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California Corporation Rules.

Though, you probably need more than what is listed below, you absolutely must comply with the list so as your corporation is legal and protects you against tax and civil claims for your personal assets.

Please Note: there are time limits for each of the steps below

For a Regular Profit Corporation You must:

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1. File:

  • A. The Articles of  Incorporation

  • B. A Statement of Officers

  • C. Notice of  Stock Transaction

 

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2. Issue Shares

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3. Obtain an IRS tax ID and a State I.D.

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4. Hold  A first Directors' Organizational Meeting adopting the bylaws and entering the Minutes.

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5. Sign a Corporate Resolution and Have a Tax I.D. to Open a Bank Account

For a NonProfit Corporation the Rules are much more Complex And You Must Comply so as To Continue having the Corporate Protection and the Tax exemption.

In Addition:

Corporation rules require that all corporations establish a board of directors, write bylaws, hold "recorded"  board meetings, appoint officers,  meet legal requirements for paperwork, and file Articles of Incorporation with state agencies. For profit corporation must separate directors from shareholders (directors from stock-owning shareholders), maintaining a stock ledger, and holding an annual shareholder meeting.

Creation - Create by filing articles of incorporation with the Secretary of State.

Maintenance of corporate status --  Must comply with statutory formalities.

Ownership --  Shareholders own the corporation and elect the Board of Directors

Government -  The Board of Directors governs the corporation elect the officers

Management  -  The officers manage its day to day activities.  Shareholders manage the corporation in some case of  extraordinary circumstances.

Corporate structure:  Corporations in California may have only one shareholder who can be the sole director,  and have three capacities as an officer.  He or she can be all three:  the president, the treasurer (chief financial officer) and the secretary officer of the corporation.  Of course, as the sole shareholder, he elects himself to be the sole director, and subsequently, as a director, he elects himself to be all three officers: president, treasurer, and secretary.

If a corporation has a total of two shareholders, the law requires two corporate directors, and if  a corporation has a total of three or more shareholders, there must be at least three directors.  This helps in creating a balance in the corporation.   For example, if there are three shareholders, and one has the majority of the shares, he can still be outvoted  from the other two directors -- since all three directors are required when there are three shareholders.  This helps shareholders with smaller # of  shares to make important decisions such as  the sale of stock  and / or the election of officers.

Tax considerations:   The current maximum federal corporate tax rate is 35%. The California corporate tax rate is 9.3%.

Tax savings:  If the business fails, individual shareholders may offset up to $50,000  ($100,000 on a joint return) from their ordinary income.

Limitation of Liability:  To limit their liability to the initial investment capital, the shareholders must follow statutory formalities, such as meetings of the shareholders and directors, etc.  If they fail to follow these formalities, the shareholders may be personally liable for the debts or other claims against the corporation.   The liability of the directors to shareholders may be limited by a certain procedure included in the bylaws and/or other legal documents.

Additional investment:  To attract more investors, the corporation may sell or issue additional shares of stock to new investors or to a venture capitalist ( preferred stock).

S Corporation

Under California corporate law, the S corporation is not classified as such.   The designation "S"  signifies Federal tax treatment of the corporation.  With an "S" corporation, shareholders may offset their profits and  losses from other personal ventures.   Income is "passed through" to the shareholders and is taxed only once -- as oppose to a "C" corporation that is taxed on its profits and the shareholder is taxed on any dividends he receives from the profits of the corporation  ( i.e., "double" taxation.)   Losses are also passed through to offset each shareholder's income or loss to the extent of his ownership of the shares of stock.

Requirement for an "S" corporation:

  1. Can have no more than 35 shareholders,
  2. A Shareholder must be an individual, estate, or a  trust,
  3. A shareholder may not be a nonresident alien,
  4. The corporation may not have more than  80% or more owned subsidiaries, and
  5. The corporation can have only one class of stock outstanding.

Limitations of an "S" Corporation: 

An "S" corporation cannot attract venture capitalists because it  has only one type of stock -- common stock.    ( venture capitalist financing requires preferred stock).  In addition, any corporate earnings that remain in the corporation as working capital ( as opposed to earnings being distributed to the shareholders ) are taxed to the shareholders.   Moreover, shareholders cannot enjoy tax deductible (to the corporaton) fringe benefits because they are not considered employees of an "S" corporation and / or split their corporation income to lower their tax bracket and save on taxes.   Shareholders can be employees of an "C" corporation, spil income to save taxes and enjoy fringe benefits.

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