Corporations

The corporation is the dominant form of business ownership in California today. A corporation is a distinct legal entity, existing apart and recognized separately from its owners as shareholders, and has all the powers of a natural person, including the rights to own property, sue in its corporate name, and make contracts. Under California law, a corporation may be formed to engage in any business activity. The rights and obligations of its directors, and its shareholders are clearly set by statute. In the case of a Close Corporation, these may be changed by agreement. A corporation is chartered by the state and may be formed by filing articles of incorporation with the Secretary of State. Owners of a corporation ordinarily are issued shares. A corporation is controlled by a board of directors who appoint officers to manage the day-to-day business.

All corporations share certain basic characteristics, including the following: (1) management and control by a board of directors and officers appointed at the board’s discretion; (2) limited personal liability; (3) greater availability of capital than generally exists for noncorporate business forms; (4) perpetual life; and (5) taxation as a separate entity, unless the corporation has elected to be taxed under Subchapter S of the Internal Revenue Code.

A corporation is under the control of its board of directors and is managed by officers appointed by the board.

If properly formed and operating, a corporate shareholder’s liability is limited to the amount of his investment in the corporation.

Further, its directors, officers, and employees ordinarily do not have any personal liability for the corporation’s debts or other obligations.

A corporation has perpetual existence, unless its articles of incorporation state otherwise. Generally, a corporation is a separate taxpaying entity for federal and state tax purposes.

In general a corporation is referred to as a “C” corporation in the Internal Revenue Code, to distinguish it from an “S” corporation which is a corporation that has elected to be taxed under Subchapter S of the Internal Revenue Code. A “C” corporation is subject to a corporate tax rate schedule, which applies graduated rates that differ from an individual’s income tax rate schedule. Taxation of “S” corporations is similar to taxation of partnerships. Therefore, this election avoids the double taxation imposed on “C” corporations in which income is taxed to the corporation and dividends are taxed to the shareholder.

Limited Liability Companies

A limited liability company “LLC” is a business entity that is essentially a hybrid of a corporation and partnership. The LLC form offers great flexibility. Areas in which the LLC structure are likely to be particularly useful include real estate, joint ventures and venture capital investments.

A California LLC can have the income tax treatment of a partnership on both the state and federal level, without the restrictions imposed on an “S” corporation. An LLC can also limit the liability of its owners to their investments. This limited liability is similar to that enjoyed by corporate shareholders.

A LLC is formed by filing articles of organization with the Secretary of State, and must have an oral or written operating agreement.

LLC’s are prohibited from engaging in some activities, including those services that may only be lawfully rendered under a license, certificate, or registration authorized by the Business and Professions Code.

The management and control of an LLC is extremely flexible. An LLC may be managed by all of its members, or by one or more managers.

A member of an LLC ordinarily is not personally liable for any debt, obligation, or liability of the LLC arising in contract, tort, or otherwise solely by virtue of that membership.

Under rules that took effect on January 1, 1997, an LLC with two or more members may elect to be taxed either as a corporation or as a partnership.

California taxation generally conforms to the federal entity classification rules.

LLC’s still are subject to the California annual minimum franchise tax and must pay a graduated entity level fee based on total income from all sources reportable to California.

Because of their customized nature LLC”s can be more costly to form and manage than a S corporation.