Corporations

San Francisco-Area Attorneys Experienced in California Corporation Formation

A corporation, generally speaking, is a legal entity that exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners.

A corporation comes into existence when a certificate of incorporation, signed by at least one incorporator over 18 years of age, is filed with his or her state’s Secretary of State. Many people starting a business in California think that they should incorporate in another state, with Delaware being a popular state for incorporation because of its corporate regulations. However, if your business interests are in California, all litigation will be handled in California courts, regardless of the state of incorporation. Our lawyers typically advise California corporation formation for our clients.

Although they are the owners of the corporation, corporate stock shareholders usually exercise direct authority only by electing a board of directors and by voting to approve certain board proposals for example, amendments of the certificate of incorporation, the sale of the business, or voluntary dissolution. The board of directors in turn establishes corporate business policies and elects officers, including a president, vice-presidents, and a treasurer, to effectuate those policies. Officers are directly accountable to the board of directors, not to the shareholders.

Advantages of a Corporation

When incorporating, it is possible to qualify the corporation as either a small-business "S Corporation" or a regular "C Corporation."  For federal income tax purposes, the S Corporation is taxed the same as a partnership. The income of the S Corporation passes directly to the corporate stock shareholders, who pay taxes on their shares. No federal income tax is paid by the S corporation itself. Meanwhile, the C Corporation pays corporate income tax on its earnings, while the stockholders only pay income tax if they receive dividends on their stock.

Another advantage of both S and C corporations are that officers and directors of corporations may be eligible for some fringe benefits that are not available to other forms of business organizations. Also, it is typically easier to sell part of the business if it is a corporation. Financing may also be more readily available for corporations, though stockholders may be required to sign personal guarantees. Corporations also have some legal immunity available from lawsuits.

Disadvantages of a Corporation

One of the chief drawbacks of a corporation is that its profits are taxed twice. Because a corporation is a legal entity with many of the rights of a person, federal and state governments impose an income tax on any profits it earns. When those profits are distributed to shareholders as dividends, they are taxed again as income.

This can be avoided if a corporation elects to be an S corporation. If the S corporation election is made, the corporation will not be treated as a taxable entity. Its gains "pass through" to the shareholders without being taxed as corporate profits. Each shareholder must pay a tax on his or her share of the business's profits, but the corporation's profits will be taxed only once and not twice.

Other disadvantages include the fact it is more difficult to transfer cash in and out of a corporation than it is for a partnership or sole proprietorship. The corporate form is also the most unfamiliar and confusing structure and requires the most paperwork. California corporation formation requires the drafting of by-laws and articles of incorporation, the issuance of stock, annual meetings, and approval by the Secretary of State.

Shareholders run the risk of being liable for unpaid wages or salaries owed to employees. Corporate officers are at risk if they fail to collect or pay withholding taxes, wages, and state franchise taxes. Corporate directors are at risk only if they make illegal dividend or other distribution payments to shareholders.

Discuss Your Situation with Our Experienced Attorneys

The lawyers of the Law Offices of G. J. Mugg can help you through the complications of corporate formation and maintenance. In an initial consultation, our attorneys can listen carefully to your situation and determine whether California corporation formation is right for you and your business partners. Contact us today.

Our corporation formation lawyers assist business clients nationwide, with a majority of our clients having business interests and concerns in San Francisco Bay Area, encompassing San Francisco, San Jose, Oakland, North Bay, East Bay, South Bay, and all of San Francisco County, Alameda County, Marin County, Sonoma County, Napa County, Solano County, Contra Costa County, San Mateo County, and Santa Clara County.