A California corporation is a popular type of business entity. It is used by business operations of all sizes – from small privately held companies to large publicly traded corporations. A corporation is owned by its shareholders (or “stockholders”) who own stock in the company. There is no limit to the number of shareholders a general California corporation can have (S Corporations are limited to 100). They can also have as few as one. The shareholders elect a board of directors, who in turn elect officers. The board and officers govern the day-to-day activities of the corporation. When a corporation is properly formed and operated, it offers its stockholders (the company’s owners) limited liability protection that is not available in sole proprietorships. Subject to some exceptions, this protection shields shareholders from corporate debts and obligations.
Advantages of Incorporating in California
A corporation is advantageous because it is treated as a separate and distinct legal entity. Shareholders, therefore, are generally not liable for the corporation’s actions and debts. Corporations have been in existence for a long time. The laws and regulations governing this form of business entity are familiar and well established. The relative familiarity of laws and regulations governing corporations may be advantageous for businesses that wish to sell stock to raise capital.
Disadvantages of Incorporating in California
One major disadvantage of the corporate form is the requirement that the corporation observe certain formalities. For example, a California corporation must adopt article of incorporation and bylaws. The corporation must strictly follow the requirements specified in these documents. Corporations must also maintain separate books and records. They must hold shareholder and board meetings and prepare minutes of those meetings. Corporations that do not follow these formalities jeopardize the limited liability protection of their shareholders.
Another disadvantage for general corporations (as opposed to S corporations) is double taxation. Corporate profits that are distributed to shareholders in the form of dividends are effectively taxed twice. The corporation pays taxes first on the profits earned. The shareholders then pay taxes individually for the dividends received. Dividend payments are not deductible by the corporation. On the other hand, various other payments to shareholders may be deducted by the corporation. These include reasonable salaries, rent for property leased by a shareholder to the corporation, and interest on loans by shareholders to the corporation.
Please feel free to download our COMPLIMENTARY Side-By-Side Comparison Chart of the advantages and disadvantages of California LLCs, corporations, s-corporations, and sole proprietorships HERE. If you would like to read a more in-depth report about the different business entity forms, please click HERE.
Please contact us if you need help forming a California Corporation or have any other business concern. The Tagre Law Office offers Modesto Business Attorney services for your corporation in California.