Corporations can be used to own property like real estate, aircraft, and yachts for certain tax advantages and for the protection of personal assets from liability. Incorporating can have its pros and cons. California corporations also have basic considerations. Although California law is emphasized, the legal concepts are very similar to any other state. If you are starting a company, it is important that no business decision should be made in isolation and should be made in the context of other actions.
A corporation is created in California by filing articles of incorporation with the Secretary of State. This California corporation is owned by its shareholders, whose involvement in management is usually limited to extraordinary matters. In California, a corporation may have only one shareholder and one director.
When a California corporation has two shareholders, there must be at least two board members. If there are ever three or more shareholders, there must be at least three people on the board. The body of the corporation governs the board, so the founder must carefully consider whom he or she has on the initial board.
A corporation is a separate part for tax purposes. Income taxes at this corporate level are taxed again at the shareholder level if any distribution is made in the form of a dividend. The maximum federal corporate tax rate as of now is thirty-five percent, and the California corporate tax rate is just over nine percent.
Worst case scenario is that the company fails. If this is the case, the losses of the initial investment of up to one million dollars of common stock may be used under certain circumstances by shareholders in order to offset an amount of ordinary income in their federal income tax returns.
Advantages of incorporating
Personal liability of the founders is limited to the amount of money invested in the corporation, which can be a huge benefit of incorporating. The corporation is then able to exist after the death of its founders. A corporation is a legal entity separate from its owners so that it can enter into contracts. Corporations have many tax options available, including setting up pension, profit sharing, and stock option plans.
Disadvantages of incorporating
A California corporation can have its downsides as well. Corporate income is taxed at both the corporate level and the individual must pay taxes on the dividends that they get. This means that corporate income is subject to what is known as “double taxation.” Debt financing obtained by the corporation may require a personal guarantee by the owners, thus distinguishing the limited liability of the owners for the amount of the loan.
Where to incorporate
A corporation is not required to incorporate in the state of its offices, so in California a corporation does not have to have offices in California. It can incorporate in any of the fifty states. Many times, the best choice for a corporation is to incorporate in its home state. Either way, you should consider aspects like tax laws, the cost of incorporation, and general laws of each state before you choose where to incorporate.
By Kristin Lockwood