As a new business owner, one of your most important decisions is determining what form of ownership will best meet your business needs. Selecting the best structure for your business should be a carefully planned process that is discussed with a qualified professional such as an enrolled agent, certified public accountant, or attorney who specializes in this area. In addition, as your business grows over time, you may want to evaluate if a new form of ownership should be used to achieve better results.
Corporations are a business entity formed under state civil law that is a separate legal entity owned by shareholders.
The California Corporations Code contains general provisions for the formation of many different types of corporations such as personal service corporations, benefit corporations, social purpose corporations, nonprofit corporations, and corporations for various special purposes (such as cooperative corporations). Consult an attorney, specializing in business entity matters, for advice about which type of corporation should be used for your specific business needs.
A corporation is managed by or under the direction of a board of directors, which generally determines corporate policy. Officers manage the day-to-day affairs of the corporation. Corporations issue stock to their owners (the shareholders). Shareholders, unless they are officers, do not participate in day-to-day management activities. Management structure can be altered by committees of board members and shareholder agreements. Shareholders generally are not personally liable for obligations of the corporation.
Key Features of a Corporation
- Generally, the life of the corporation is perpetual in nature.
- Generally, ownership is easily transferred through the sale of stock, and new owners can be easily added by issuing additional stock.
- It is more costly to set up and maintain than a sole proprietorship or partnership.
- The corporation must create bylaws (i.e., how the corporation will operate) that cover items such as stockholder and director meetings, the number of officers, and their responsibilities.
- To preserve the liability protection for its owners, a corporation is required to abide by numerous corporate formalities, including but not limited to the holding of annual meetings and the keeping of written minutes.
- Each year, the corporation must file a Statement of Information with the Secretary of State.
- Generally, owners (shareholders) are not liable for the corporation’s contractual debts and other obligations and creditors may only look to the corporation and the business assets for payment. However, there are some exceptions. For example, if an owner/shareholder becomes a guarantor or cosigner of a debt, they may be liable.
- A separate bank account and separate records are required.
- The corporation pays a minimum tax of $800 each taxable year.
- The California $800 minimum tax is waived on newly formed or qualified corporations filing an initial return for their first taxable year.
- The California $800 minimum tax is also waived if the corporation: 1). did not do business in California during the taxable year, and 2). the taxable year was 15 days or fewer.
How to Form Corporations
The type of corporation you form will affect the administration and operation of the corporation and the type of documents that must be filed with the Secretary of State. The Secretary of State will assign a 7-digit filing number and the date of incorporation. Keep this filing number and date for your tax records. Contact the California Secretary of State at 916.657.5448 or go to sos.ca.gov for more information.
- A separate bank account should be established for the corporation.
- A corporation formed in California, referred to as a domestic corporation, will file the appropriate Articles of Incorporation and pay a fee to the Secretary of State. When a corporation is formed somewhere other than California, referred to as a foreign corporation, it can qualify/register to transact business in California by filing the appropriate Statement and Designation by Foreign Corporation along with an official certificate that verifies the corporation exists in good standing with the country or state of its incorporation, and pay a fee to the California Secretary of State.
- A corporation must create bylaws (i.e., how the corporation will operate) that cover items such as stockholder and director meetings, the number of officers, and their responsibilities.
- The California Corporation Code requires a corporation to hold annual meetings and keep written minutes to preserve the liability shield for its owners. Note: additional corporate formalities may also be necessary to preserve liability protections. The performance or omission of certain acts may eliminate the liability shield for the shareholders. Consult with a business attorney, if necessary.
- Corporations are also required to file a Statement of Information with the California Secretary of State every year. If the Statement of Information is not timely filed, the corporation may be subject to penalties and/or may be suspended. Contact the California Secretary of State at 916.657.5448 or go to sos.ca.gov for more information.
- Most cities and counties require a business license, various permits, and/or registration to do business within their city or county limits. If you are doing business in multiple cities or counties, you may be required to have multiple licenses. Contact the business licensing department of the city and/or county directly where your business will primarily be located for specific rules and regulations. The Governor’s CalGold online database at calgold.ca.gov, the Governor’s Office of Business and Economic Development (GO-Biz) at business.ca.gov, and the California Business Portal at businessportal.ca.gov all provide links and contact information to agencies that administer and issue business licenses, permits, and registration requirements from all levels of government.
- Contact your local Chamber of Commerce or call the statewide Chamber of Commerce at 800.331.8877 for information for your area and referrals to other agencies.
- If required, register a fictitious name, also referred to as “Doing Business As” or DBA. Refer to Appendix 1 in this booklet for more information.
Personal Service Corporation
A personal service corporation is a type of corporation whose principal business activity is the performance of personal services and such services are performed by employee-owners. Individuals who perform services in fields such as health, law, engineering, architecture, performing arts, and accounting typically use this classification.
A corporation is a personal service corporation if it meets all of the following requirements:
- Its principal activity during the testing period is performing personal services. Personal services include any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Generally, the testing period for any tax year is the prior tax year. If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of: a). The last day of its tax year, or b). The last day of the calendar year in which its tax year begins.
- Its employee-