Welcome back to our San Diego Business Law blog series! In our past posts in this series we have addressed how liability considerations affect the selection of the appropriate business entity as well as the formal requirements for forming a corporation in California.
In this week’s blog we are going to address the different types of corporations available to you if you are doing business in California. There are a number of different corporate options for business owners, however, the most popular are:
A C corporation is any corporation that is taxed separately from its owners. Income that passes from the corporation to the owner(s) is considered dividend income and will be taxed at that rate. C corporations provide owners with protection from personal liability so long as the formal requirements for operating a corporation are complied with.
C corporations require the owners to appoint a board of directors, hold an annual meeting and comply with several accounting and reporting obligations. Failure to comply with the formal obligations of operating a C corp can result in the loss of the owners’ protection from liability.
S corporations are “pass-through” entities (like partnerships and LLCs) that allow business income to pass through the organization to the business owners for tax purposes: Shareholders of S corporations report profit and loss on their individual tax returns, and pay taxes on the distributions at their personal rate. An S corporation is not automatically established when you incorporate. Rather, under IRS regulations, a C corporation may elect to register as a subchapter S corporation, which allows for these tax advantages.
Although S corporations are popular corporate forms, they do have important restrictions on who can hold stock/have an ownership interest in the S corporation. Only U.S. citizens or resident aliens, estates, certain kinds of trusts, another S corporation (but only if the other S corporation is the sole shareholder), a partnership (but only if the partnership is acting as a nominee for a person who qualifies as an S corporation shareholder), and tax-exempt charitable organizations can hold stock in an S corporation.
A closed corporation is a business that has elected to operate under a corporate structure but the shares of the corporation are owned by a small group of individuals who are closely involved in the operation of the business. Closed corporations are normally formed by small groups of owners who want protection from legal liability that is not available in a partnership.
Closed corporations are also exempt from some of the formalities of operating as a corporation in that they are not required to have a formal board of directors or hold a formal annual meeting.
Benefit corporations are a newer subtype of traditional corporation available in California as of January 1, 2012. By forming a benefit corporation, rather than a C or S corporation, the board of directors is able to run the business while being mindful of social and environmental goals. Benefit corporations must identify the social or environmental goals they wish to pursue in their charters and must also comply with state financial transparency requirements and file a Benefit Report within 120 days of the end of the fiscal year.
Flexible Purpose Corporations
Flexible purpose corporations (Flex C) are also relatively new business forms available to California business owners. Like benefit corporations, flex C’s allow for-profit businesses to incorporate and designate a “special purpose” in the charter that the owners and managers may put in front of or in line with traditional obligations to maximize shareholder value.
In order to do business as a Flex C, the business name must include the phrase “flexible purpose corporation”, the special purpose must be identified in the company’s charter and the company must comply with state disclosure and reporting requirements.
The selection of one corporate form over another is often dependent upon a number of considerations including the financial needs of the owners, the social and economic goals of the business and the desire for protection from personal liability for business debts. If you would like to learn more about the corporate forms available to you here in California, please contact San Diego business law attorney, Rosana Ortega today.
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