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What does it take to form a corporation? In California, the process involves filing the appropriate Articles of Incorporation with the Secretary of State's office. For lay people who attempt to do this themselves (not recommended) and mail the paperwork to Sacramento, it takes 6-8 weeks.Our firm uses an expedited attorney filing service that gets the certified Articles in your hands in about 10 days. Remember, FORMING a corporation is only half the challenge. The corporation must then issue stock, adopt bylaws, and hold formal meetings of the board of directors in order to properly MAINTAIN its corporate status. Failure to comply with these requirements can result in the loss of liability protection, so it's best to see an attorney to ensure complete compliance. Further, a corporation may not always be the BEST legal entity for your business. For many small businesses with a few owners, we often recommend a Limited Liability Company, or LLC. Please call us for a complete overview of LLCs along with a comparison to a traditional corporation.
How is a corporation different than a partnership? The two big differences are taxes and liability. A regular (or "C") corporation pays its own taxes, then passes any profits on to the shareholders (if the board authorizes dividends). Since the shareholders also pay personal taxes on these dividends, this is commonly know as double taxation. An "S" corporation does not pay taxes itself, but instead passes all its profits directly to the shareholders who then pay the appropriate individual taxes. The election to become an "S" corporation is not made upon formation, but rather with the IRS before the first return is due. Neither form is better in all cases, so consult your tax advisor first. As to liability, this is the main reason people incorporate. If a corporation is sued, only the assets of the corporation are at risk. The personal assets of the directors, officers, and shareholders are not at risk (unless, of course, they are named in the suit). As to contractual relations with third-parties, conducting business through a corporation is an excellent way to shield your personal assets if things go sour. However, there are exceptions to every rule. If it can be shown that you intended to defraud a third party, or set up the corporation with insufficient capital, you could be personally liable. This is commonly known as "piercing the corporate veil".
Who conducts the business of a corporation? It works like this: Shareholders elect members of a corporate board of directors to govern the fundamental direction of the corporation. Directors then elect officers (President, Secretary, etc.) to run the day to day management of the corporation. Officers conduct most of the corporation's business, such as hiring employees, filing the taxes, etc. Directors are limited in the scope of their duties to things like approving major corporate decisions, electing officers, and authorizing corporate dividends if profits allow. Shareholders, in that capacity, do nothing more than elect directors and approve changes that affect corporate bylaws (including mergers and dissolution). In a closely held corporation, one person may end up wearing all hats. One person may own all shares, hold the only directorship, and serve as all officers if he owns 100% of the shares. Once shares are owned by more than one person, multiple directors are required.
I now own 100% of my corporation, but want to offer stock options to my employees. Is this a good or bad idea? In almost all cases, it's a BAD idea. First of all, a stock is only worth what someone else is willing to pay for it. Unless your corporation is publicly traded, your stock is worthless to an employee unless he or she can convince someone else to buy it. It's better to motivate employees with bonuses or profit sharing, at your discretion. There's also a critical reason you don't want other people to own any shares of your company -- you will no longer work for yourself. If anyone else owns stock, you must now act in the best interest of all shareholders in your business decisions. No longer can you simply write yourself a check out of the corporate account when you personally need money. You must now limit your salary to what is "reasonable" and pay all other money out in dividends. These dividends must now include those employees who exercised their stock options.
If other people do own a few shares of stock, what can they really do if they don't like corporate decisions made by the President? Very simple. They can take you to court! While most minority shareholders will not take a majority shareholder to court over a couple of dollars, it has happened. The worst part about it -- if they win then you have to reimburse the corporation's legal expenses! The moral of the story -- if you are an officer or director of a corporation with more than one shareholder, you must act in the best interests of all shareholders even if it conflicts with your personal interests. |
Scott W. Williams Small Business Law Ventura County Los Angeles County California Estate Planning Corporation LLC Partnership Litigation Living Trust Bankruptcy Small Business Law Limited Liability Company Employment Law Thousand Oaks Westlake Village Agoura Hills Simi Valley Camarillo Oxnard Moorpark Ojai Scott Wesley Williams |
