Sunday, April 28, 2013

What is a California Corporation?

     A California corporation is a distinct legal entity separate and apart from its officers, directors and shareholders. As a result, a shareholder, officer or director is not the employer of those working for the corporation, nor are they considered the owner of the corporate property. As a separate legal entity, a corporation has the power to act in any way permitted by the laws that created it. A corporation can own and convey property. It can sue and be sued. A corporation can commit torts and crimes.

     Although a corporation can sue or be sued in its name, with the exception of small claims court, it cannot appear in court and represent itself. Nor can it appear on its own behalf as defendant in a criminal proceeding. In general a corporation must be represented by a lawyer when it appears in a civil or criminal case. Even where a sole shareholder's interests are identical to those of the corporation, a non lawyer shareholder cannot intervene in the proceeding as a method of circumventing the requirement that the corporation be represented by an attorney.

     As a separate legal entity, the corporation is responsible for its own debts. Normally, the shareholders, directors or officers of the corporation are not legally responsible for corporate liabilities. If there are losses in the business, the corporation bears them to the extent of its own resources; the stockholders indirectly bear them in that the value of their stock declines more or less in proportion to such losses. However, the shareholders may be held personally liable for corporate obligations if they have personally guaranteed them or if “alter ego liability” is imposed. They may also be liable for their own tortious conduct in ordering, authorizing or participating in corporate wrongdoing.

     As a general rule, management and control of a corporation is vested in the board of directors that are elected by the shareholders of the corporation. The directors generally make policy and major decisions but do not individually represent the corporation in dealings with third parties. Dealings with third parties are conducted through the corporation's officers and employees, to whom authority is delegated by the directors. Although the shareholders elect the board of directors, they do not directly control the board's activities or decisions.

     In a corporation, the same persons may be stockholders, directors and officers of the corporation (and usually are in small corporations).

     A corporation can be created only by complying with California's General Corporation Law. The law requires filing of articles of incorporation containing certain essential provisions and the prepayment of certain fees, before a corporation can be formed.

     As a separate legal entity, the corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers or directors, or by transfer of its shares from one person to another.

     Corporations can be "C" corporations, Sub chapter "S" corporations, close corporations or under certain circumstances, professional corporations.

     "C" corporations pay tax on taxable income generated by the corporation. A "C" corporation is a separate taxable entity in the eyes of the state franchise tax board and the IRS. An "S" corporation has its taxable income treated like the income of a partnership or sole proprietorship. In other words, an "S" corporation is a pass through tax entity. The income or loss of the company is reflected on the tax return of the owners of the company. To qualify as an "S" corporation there must be fewer than 75 shareholders, and the shareholders cannot be non-resident aliens.