If you have created a California business, it might be in your best interest to incorporate through the Secretary State. A corporation can provide many benefits to a business, including the ability for it to attract investors and protect its owners from potential complications.
A corporation allows for a clear division of power between shareholders, directors and officers. Shareholders own the company and are not usually liable for its debts. Directors ensure that shareholder assets are protected by setting long-term goals for the business. They also hire and fire officers to perform day-today tasks.
California allows you to incorporate as five different entities: Corporation (an entirely separate tax entity created separately from its owners) – This helps protect the owner against debts and any legal liability the corporation might incur.
Limited Liability Companies (LLC) – Limits the liability of an owner, but allows profits to flow to them directly. They are then taxed on a portion of their income. General Partnerships – The liability is on the partners of the company, who are the owners. Profits and debts are distributed equally to all the partners.
Limited Partnerships – These are a combination of general and limited partners, who are liable only for debts equal to the amount they invested and do not manage the business. Limited Liability Partnerships – The liability for each partner varies. Each partner is not responsible if another partner commits a mistake. Only certain businesses in California can form this type of partnership.
What a corporation needs to file:
To become a California corporation, you must submit a few documents and pay multiple fees. Your aspiring corporation will first need to submit Articles of incorporation. This is a single, document containing the following: the name of your corporation, California Corporations Code and the initial agent of service of process.
Fees for filing the Articles of Incorporation are $100 plus an additional $15 if you file by hand. Within 90 days of filing the Articles of Incorporation, a Statement of information must be filed for $25 or $20 in case you’re a non-profit.
This form asks for the most basic information about your corporation, such as its location, name and type of business. This form is required to be submitted annually for corporations and biannually by non-profit corporations. Failure to do so can lead the suspension of your corporation. It is the responsibility of your corporation to keep all internal forms in its records.
Your corporation must first have a set of agreed-upon bylaws. Bylaws are the constitution for your corporation. The next step is to review all corporate resolutions. These are documents that are approved by the board of directors and outline what specific individuals are allowed to do. Minutes of shareholder and director meetings must be kept in your company’s records.
In a lawsuit, it could be very costly for your company if you fail to include the documents mentioned.
Types of corporations:
If you decide to incorporate your business, you can choose to be a C corporation or S corporation. Taxation is the main difference between C and S corporations. In a C-corporation, a separate entity that is owned solely by the shareholders is created. The corporation pays tax on its earnings but the shareholders pay tax on their dividends.
A hybrid entity, an S corporation is similar. The shareholders still have liability protection, but you pay low income tax because only dividends are taxed. The California Franchise Tax Board taxes each corporation differently. In California, a C Corporation’s annual net profit is taxed with an 8.84 percent rate, and a minimum of $800. For an S Corporation, your net annual income is only taxed with a 1.5 percent rate, and a $800 minimum.
The IRS taxes a C-corporation at a higher rate (depending on its income), whereas S corporations are not taxed. The IRS has strict requirements that make it difficult to maintain an S corporation, despite the benefits they offer. You must have less than 100 shareholders and only one type of stock to maintain an S Corporation. This makes an S corporation more suited to small businesses.
Limited Liability Companies:
If you choose a LLC, your business will run like a normal corporation with the exception that owners (shareholders), are called members. Members are similar to shareholders in corporations in that they do not have to be responsible for the debts of the company. However, members are not restricted to just a single natural person. Your LLC may have members who are corporations, other partnerships or other business entities.
To create an LLC, two documents must be filed at the Secretary of State. The first document to be filed is the Articles of Organization, which costs $70. The articles of organisation act as a charter for your LLC. They include basic information such as the business name, the location and the members and managers.
Second, a Statement Of Information (which contains much of the information contained in the articles of incorporation) must be submitted within 90 days after the articles are filed. This statement is resubmitted every two years for a $20 fee.
If you fail to submit the updated statement of information, your LLC may be suspended as a California entity. In addition to the mandatory document, you must also keep internal records of the operating agreement, corporate resolutions and minutes. In essence, the operating agreement of a LLC is similar to the bylaws of a regular corporation in that it sets out the rules for the way your business will run. The taxation of an LLC differs from that of a normal corporation.
In LLCs, you do not pay federal income taxes as a company because you are taxed separately. In an LLC, any profits are distributed directly to members who then pay tax on them as part of their individual income. The State of California, through its Franchise Tax Board, still taxes the annual income of LLCs at 8.84 percent and a minimum of $800.
General Partnerships (GPs)
If you decide to incorporate your business as a general partnership, you will require at least two partners who will be responsible for its profits and liabilities. Each partner will receive a share of profits or debts incurred by the business. This also means that all partners are equally responsible for the misconduct of another partner. Unlike other forms, GPs do not require filing documents with the Secretary State. A GP can be formed by two people simply by word of mouth. Due to the lack of legal proof, it is highly recommended that you file a Statement on Partnership Authority at the Secretary of State. The fee for the document is $70. It creates a legally binding agreement between yourself and your partners. This agreement can only be ended by a Statement of Dissolution, or death of one of your partners. A partnership is a tax-efficient way to form a business, as it does not create a second taxable entity like a corporation. Profits earned in GP are distributed directly to the partners and you, who will be taxed on them as regular income.
Limited Partnerships (LPs):
LPs are similar to GPs in that they require two or more partners. However, these partners can be divided into two categories: limited partners and general investors. Limited partners can invest in your company and receive a portion of profits. However, they do not take part in the running of the business. General partners, on the other hand, are responsible for managing your business and all financial obligations. By law (Assembly Bill 339), a LP must always have one general and one limited partner. A LP must also file a Certificate for Limited Partnership with the Secretary of State, which costs $70. Taxation is similar to that of a GP, as only profits are taxed. The taxation is different in one important way. All limited partners are required to pay $800 annually as a tax to the Franchise Tax Board.
Limited Liability Partnerships (Limited Liability Partnerships):
The personal liability of each partner to the company varies. You could be responsible for 70 percent of the company’s debts, while your partner can only be held accountable for 30 percent. California only allows public accounting, law and architecture firms to form a LLP. If your business falls into one of these categories, you can register as an LLP for a fee $70 by submitting the form Registered Limited Liability Partnership registration. LLPs, as they are still partnerships, do not have to adhere to the same annual meetings and minutes as normal corporations. This is something that some people consider an advantage. Taxation is the same for LLPs as other types of partnerships. Profits from your business will go directly to your partners, and they are taxed on their own income.
