In this week’s edition of our San Diego Business Law blog series we will take a general look at corporations in California.
In order to do business in California as a corporation the business owner must comply with a number of formalities to incorporate and maintain the benefits of incorporation.
Formalities for Incorporation in California
First and foremost, you need to determine whether or not the name you would like to use for your corporation is available. In California you can check the availability of a corporate name through methods including:
- Via mail using a Name Availability Inquiry Letter (which can also be used for LLCs and Limited Partnerships)
- Via telephone through the Priority Telephone Service which is only available on a prepaid basis to businesses that regularly check the available of corporate names
Once you or your attorney has confirmed that your business name is available, you may reserve the name. This can be done via mail or via Priority Telephone Service by your experienced corporate law attorney on your behalf.
Upon reservation of the name you must complete a number of formalities to properly operate your business as a corporation. These include:
- Filing the articles of incorporation with the Secretary of State
- Designating an Agent for Service
- Drafting corporate bylaws
- Issuing stock to the owners
- Paying annual corporate taxes
As we have previously discussed, a major benefit of doing business as a corporation is that corporations provide their owners with protection from personal liability in a number of situations. This means that if the business defaults on an outstanding debt or has a judgment filed against it, the business owner(s) will not be forced to use personal assets to pay for the judgment or satisfy the outstanding debt.
Issues with Personal Liability
Unfortunately, simply filing the articles of incorporation with the Secretary of State and completing the initial formalities will not be enough to maintain immunity from personal liability for the business’ debts. Business owners have been held personally responsible for business debts if there is not sufficient evidence to show that the business was truly separate from its owners. Business owners may, for example, be personally liable when there is failure to:
- Hold the required annual shareholders’ and directors’ meeting
- Keep the minutes of the major decisions made by the shareholders and directors at the annual meeting or at any other time
- Maintain separate corporate and personal bank accounts
- Properly invest money in the corporation
- Keep detailed financial records for the corporation
- Issue stock to the business owners
If the formal requirements seem reasonable and the limitations on the use of the income generated by the business will work with your business model, you will want to select the right type of California Corporation for your business. A one-on-one consultation with an experienced corporate law attorney is the best way to pick your corporate form as every business is distinct and your business model, product/service, intended revenue, and other issues are important factors in determining the best type of corporation for your business.
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