation. Finally, the Board must make certain that it properly exercises its authority in managing the corporation and does not breach or shirk its responsibilities to others.
This means that the board must be very careful to document that each Board action was reasonable, lawful and in the best interests of the corporation. This is particularly true with matters involving compensation, dividends and dealings involving Officers, Directors and Stockholders. The record or Corporate Minutes of the meeting must include the arguments or statements to support the Board action and must detail why the action was proper.
What is a Corporate Officer?
A corporate officer is a person empowered by the Board of Directors to operate and manage the day-to-day affairs of the corporation. As corporate officer must be a natural person, and cannot be another corporation, business, trust, or other legal entity. California currently allows the same person to act in all capacities, and that person has different responsibilities depending on the capacity in which he or she is acting.
• Vice President
• Secretary (or Clerk)
• Assistant Secretary
• Assistant Treasurer
The President is generally appointed by the Board of Directors, is directly responsible for carrying out the Board’s orders, and serves at their pleasure (meaning the Board can fire the President if they so choose!) The President is typically responsible for entering into contracts on behalf of the corporation, overseeing the employee workforce, managing the duties of the other corporate employees, and delegating corporate authority to other officers as the President directs.
The Treasurer is usually also the chief financial officer of the corporation and is responsible for controlling and recording its finances and maintaining corporate bank accounts. Actual fiscal policy of the corporation generally rests with the Board of Directors and can be largely controlled by the president on a day-to-day basis.
The Secretary is responsible for observing corporate formalities and maintaining corporate records.
In addition to these required officer positions, a corporation may also have vice presidents and/or assistant secretaries or assistant treasurers.
Typically, the authority and responsibilities of each officer is described in the corporate bylaws and may be further defined by an employment contract or job description.
Where can I get a Corporate Seal?
Although California no longer has the requirement of maintaining a corporate seal, many corporations still choose to obtain one as a formality. If you decide you would like to have one, Attorney Alternative can arrange to have one made for you. The cost for a Corporate Package, including steel embosser, a nicely-bound corporate minutes book, and printed stock certificates is around $120.00
What is a Federal Employer Identification Number?
You will almost certainly be opening a bank account under your corporate name. To open a corporate account, most banks will require that your corporation have a Federal Employers Identification Number.
A Federal Tax Identification Number (also known as a “Tax ID” or an "EIN Number" ) is a number assigned to a corporation or L.L.C. by the IRS for purposes of taxation identification. The Federal Tax ID Number is to a corporation or L.L.C. as a Social Security Number is to an individual. Attorney Alternative can prepare your Federal Tax Identification Number Application (IRS Form SS4) and obtain your Tax ID number promptly.
Does the corporation have to issue stock?
Yes. Shares of stock represent ownership of the corporation. Where no shares are issued, no individual owns the corporation. Thus, shares must be issued to those individuals who will own the corporation.
California requires that you file a Notice of Intent to Issue Stock (Form 25102(f)) when the Board decides to whom and in what quantity your corporation will be issuing shares.
Since issuance of stock is a legal matter, for help regarding your corporation’s stock issuance, please contact your attorney or the California Department of Corporations.
Should I also file a D.B.A. (‘Doing Business As’)?
If corporations desire to do business under a name that is different than the name set forth in their organizational documents, they must file certificates in the counties where the registered office and the principal office are located (if different), and must also file with the secretary of state that they are “doing business as” (dba) a name different than that under which they were incorporated.
Does incorporating prevent others from using my company name?
Incorporating will not keep another business from using your name. Generally, every business must protect its own business name and the good will that it has acquired from the sale of its goods or services in a specific geographic area.
Filing articles of incorporation only prevents the Secretary of State from filing a document to create another corporation, limited liability company or limited partnership that has the same, a deceptively similar, or similar name as the entity already in existence.
Can I protect my trade name?
There is currently no national registration of trade names. Generally, businesses, including corporations, protect their trade names by registering their trade name as a service mark or trademark if the trade name also functions as a service mark or trademark.
While Attorney Alternative can assist you in obtaining a trade name for a corporation doing business in California, because of the legal complexities involved, we recommend that businesses obtain private counsel to get advice on how to protect a trade name in interstate commerce.
Can the same person be the shareholder, director and all officers of a corporation?
California requires that there be at least one director and two officers in a general, for-profit corporation. The required officers are President and Secretary. California does, however, allow one natural person to hold both offices and be the sole director of the corporation. Usually, that one person may also be the sole shareholder. It is a good idea to consult with your attorney if you have any questions regarding the legality of your proposed corporate structure.
What are the differences between a sole proprietorship, a partnership, an LLC, and a corporation?
Corporations are formed pursuant to state law and have shareholders, are managed by a board of directors, and the daily affairs are administered by officers. A limited liability company (LLC) has members and may be managed by one or more managers. Most often, both entities must pay franchise taxes, but may have different federal tax liabilities.
Generally, most people form corporations or limited liability companies in order to shield the shareholders or members and officers or managers from personal liability for the debts and obligations of the entity. There may also be various tax advantages to forming these entities which may not be available for sole proprietorships and general partnerships.
• In General – This is the simplest form of business. A sole proprietorship is not a separate entity itself. Rather, a sole proprietor directly owns the business and is directly responsible for its debts.
• Unlimited Personal Liability for Loss – In a sole proprietorship, the owner is personally liable for the company, thus placing his or her entire personal assets and wealth at risk. If an owner is married, that owner puts the community property at risk as well.
• Management and Control – The owner (sole proprietor) has total management and control over the company. However, the price for total management and control is that the owner is at risk for personal liability incurred through the acts of the owner’s agents or employees.
• No Formalities – With the exception of complying with any applicable licensing requirements, there are generally no formalities required of a sole proprietorship. Note, however, where the business is conducted under a name which does not show the owner’s surname or implies the existence of additional owners, California requires that the owner file a fictitious business name statement (“dba”) and publish notice.
• Transferability – The owner can sell the business as he or she pleases.
• Duration – The sole proprietorship remains in existence for as long as the owner is willing or able to stay in business.
• In General – A form of business entity in which 2 or more co-owners engage in business for profit. For the most part, the partners own the business assets together and are personally liable for business debts.
• Sharing Profits – In the absence of a partnership agreement, profits are shared equally amongst the partners. A partnership agreement, however, will usually provide for the manner in which profits and losses are to be shared. California currently has no requirement that a formal partnership agreement be drafted and filed. However, it is a good idea to put your Partnership Agreement in writing to be sure each partner understands his or her duties, responsibilities and liabilities, to help avoid disputes over the agreement, and to ensure that all partners agree on the terms and conditions of the partnership agreement.
• Unlimited Personal Liability for Losses – Each Partner is, jointly and severally, personally liable for debts and taxes of the partnership. For example, if the partnership assets are insufficient to satisfy a creditor’s claims, the partners’ personal assets are subject to attachment and liquidation to pay the business debts.
• Liability for a Co-partner’s debts – Each general partner is deemed the agent of the partnership. Therefore, if that partner was apparently carrying on partnership business, all general partners can he held liable for his dealings with third persons. There are exceptions to this rule, but generally the actions of one can be imputed and charged to all of the partners if that person was acting on behalf of the partnership.
• Liability for a co-partner’s wrongdoing – Each partner may be held jointly and severally liable for a co-partner’s wrongdoing or tortious act (e.g. the misapplication of another person’s money or property.
• Management and Control – In the absence of a partnership agreement, each general partner has an equal right to participate in the management and control of the business. Disagreements in the ordinary course of partnership business are decided by a majority of the partners. Disagreements of extraordinary matters and amendments to the partnership agreement require the consent of all partners.
• Transferability – Unless otherwise provided in the partnership agreement, no one can become a member of the partnership without the consent of all partners. However, a partner may assign his share of the profits and losses and right to receive distributions ("transferable interest"). Further a partner’s judgment creditor may obtain an order charging the partner’s "transferable interest" to satisfy a judgment.
• Duration – Technically, a partnership terminates upon the death, disability, or withdrawal of any one partner. However, most formal partnership agreements provide for these types of events with remaining partners in the partnership having first right of refusal to purchase the share of the departed partner.
Limited Liability Company (“LLC”)
• In General – An LLC is a hybrid between a partnership and a corporation in that it combines the "pass-through" treatment of profits and losses of a partnership with the limited liability accorded to corporate shareholders.
Two members required: Unlike a corporation which can have as few as one shareholder, California requires that an LLC consist of two or more members (owners). Recently, however, some states are allowing single-member LLCs. Check with your attorney to determine what the current state of the law is regarding this issue in California.
• Separate Legal Entity – Like limited partnerships and corporations, an LLC is recognized as a separate legal entity from its "members."
• Limited Liability – Ordinarily, only the LLC is responsible for the company’s debts thus shielding the members from individual liability.
• Guarantor Liability – Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.
• “Alter Ego” Liability – Similar to a corporation, a court may hold the individual shareholders liable where the business entity is merely the "Alter Ego" of its shareholders. As such, a member of an LLC may also be held liable for the LLC’s debts if the court determines that the LLC is merely the “alter-ego” of its members and not a separate legal entity.
Please note, however, that although a corporation’s failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in California. An LLC’s failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC’s Articles of Organization or Operating Agreement do not expressly require such meetings.
• Management and Control – Management and control of an LLC is vested with its members unless the articles of organization provide otherwise.
• Voting Interest – Ordinarily, voting interest directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise.
• Transferability – No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.
• Duration – Although many states now allow an LLC to have a perpetual existence, LLC’s traditionally were required to specify the date on which the LLC’s existence will terminate. In most cases, unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC).
• Formalities – The existence of an LLC begins upon the filing of the Articles of Organization with the Secretary of State. The articles must be on the form prescribed by the Secretary of State. Among the required information on the form is the latest date at which the LLC is to dissolve and a statement as to whether the LLC will be managed by one manager, more than one manager, or the members.
To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.
• In General – The “C” designation refers to the applicable Internal Revenue Code section governing the taxation of this type of corporation. Without making an election to change the corporate tax status (See “S-Corporation” discussed below) this is the default type of corporation that will be formed in California. To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State).
• Separate Legal and Tax Life – A corporation which is properly formed and operated as a corporation assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at its own corporate income tax rates and files its own corporate tax forms each year.
• Management and Control in Corporations – Normally, a corporation’s management and control is vested in the board of directors who are elected by the shareholders of the corporation. Directors generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons. Rather, dealings with third persons are conducted through officers and employees of the corporation to whom authority is delegated by the directors of the corporation.
• Shareholders – Shareholders are the owners of a corporation.
• Board of Directors – The Board of Directors is responsible for the Management and policy decisions of the corporation.
• Corporate Officers – Corporate officers are elected by the Board of Directors and are responsible for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the following: (President, Vice-President, Secretary, Treasurer).
• Number of Persons Required – In California, one or more persons may form and operate a corporation.
• Fringe Benefits – Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, corporate defined – benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.
• Corporate Formalities – To retain the corporate existence and thus the benefits of limited liability and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion.
For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be taken, Officers must be appointed, and shares must be issued to shareholders.
Most importantly, however, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any "foreseeable" business debts.
• Shareholder Liability for Corporate Debts – Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by California are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
• Avoiding Double Taxation – Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder’s tax rate. However, most small corporations rarely pay dividends.
Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occurs.
• Duration of a Corporation – As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers , or directors or by transfer of its shares from one person to another.
• In General – An S Corporation begins its existence as a general, for-profit corporation upon filing the Articles of Incorporation at the state level. A general for-profit corporation (also known as a ‘C corporation’) is required to pay income tax on taxable income generated by the corporation.
However, after the corporation has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service. Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the profits and losses are "passed-through" to the shareholders for tax purposes. Therefore, a shareholder’s individual tax returns will report the income or loss generated by an S corporation.
• Qualifying for S Corporation Status – To qualify as an S corporation, a corporation must timely file IRS Form 2553 with the IRS. This election must be made by March 15 if the corporation is a Calendar year taxpayer in order for the election to take effect for the current tax year. However, a "new" corporation may make the filing at anytime during its tax year so long as the filing is made no later than 75 days after the corporation has began conducting business as a corporation, acquired assets, or has issued stock to shareholders (whichever is earlier).
To qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock. In addition, the corporation cannot have more than 75 shareholders. Further, shareholders must be individuals, estates or certain qualified trusts, who consent in writing to the S corporation election. No shareholder can be non-resident alien.
• Corporate Formalities – An S-Corporation follows the same state formalities as does a C-corporation (i.e. filing Articles of Incorporation and paying state fees). However, an S-Corporation must make a special tax election under sub-chapter S of the Internal Revenue Code by filing IRS Form 2553.
• IRS Filing – The S-Corporation must complete and file the appropriate IRS Forms to report its annual income to the IRS each year.
• General Shareholder Requirements – ALL shareholders of the corporation must be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred (even if by will, divorce, or other means) to a shareholder who is a foreign national, the corporation will lose its S-Corporation status and be treated as a C-Corporation. In addition, the corporation may never have more than 75 Shareholders.
• Only One Class of Stock – S-Corporations may have only one class of stock.
• Losing S-Corporation Status – An S-Corporation that loses its status as such may not re-elect S-Corporation status for a minimum of five years.
• Who Should Elect S-Corporation Status – Owners who want the limited liability of a corporation and the "pass-through" tax-treatment of a partnership will often make the S-Corporation election.