California Corporation

California Corporation

Separate Legal Entity:

A California corporation is a separate legal entity existing under authority granted by state law.

Process to Incorporate:

A Corporation can be created only by compliance with the California Corporations Code §§200-300, which require formalities:

  1. filing articles of Incorporation
  2. organizational meeting
  3. prepayment of fees

Cost Estimate for California Corporation formation (approximate):

  • Filing fee with the California Secretary of State $115
  • Check name availability and reserve corporate name$20
  • Filing fee to the Department of Corporations$25
  • Corporate book, seal, stock certificate, registration fees, etc. $110
  • Legal Fees – depends on the number of shareholders etc. $800 – $1,200
  • Costs – publication, registration, etc.$110
  • Estimated total cost$1180.00 – $1,580

Personal Liability:

Shareholders can be held liable for Corporate debts if:

  1. They personally guarantee a corporation debt or obligation, or;
  2. Alter ego liability:
    • they fail to adequately capitalize the corporation in an amount which is adequate in relation to the obligations likely to be incurred to third parties in connection with the corporation’s business, and
    • they fail to comply with formalities (except a Statutory Close Corporation) and fail to issue stock or otherwise fail to complete the incorporation process, and
    • they commingle personal funds and corporate funds and/or fail to act at arms-length with the corporation.

Methods to get cash out of a California corporation:

  • Salary
  • Pension plan
  • Rental payments
  • Loans
  • Dividends
  • Liquidation of Corporation


  • Ownership by the shareholders.
  • Shareholders elect Directors to oversee the corporation.
  • Directors elect Officers to run the day-to day business.
  • Minimum number of officers is three: President, Secretary, and Chief Financial Officer (one person may hold all offices). Corporations Code §412(a)
  • Minimum number of directors for a ‘for profit’ corporation is one (if there is only 1 shareholder). (If 2 shareholders then minimum number is 2.) General rule is there should be three directors. §212(a)

Insulation from personal Liability:

  • Incorporate
  • Adequate capitalization of corporation
  • Elect “Statutory Close Corporation” status (separate from Subchapter-S election)
  • Observe corporate formalities
    1. Initial organizational meeting
    2. Annual corporate meeting of shareholders/directors to elect directors/officers
    3. Written contracts for compensation of officers
    4. Written contracts for rental of equipment to the corporation
  • Purchase adequate insurance for normal business risk

Statutory Close Corporation:

Advantage: lack of formalities is not a basis for alter ego liability. Corporations Code §300(e). You still need to adequately capitalize the corporation and issue stock.

  • Name must include Inc., Corp. or Ltd.
  • Articles must state that it is a Close Corporation
  • No more than 35 shareholders
  • Need unanimous written shareholder agreement
  • Need legend on the stock certificates indicating Close Corporation etc.

Subchapter S Corporation Election under IRC §1362:

  • Makes sense where the company intends to distribute most of the profits of the company.
  • Federal Corporate tax – none on the corporate entity.
  • Federal and state income is taxed to the shareholders.
  • California “Franchise” tax of $0 first year, $800 minimum per year thereafter.
  • California Franchise tax of 2.5% of net income of the corporation (plus share holders pay tax on their Subchapter-S income).
  • Losses are deductible by the shareholders.
  • Non-deductibility of fringe benefits for over 2% owners.

Available Names for California Corporation:

Cannot use in the name:

  • Bank, Trust, or Trustee,
  • Co-operative,
  • Olympics or Olympiad

Procedure to Incorporate:

  1. Reserve name,
  2. File signed articles,
  3. Order corporate kit – corporate shares, seal, book, stock ledger, etc.
  4. Give notice and hold organizational meeting with initial directors.


  1. Select corporate name and alternate name, and reserve name,
  2. Draft and sign Articles,
  3. File Articles,
  4. Order corporate kit,
  5. Decide on assets to contribute in exchange for stock,
  6. Draft all documents,
    • Bylaws
    • Minutes
    • Close Corporation and/or shareholder agreement
    • Schedule of assets to be contributed
    • Securities representations from prospective shareholders
    • Exemption form – California securities laws §2510(f)
    • Corporations Code §1502 form
  7. Notice of First Director’s meeting is sent out or waived in writing

Hold First Corporate Meeting:

  • To adopt bylaws, elect directors, officers, and
  • Adopt share certificate form,
  • Authorize the issuance of shares,
    1. set par value of shares
    2. determine FMV of non-cash consideration received in exchange for shares,
    3. authorize the application for exemption from registration of securities under California and federal laws,
    4. approve legend on share certificates for exemption from securities laws and Close Corporation,
  • Qualification of stock under IRC §1244 (‘Small Business Stock’ for ordinary loss treatment)
  • Authorize election to be a Close Corporation under Cal. Corporations Code §158,
  • Authorize the election for Subchapter-S status,
  • Establish bank accounts and check writing authority,
  • Select annual accounting period,
  • Adopt corporate seal,
  • Authorize reimbursement of incorporator’s incorporation expenses.
  • Establish shareholders agreement

After First Corporate Meeting:

  • File forms with the Secretary of State and Commissioner of Corporation,
  • File Subchapter-S election federal and state,
  • File form SS-4 for Federal ID number
  • Open bank account and begin transacting business.


To decide which type of business entity is best for you, many factors have to be weighed. Please contact our office today so we can help you achieve your business goals.


This article provides general information about California corporation law. The laws are constantly changing and this information is not intended to provide legal advice about your specific situation. Set up an appointment to come in so we can talk about your particular situation.

Gary A. Quackenbush, Esq.