BUSINESS ENTITIES – Part 3: Corporations by BPE Attorneys Keith Dunnagan and Matthew Kirkpatrick
In the last article we discussed partnerships and their role in the business community. In this article we will look at the corporate model as an alternative business structure for your company.
Corporations are governed by the California Corporations Code and within the corporate structure there are 2 primary tax structures and 3 types of corporations.
From a structure type, each corporate entity must determine are they forming as a for profit corporation, not for profit corporation (which included religious institutions) or a mutual benefit or social purpose corporation. For purposes of this article we will only be addressing for profit corporations. However, if you are in need of advice related to a not for profit corporation or mutual benefit or social purpose corporation we would be happy to assist.
From a tax standpoint each company makes an election to be taxed either as a C-Corporation (the default election) or an S-Corporation. Many small business owners make an S-Corporation election in an effort to avoid the corporate double taxation. By making the S-Corp election profits are able to be passed through to the owner/shareholder and taxed as ordinary income to the owner in the same manner as a partnership would be taxed.
The primary benefit to the corporation model is third party liability protection. So long as the corporate structure is maintained and the business acts as a corporation, then the individual owners/shareholders along with the officers and directors of the corporation can insulate themselves from liability to claims asserted against the company. Unlike a partnership where each general partner is jointly and severally liable for the debts of the company, in a corporate model the debts are solely the responsibility of the company and in general the shareholders are not personally liable for the company debts.
However, one of the draw backs that many small business owners do not like about corporations is the rigid formality for which a corporation is managed and maintained. Directors and Shareholders are required to have annual meetings to ratify the actions of the previous year. Special meetings through out the year to make major decisions and each of these meetings must be documented in the corporate book. Additionally there must be some degree of formality with respect to distribution of proceeds to the owner and absolutely no commingling of funds. In reality what this means is that the corporation should not be directly paying personal bills of the owners/shareholders. In doing so that creates the appearance that the corporation is not actually a corporation but rather a sham and that can allow third parties to pierce the corporate veil and reach owners personally for liability.
Corporations, once you understand the model and restrictions, are very easy to maintain and operate and the liability protection is something most business owners appreciate. Further, unlike partnerships which can be expensive to form and in which at least two people must participate, corporations are generally relatively cheap to form and a corporation can be owned and controlled by a single owner. Giving the solo business owner added viability for the business.
The key to a successful corporation really comes down to operating as a company and maintaining the books. In doing so, the shareholder should enjoy the protections and benefits afforded by the corporate structure for years to come.
If you are contemplating a corporate business model, the attorneys at BPE Law have significant experience in counseling business owners on corporate formation and governance. We would welcome the opportunity to assist you in your business endeavors and selecting your structure is your first step.
If you have any further questions, please feel free to contact me at firstname.lastname@example.org or, if you need help now, please call our office at (916) 966-2260 to set up a consultation.
This article is not intended to be legal advice, and should not be taken as legal advice. Every case requires review of specific facts and history, and a formal agreement for service. Please feel free to contact us if you need legal advice and are interested in seeing if we can help you.