Is a Corporation (or C-Corporation) Right for My California Business?

When you think of a corporation you undoubtedly think of a company like Google or Apple.  These are both fine examples of corporations but you don’t have to be the size and stature of one of these corporations that are household names in order to be a prime candidate to form a corporation.  Corporations can be C-Corporations, like Google is and is what we usually think of when we think of corporations, or can be Subchapter S-Corporations or commonly referred to as S-Corps, which are more restrictive than C-Corporations.

We will only discuss C-Corporations here but for a discussion of S-Corporations, you can see S-Corporations: What Are They and How Do I Get One?

A C-Corporation is not a very flexible structure for your business but often will offer the best protection.  Further, if you are seeking financing for your business, be it through a bank or through venture capital funds, a C-Corp may be a necessity for your business.

Registration

Before you begin the process of filing all the requisite documents with the California Secretary of State to either form your C-Corporation or register it to do business in California, you should do some searching to make sure there are not already Corporations or other entities operating under your preferred business name. After you are comfortable that no other business is likely to be using the name or such a similar name as to cause confusion to yours, you can move forward.  As with most other entity structures, a C-Corporation must file the appropriate documentation with the Secretary of State in California in order to conduct business or collect income here. Even if your C-Corp is not a California Corporation it must be registered with the California Secretary of state prior to doing business in California.

Operation

A C-Corporation is owned by its shareholders, each owner is issued shares in the C-Corporation.  There can be multiple classes of shares each with its own restrictions and benefits, and shares can be sold and new shares can be issued, as needed.  A C-Corp will operate under its by-laws.  The by-laws must include many items, including when the shareholder meetings will be held, when the directors will meet, how many officers the C-Corporation will have, and the officers’ responsibilities.  Whereas the shareholders own the company, the directors, who are elected by the shareholders, make big decisions for the C-Corporation, and the officers have responsibility for the day-to-day operations of the business.  The directors and officers can be, and often are, shareholders in a C-Corp.  The requirements for maintaining a C-Corp are much more rigid than other entities, for instance, even if you are a small C-Corporation, you must maintain bank accounts and financial records that are separate from your personal accounts.  Finally, a C-Corp is perpetual in that a C-Corporation will continue to survive even of one of its shareholders or owners is no longer a shareholder and no date of termination of the C-Corporation is required to be stated in the by-laws.

Taxation

A California C-Corporation must pay a minimum franchise tax of $800 per year.  On top of that a C-Corp is taxed at the corporate level, e.g. the corporation must file its own tax return, then the shareholders are taxed on any distributions made to them, that is why you hear many people talk about double taxation of corporate entities.

A C-Corporation can be more costly to set up and maintain than other business entities, such as sole proprietorships or partnerships. Accordingly you may wish to consult with an attorney before setting up your corporate entity.  If you would like to discuss whether a California C-Corp is the correct entity for you, please contact us to schedule a time to discuss your entity selection.