A California Corporation is a popular business structure among entrepreneurs and small business owners in California due to its tax benefits and liability protections. But exactly who owns a California Corporation?

This article seeks to shed light on this question by exploring the roles of shareholders, corporate officers, and the board of directors in owning a Corporation operating and formed under California law (as opposed to a foreign corporation, which is an existing corporation formed under the laws of a jurisdiction other than California). We will highlight the intricate ownership structure, the tiered management structure, the distribution of power, and the legal obligations of each role, providing clarity for existing or potential owners of a Corporation in California.

Who Owns a California Corporation?

In California, a Corporation is owned by its shareholders, who are the individuals and entities) that own shares of stock in the California Corporation.

Shareholders have the Ultimate Controlling Interest in a California Corporation

These shareholders have the ultimate controlling interest in the California Corporation.

Corporate Officers Manage Day-to-Day Operations of California Corporations

The day-to-day operations are typically overseen by elected corporate officers such as the President or Chief Executive Officer (CEO), the corporate Secretary, Treasurer or Chief Financial Officer (CFO), and others.

The Board of Directors Control the Direction of a California Corporation

The corporate officers are accountable to the Board of Directors, who are elected by the shareholders of the California Corporation. The Board of Directors has a fiduciary duty to make decisions in the best interest of the shareholders of the California Corporation. While shareholders own the California Corporation, they do not necessarily manage it. Instead, they exercise control by electing the Board of Directors and voting on major corporate decisions as required by the California Corporations Code, the Articles of Incorporation of the California Corporation, or the corporate Bylaws of the California Corporation.

What is a Shareholder of a California Corporation?

A shareholder of a California Corporation is an individual entity that owns shares of stock in the California Corporation, thereby holding an ownership interest in the California Corporation.

Shareholders Have the Ultimate Controlling Interest in a California Corporation

Shareholders are essentially the owners of the California Corporation and have the ultimate controlling interest.

Shareholders Enjoy Personal Liability Protection in a California Corporation

Shareholders also enjoy the unique benefit of limited liability, which means their personal assets are protected and cannot be used to cover the debts, liabilities, obligations, and legal judgments against the California Corporation.

Shareholders Elect the Board of Directors of a California Corporation

Shareholders have the power to elect the Board of Directors, who are responsible for overseeing the overall direction of the California Corporation and making high-level decisions for the California Corporation. In turn, the Board of Directors appoint corporate officers to manage the day-to-day operations. Shareholders also have the right to vote on major corporate decisions, as required by the California Corporations Code, the Articles of Incorporation, or the Bylaws of the California Corporation.

California Corporation Shareholders Do Not Participate in Management in Their Role as Shareholders

Despite holding the ultimate power in the California Corporation, shareholders often do not participate in the daily operations of the California Corporation in their role as shareholders. Instead, the California Corporation entrusts the management of the business of the California Corporation to the corporate officers and the Board of Directors. However, shareholders in a California Corporation retain the right to review the financial statements of the California Corporation, attend annual meetings of shareholders, vote on critical business matters, and receive a pro rata portion of the profits of the California when distributed as dividends.

Notwithstanding the foregoing, nothing prevents a shareholder in a California Corporation from also being a member of the Board of Directors of that California Corporation and/or also having one or more corporate officer positions with that California Corporation. However, it is important to note that the roles and responsibilities of a shareholder and those of a corporate officer or director are distinct the actions taken by a corporate officer or member of the Board of Directors is taken in those roles and not on account of the corporate officer or member of the Board of Directors of the California Corporation being a shareholder in the California Corporation.

What is the Board of Directors of a California Corporation?

The Board of Directors of a California Corporation is a group of individuals who are elected by the shareholders to oversee the overall direction of the California Corporation. They are responsible for high-level strategic planning and decision-making and ensure that the California Corporation is being run in a way that enhances shareholder value.

Responsibilities of the Board of Directors in a California Corporation

The responsibilities of the Board of Directors of a California Corporation includes setting the strategic direction of the California Corporation, establishing policies for management of the California Corporation, overseeing the activities of the corporate officers, and making significant decisions such as mergers, acquisitions, or dissolution of the California Corporation. The members of the Board of Directors of a California Corporation are also responsible for ensuring that the California Corporation meets its legal and fiduciary obligations.

Fiduciary Duties of the Board of Directors in a California Corporation

Members of the Board of Directors owe fiduciary duties to the California Corporation and its shareholders. These duties include the Duty of Care and the Duty of Loyalty.

Duty of Care

The Duty of Care requires each member of the Board of Directors of a California Corporation to make informed decisions. The members of the Board of Directors of a California Corporation must act in good faith, with the degree of diligence, care, and skill that a prudent person would exercise in similar circumstances. This includes a duty to stay informed about the activities of the California Corporation, to participate in decisions for the California Corporation, and to do so in a way that is not negligently or recklessly uninformed.

Duty of Loyalty

The Duty of Loyalty requires each member of the Board of Directors of a California Corporation to act in the best interest of the California Corporation and its shareholders. This means that they must put the interests of the California Corporation and its shareholders above their own personal interests. It prohibits self-dealing, use of corporate assets for personal benefit, and other conflicts of interest.

In fulfilling these obligations, the Board of Directors must always act in good faith with the honest belief that their actions serve the best interests of the California Corporation and its shareholders. Breach of these duties can lead to legal liability for the members of the Board of Directors of a California Corporation.

What are the Corporate Officers of a California Corporation?

The Corporate Officers of a California Corporation are individuals appointed by the Board of Directors to manage the day-to-day operations of the California Corporation. These officers include the President or Chief Executive Officer (CEO), the Corporate Secretary, and the Treasurer or Chief Financial Officer (CFO), each having distinct duties and responsibilities.

Duties of the President or CEO of a California Corporation

The President or CEO is the highest-ranking executive officer of a California Corporation, responsible for making significant corporate decisions and managing the overall operations of the California Corporation. Their duties include setting corporate strategies and objectives, coordinating with the board of directors, and ensuring that the California Corporation complies with all relevant laws and regulations. The President or CEO is usually the face of the California Corporation, representing the California Corporation in dealings with governmental entities, the media, and the public.

Duties of the Corporate Secretary of a California Corporation

The Corporate Secretary of a California Corporation plays a key role in ensuring the smooth operation of the procedures of the Board of Directors and maintaining the records of the California Corporation. Their responsibilities include preparing and distributing agendas for meetings of the Board of Directors, taking and maintaining meeting minutes, keeping track of shareholder records, and ensuring compliance with regulatory requirements and corporate governance practices of the California Corporation.

Duties of the Treasurer or CFO of a California Corporation

The Treasurer or CFO of a California Corporation is responsible for the financial health of the California Corporation. They manage the financial planning of the California Corporation, keep track of cash flow, and monitor the financial performance of the California Corporation. Other duties may include preparing financial statements, budgeting, managing investments, and ensuring that the California Corporation complies with all financial regulations and taxation requirements, including the preparation and filing of an annual California and federal income tax return, ensuring the annual minimum franchise tax with the California Franchise Tax Board, and other taxes other than federal income taxes, such as the federal self-employment tax. Federal income taxes and self-employment taxes on the net income of the California Corporation may also be prepared by the accountants or tax attorneys for the California Corporation and filed with the Internal Revenue Service and other taxing authorities at the direction of the Treasurer or CFO of the California Corporation.

Fiduciary Duties of Corporate Officers of a California Corporation

Corporate Officers of a California Corporation, much like the members of the Board of Directors, hold fiduciary duties to the California Corporation and its shareholders. They are required to act in the best interests of the California Corporation above their personal interests, to act in good faith, and to use the same level of care that a reasonable person in a similar position would use under similar circumstances.

Duty of Care

The Duty of Care refers to the obligation of corporate officers of a California Corporation to make decisions in an informed and deliberate manner. They must exercise due diligence and prudence in managing the affairs of the California Corporation. This means they must thoroughly review all relevant information, seek expert advice when necessary, and devote adequate time and effort to their duties. Failing to exercise proper care could lead to personal liability for losses suffered by the California Corporation.

Duty of Loyalty

The Duty of Loyalty means corporate officers of a California Corporation must act solely in the best interests of the California Corporation and its shareholders. They are prohibited from using their position to promote personal interests or to benefit another party at the expense of the California Corporation. This includes, but is not limited to, avoiding conflicts of interest, not exploiting corporate opportunities for personal gain, and maintaining the confidentiality of corporate information. Violations of this duty could also result in personal liability to the California Corporation.

These fiduciary duties guide the actions and decisions of corporate officers, ensuring that they always work towards the wellbeing and success of the California Corporation. Failure to uphold these responsibilities can have serious legal consequences, underscoring the importance of these core principles in the governance of a California Corporation.

What is a California Corporation?

A California Corporation is a business entity formed under the laws of the State of California offering its shareholders personal liability protection. This means the shareholders are typically not personally responsible for the debts, liabilities, obligations, and legal judgments against the California Corporation. It is governed by a Board of Directors elected by the shareholders, and its day-to-day operations are managed by corporate officers appointed by the Board of Directors. To form a California Corporation, specific steps must be followed, including filing Articles of Incorporation with the California Secretary of State and paying the associated filing fee. Once formed, the California Corporation must meet certain ongoing requirements, such as annually filing a Statement of Information and paying state and federal taxes.

A California S-Corp is a type of California Corporation that meets specific Internal Revenue Code requirements enabling it to pass income, losses, deductions, and credits through to its shareholders as an S Corporation for federal tax purposes. To qualify for S Corporation status in California, the California S-Corp must meet several requirements. It must be a domestic corporation, have only allowable shareholders (including individuals, certain trusts, and estates but not partnerships, corporations or non-resident alien shareholders), have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).

Taxation of California Corporations

California Corporations are subject to specific taxation laws and regulations, both at the state and federal levels. Understanding the nuances of these prerequisites is crucial to maintain fiscal compliance and ensure the financial stability of the California Corporation. This section will provide an overview of the taxation process, including income taxes, franchise taxes, and the role of the federal self-employment tax.

Federal Income Tax for California Corporations

For federal income tax purposes, a California Corporation is taxed on its net income at the corporate level using federal corporate income tax rates, which are 21% as of the time of this writing. This is computed by deducting allowable business expenses from its gross income.

California State Income Tax for California Corporations

On the state level, a California Corporation is subject to the California corporate income tax. The tax rate is currently 8.84% on net income for most California Corporations, however, banks and financial corporations are taxed at a higher rate of 10.84%.

Self-Employment Tax for California Corporations

Corporate officers who work for a California Corporation are considered employees, not self-employed individuals, and therefore are not subject to self-employment tax. Instead, the California Corporation and the officer each contribute half of the FICA tax which funds Social Security and Medicare, the total of which is 15.3%.

Double Taxation of California Corporations

One significant aspect of a California Corporation is the concept of double taxation. When a California Corporation earns a profit, it pays federal and state income tax on the profit. If the remaining profits are distributed to shareholders as dividends, those dividends are taxed again on the individual income tax return of the shareholder. This double taxation can be mitigated by retaining earnings within the California Corporation or by compensating officers and employees with deductible salary instead of dividends.

Dividend Taxation from California Corporation Dividend Distributions

Dividends distributed to shareholders are taxed at the tax rate of the individual shareholder. For federal purposes, qualified dividends are taxed at capital gains rates, which are generally lower than ordinary income rates, while nonqualified dividends are taxed at ordinary income rates. For California state tax purposes, dividends are taxed as ordinary income.

When Should a California Corporation Be Used?

The decision to form a California Corporation should be influenced by various factors. Start-ups that plan to raise capital from outside investors often choose the corporate structure, as it offers an easy and clear way to divide ownership through the issuance of shares. More established businesses may also elect to incorporate to take advantage of the potential tax benefits and the limited liability protection provided to shareholders. Yet, it is also essential to consider the administrative burdens associated with operating a California Corporation, as it requires more record-keeping and reporting than other business entities. Before deciding, individuals should consult with a business attorney or a tax advisor to fully understand the implications and responsibilities associated with forming a California Corporation.

Self-Employment Tax Benefits of California Corporations

Shareholders of a California Corporation who provide services to the California Corporation can potentially benefit from self-employment tax savings. Unlike California Sole Proprietors, general partners in a California General Partnership or California Limited Partnership, and members of a California LLC (limited liability company) disregarded for tax purposes or taxed as a partnership, all of whom are subject to self-employment taxes on the entire net income of the business, the net income of a California Corporation is not subject to self-employment taxes; only wages paid to employees, including employee-shareholders are subject to standard payroll taxes.

Where is a California Corporation Most Frequently Used?

A California Corporation is most frequently used in diverse industries and sectors across the state that value the benefits this form of business offers, such as limited liability and potential tax advantages.

Why Choose a California Corporation?

Choosing a California Corporation as your business structure can offer several benefits. It provides limited liability protection, meaning shareholders are usually not personally responsible for business debts, liabilities, obligations, and legal judgments against the California Corporation. It offers ease of transferring ownership and raises capital through the sale of stocks. A California Corporation has an unlimited life; even if an owner leaves the California Corporation or sells their shares, the California Corporation continues to exist. Finally, there can be potential tax advantages, including deductions for business expenses and the ability to carry losses forward to offset future profits. However, these benefits should be weighed against potential downsides, such as double taxation and administrative complexity, some of which may be mitigated by the election of S Corporation status for tax treatment as an S Corporation. Proper advice from legal and tax professionals should be sought to make an informed decision.

How are California Corporations Formed?

Forming a California Corporation involves a multi-step process briefly outlined in this section. An experienced corporate attorney should be consulted for the formation of a California Corporation.

Choose a Name for the California Corporation

Select a unique name for the California Corporation. Name availability can be checked through the website of the California Secretary of State, California Business Entity Search. The name should end with either “Incorporated”, “Inc.”, “Corporation”, to indicate corporate status, however such designation is not required (but often the lack of a corporate designator indicates the corporation is a California Nonprofit Corporation).

Draft and File Articles of Incorporation

After selecting a name, Articles of Incorporation may be drafted and filed with the California Secretary of State. The Articles of Incorporation must include basic information about the California Corporation, such as its name, corporate purpose, and capitalization, although other information is required or advisable to include.

Appoint a California Registered Agent

California law requires all California Corporations to have a California registered agent for service of process. This corporate agent is a person or registered agent service that agrees to receive legal papers on behalf of a California Corporations.

Create Corporate Bylaws

Bylaws are a required internal document that outlines how a California Corporation will operate. Bylaws should include information about the structure of the California Corporation, the roles of Board of Directors and corporate officers, and other legally required processes.

Issuing Share of Stock and Stock Certificates

When issuing shares of stock to founders in a California Corporation, the issuance of shares to founders often falls under the exemption provided in California Corporations Code Section 25102(f), which requires the filing of a notice. A California Corporation may issue stock certificates to shareholders, but may also track share ownership by book entry only.

File Statement of Information

Every California Corporation must file a Statement of Information with the California Secretary of State within 90 days of filing the Articles of Incorporation and annually thereafter.

File Form 2553 with the Internal Revenue Service

To make an S Corporation election to elect S Corporation status, a California Corporation must submit Form 2553 to the Internal Revenue Service. This form is used to make an election under Subchapter S of the Internal Revenue Code. The form must be completed and filed before the 16th day of the 3rd month of the tax year, or at any time during the year preceding the tax year. However, no filing is required for a California Corporation not seeking S Corporation tax treatment.

Comply with Tax and Regulatory Requirements

This includes obtaining an Employer Identification Number (EIN) from the Internal Revenue Service, registering for state and local taxes, obtaining any necessary local business license and required permits, and opening a business bank account.

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At San Diego Corporate Law, our experienced corporate attorneys are ready to help you harness the benefits of a California Corporation. We provide comprehensive legal support, taking care of the drafting and filings for each step of the formation process and ensuring compliance with all local, state, and federal regulations. Do not leave your business future to chance – trust the professionals who understand the intricacies of the corporate landscape. Contact us today to start your journey towards forming a successful California Corporation.