FAQs
Corporations
Are there any restrictions on the name of my corporation?
What is an agent for service of process?
What is the difference between authorized shares
and issued shares?
How many directors are required?
What are Bylaws?
What officers are required?
What is an incorporator?
Is a corporate seal required?
What is a principal place of business?
What is a Statement of Information?
What is the difference between a "C" and
"S" corporation?
What is the benefit of electing to be treated as
a "S" corporation?
What is the deadline for filing a Subchapter "S"
election?
How do I establish a bank account?
What is a federal employer identification number?
What are the record-keeping requirements for a corporation?
How does a corporation sign documents?
LLCs
How does an S corporation differ from a limited
liability company?
When do I have to pay the Annual LLC Tax?
What is the annual cost of maintaining an LLC?
Does an LLC require more than one member?
Is it cheaper to form the LLC in Nevada?
Why does my lender require a bankruptcy-remote, separate
entity?
How does a LLC sign a document?
Are there any restrictions on the name of my corporation?
A corporate ending (e.g, "Inc", "Corp", "Incorporated") is common but only required for statutory close corporations or where the name of the company is a personal name. A corporate name cannot include the words "bank", "trust", or "trustee", "industrial loan", "investment and loan", or "thrift". There is also a ban on the use of the words "cooperative", "Olympic", or "Olympiad". A professional corporation must include the designation "a professional corporation", "a law corporation", or a "medical corporation", as the case may be. In some cases, the desired name is not available, because the Secretary of State will not accept Articles of Incorporation for filing that are confusingly similar to the name of an existing corporation. (top)
What is an agent for service of process?
All corporations must have an agent for service of process. This is the designated party upon whom a lawsuit may be served if the corporation is involved in litigation. The agent for service of process must be either a natural person residing in California, or a corporation having an office within the State of California. If a corporation serves as an agent for service of process, the corporation must file a certificate with the Secretary of State, identifying the office and person who may be served with process. (top)
What is the difference between authorized shares and issued shares?
The Articles of Incorporation must designate the number of shares of stock that the corporation may issue to shareholders. The shares are issued to shareholders in the corporation’s first minutes. The number of shares actually issued to shareholders are referred to as the "issued" shares of stock. It is good practice for the number of "authorized" shares to substantially exceed the number of shares that have been actually "issued" to shareholders to enable the corporation to engage in future transactions (e.g., issuing shares to a key employee, stock split, etc.) (top).
How many directors are required?
A corporation is required by law to have at least three directors. However, the corporation may have one director if the corporation has only one shareholder; and the corporation must have at least two directors if the corporation has only two shareholders. If the corporation has a variable number of directors (e.g, no more than 7 and no less than 5), the maximum number cannot be more than twice the minimum. (top)
What are Bylaws?
The Bylaws of a corporation are the "play book" for the rules of corporate governance. Typical provisions include the roles of the officers, number of authorized directors, and the time and place of the annual meetings of shareholders and directors. (top)
What officers are required?
California law requires that each corporation must have a president, a secretary, and a chief financial officer. We typically also provide for at least one vice president. California law permits a single person to hold multiple offices – in many cases, a single person acts as each of the officers. (top)
What is an incorporator?
The Articles of Incorporation are signed by the "incorporator". Any natural person may serve as incorporator. As a matter of convenience, our firm generally serves as the initial incorporator. (top)
Is a corporate seal required?
No. A corporate seal is no longer required in the state of California. However, some organizations (e.g., lenders) continue to require a seal, so we can provide one if necessary. (top)
What is a principal place of business?
A corporation is required to designate its principal executive office in the Statement of Information that must be filed with the Secretary of State within 90 days after incorporation. (top)
What is a Statement of Information?
A new corporation is required by California law to file a Statement of Information with the Secretary of State within 90 days after incorporation. A renewal form Statement of Information must be filed biennially thereafter. (top)
What is the difference between a "C" and "S" corporation?
"S" and "C" corporations are the same from a corporate law standpoint. The difference relates to tax treatment only. Any corporation that does not file a IRS Form 2553 (Subchapter "S" election) will be treated as a "C" corporation. (top)
What is the benefit of electing to be treated as a "S" corporation?
The simple explanation is that a "S" election is made to avoid double taxation. Because a corporation is viewed as a separate taxpayer, a "C" corporation files its own tax return and is obligated to pay tax on its income. When the income is later distributed to the shareholders, the same income is taxed to the shareholder – a second time. To avoid this result, the shareholders may make an election to be taxed under Subchapter "S" of the Internal Revenue Code, such that the income of the corporation is taxed only once.
At the initial stage of the business, "S"-type tax treatment will enable start-up losses to be passed through to the shareholders, so that they may be used to offset other income (subject to certain limitations). (top)
What is the deadline for filing a Subchapter "S" election?
The election must be filed by (a) at any time before the 16th day of the 3rd month of the tax year, if filed during the tax year the election is to take effect, or (b) at any time during the preceding tax year. An election made no later than 2 months and 15 days after the beginning of a tax year that is less than 2 months long is treated as timely made for that tax year. In the case of a newly filed corporation, the taxable year is the first to occur of:
- the corporation beginning to do business,
- acquiring assets, or
- issuing shares.
A failure to timely file the election is treated as an election for the following tax year.(top)
How do I establish a bank account?
Any financial institution will establish a bank account in the name of the corporation with a tax identification number and a certified copy of the corporation’s Articles of Incorporation. The first minutes of the corporation must also authorize the corporation to open its initial bank account. (top)
What is a federal employer identification number?
An "EIN" (Employer Identification Number) is a number assigned to the corporation by the IRS for identification purposes. Each separate entity or business must have a separate EIN. The EIN is obtained by submitting IRS Form SS-4 (Application for EIN) to the IRS. (top)
What are the record-keeping requirements for a corporation?
Corporations act by meetings of shareholders and directors, and these meetings are documented in Minutes or Written Consents. Each corporation must have an annual meeting of the shareholders and the Board of Directors. (top)
How does a corporation sign documents?
Cal. Corp. Sec. 313 requires a signature by the Chairman,
President, or Vice President, and either the Secretary or CFO. The
following is an example:
ABC Corporation, A California corporation
By: __________________________
John
Smith, President
By: __________________________
Jane
Smith, Secretary
(top)
How does an S corporation differ from a limited liability company?
While LLCs and S-Corporations are both taxed as so-called "pass through" entities, the S-Corporation is strongly discouraged for the ownership of real estate because S-Corporation shareholders may not be able to maximize their depreciation deductions. The reason for this potential pitfall is because the amount of tax loss that may be used by a shareholder or a LLC member is limited to the member/shareholder’s tax basis. The tax basis of shareholders and LLC members is computed very differently. For a LLC member, tax basis includes debt, but debt is not included in the calculation of tax basis for a shareholder of a S-Corporation.
In addition, while S-Corporations are limited to a single class of stock, there may be more than one class of economic interest held in the LLC, thus permitting special allocations of income, loss and cash flow among the members. Finally, while an S-Corporation cannot include more than 75 shareholders, and permitted shareholders may not include corporations, partnerships, non-qualified trusts or foreign shareholders, none of those limitations applies to LLCs. (top)
When do I have to pay the Annual LLC Tax?
The annual LLC tax is due and payable on or before the 15th day of the 4th month after the beginning of the LLC’s taxable year (fiscal year) or April 16, 2001 (calendar year). The first taxable year of an LLC that was not previously in existence begins when the LLC is organized. For example, if the Articles are filed on June 1, 2001, the annual LLC tax is due on September 15, 2001. (top)
What is the annual cost of maintaining a LLC?
You should speak to your accountant regarding the annual cost of preparing K-1s for the LLC. Generally speaking, the LLC is subject to an annual California Franchise tax, which is $800 plus an amount determined by the gross receipts of the LLC.
In order to do business in California, every LLC must pay an annual tax of $800. California Revenue and Taxation Code Section 17942 also requires that every LLC must pay an annual fee based on total gross revenue.
California LLC Fees |
|
| Annual Gross Receipts | Annual Fee |
| less than $250,000 | $800 |
| $250,000 to $499,000 | $800 + $900 |
| $500,000 to $999,999 | $800 + $2,500 |
| $1 million to $4,999,999 | $800 + $6,000 |
| $5,000,000 or more | $800 + $11,790 |
Does a LLC require more than one member?
Recent changes to the California LLC law permit one-member LLCs. Prior to Jan. 1, 2000, California law required at least two LLC members. (top)
Is it cheaper to form the LLC in Nevada?
If the LLC will own real estate in California, it must be formed or qualified in California. Forming the LLC in Nevada would result in additional cost. (top)
Why does my lender require a bankruptcy-remote, separate entity?
"Special purpose entities" (SPEs) are used to minimize a lender’s risk of the borrower filing a bankruptcy petition. The lender wants to avoid the situation where a performing loan and property becomes entangled in a Chapter 11 proceeding involving other non-performing loans or properties, simply because multiple properties are owned by a single entity. (top)
How does a LLC sign a document?
ABC, LLC, A California limited liability company
By: __________________________
John
Smith, Manager
- OR -
ABC, LLC, a California limited liability company
By: The Smith Company, Inc., a California corporation, Manager
By: __________________________
John
Smith, President
By: __________________________
Jane
Smith, Secretary
(top)