The most attractive feature of creating a corporation for you business is limited liability. There are requirements that must be fulfilled to create this type of business entity. More importantly though is the need for both officers and shareholders alike to be aware of the circumstances that could still expose them to liability even with a properly formed corporation.
A California corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. It is often referred to as a “legal person.”
You form a California corporation by completing the following procedures:
- Choose a name: Must be unique and not the same as any other corporate name filed with the Secretary of State. The name must end with a corporate designator, such as “Corporation,” “Incorporated,” or “”Limited.”
- Directors: A board of directors must be appointed to make policy decisions and to handle the financial affairs of the corporation, including authorizing the issuance of stock and appointing corporate officers. The initial directors are not elected, but appointed by the owners of the corporation.
- File articles of incorporation: All corporations must file “articles of incorporation” with the State of California corporate filing office. These articles contain basic information about the corporation, such as the corporate name and principal office address.
- Bylaws: A documents that contain the rules by which the corporation operates and includes such things as when meetings will be held, shareholders’ voting rights, and directors’ voting requirements and responsibilities.
- Director’s first meeting: At this meeting, the directors appoint corporate officers, adopt the corporate bylaws, and authorize the issuance of shares of stock.
- Retention of corporate status: For a corporation to maintain it’s status as a separate entity, the shareholders must observe certain formalities, such as keeping detailed financial records and recording minutes of major decisions.
All employees, including directors and shareholders, who work for the corporation must pay income tax. The corporation pays taxes on any profit (income in excess of expenditures) by filing Form 1120.
Subchapter S California Corporation
A California corporation can avoid paying income tax if it files for subchapter S status by filing Form 2553 with the IRS. Once done, corporate profits and losses will “pass-through” to the stockholders who will report this figure on their individual tax form.
Directors or Officers Personal Liability
A director or officer can create personal liability by:
- Committing a tort or a criminal act.
- Committing intentional acts that cause harm to the corporation.
- Personally guaranteeing a loan or debt for the corporation.
- Treating corporate assets as their own.
- Failing to follow routine corporate formalities.
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