Business Law is the creation of business entities, such as corporations and Limited-liability companies, the dissolution or sale of business entities, and the drafting and interpretation of contracts. Corporations and Limited-liability companies are similar in many ways, but ownership and taxation are different.
What is the difference between a corporation and a Limited-liability company?
Corporations: A corporation is a business entity which is created by filing Articles of Incorporation with the California Secretary of State. A corporation may own property and engage in any lawful business with the exceptions of corporations subject to the Banking Law and professional corporations. A corporation may exist for an unlimited time unless the Articles of Incorporation state otherwise.
A fee of $100 is due when the Articles of Incorporation are filed. Before the Articles are filed, a name for the corporation must be chosen, which is not so similar to an existing corporate name that, in the opinion of the Secretary of State’s office, it will confuse the public. For a nominal fee, the proposed name can be submitted to the Secretary of State in advance and if it does not conflict with a name already being used, it will be reserved for a period of time. Within 90 days of filing the Articles, a Statement of Information, identifying the primary officers of the corporation, the principal place of business, the type of business the corporation will engage in and the agent for service of process. The Statement of Information requires a $25 fee and must be renewed every year. Regardless of the type of business and how much or how little the corporation earns, a minimum franchise tax of $800 is assessed each year for the privilege of doing business in California.
The basic elements of a corporation include issuance of shares in the corporation, election of directors, appointment of officers, and corporate by-laws, setting out the rights and duties of shareholders, directors and officers. Corporations are required to have an Agent for Service of Process. This may be a corporation which is specifically engaged in the business of serving other corporations, a third party or a designated shareholder in the corporation. The role of the Agent is to provide a specific place where legal documents are served on the corporation.
Corporations, particularly those not created by and owned solely by family members or a small group of investors, must maintain certain records and make them available for inspection by the shareholders on demand. The directors must have regular meeting to review and carry out the business of the corporation, and a shareholders meeting must be held at least once a year after notice of the time and place of the meeting is provided to all shareholders.
Corporations are taxed for federal income tax purposes on all earnings and profits. The shareholders are then taxed again in any profits or dividends which are passed to them.
Limited-liability companies: Limited-liability companies are created by law. Similar to corporations, the creation of an LLC begins by filing Articles of Organization with the Secretary of State with the $70 fee. An LLC may engage in any lawful business purposes except banking, issuing insurance policies and assuming insurance risks or trust company business.
An LLC must file a statement of information, which requires a $20 fee and must be renewed every two years. The Statement of Information identifies the manager of the company or members serving as managers, the primary place of business, the agent for service of process and the type of business the company will engage in.
LLC’s are owned by members instead of shareholders. Each member owns a share of the LLC, which is based on his or her contribution. The initial contribution may be money, equipment, or particular knowledge and expertise in the area of business in which the company will be engaged. The LLC may be managed by one or more members or by an outside manager who is hired by the company.
LLC’s are classified as partnerships for federal income tax purposes. The profits of the company pass through to the members who are taxed on what they receive from the LLC, avoiding the dual taxation of corporate profits. LLC’s like corporations must pay the $800 annual franchise tax.
What is the advantage of having a corporation or a Limited-liability company?
Both Corporations and Limited-liability companies provide a shield against liability for the shareholders or members of the business. If the business suffers great financial losses through market changes or mismanagement, or is sued and subject to an award in an amount greater than its insurance coverage, the shareholders or members, depending on the type of business entity, may lose their investment, but their personal assets are protected from loss. This protection comes with limitations. Shareholders of corporations and members of LLC’s must maintain a boundary, a firewall between their personal assets and those of the business. If an individual with access to the company’s assets is intermingling his personal funds with those of the company, for example using the company bank account as his personal account or diverting funds from company accounts to personal accounts he could be found personally liable for losses or obligations of the company. If you read an article or hear a news report which references “piercing the corporate veil”, this is what it is referring to; someone has mixed the funds of the corporation or LLC which they were involved with their own funds in an improper and illegal manner.
Additionally, directors and officers of corporations, who most often own shares of that corporation, and manager/members of LLC’s may be found personally liable for company losses and obligations if they have acted in a way that was grossly negligent and willful, ignoring facts and warnings against taking certain business actions which they knew of and knew or should have known would result in loss to the company.
What a Subchapter S corporation?
SubChapter S Corporations: A Subchapter S corporation is a corporation organized under the laws of the State of California which has made an election under Internal Revenue Code section 1362(a). This election allows the corporation to be treated as a conduit of income, losses, and deductions to its shareholders. This election avoids the dual taxation generally imposed on corporations and their shareholders.
In order to make the election, the corporation must be a qualifying small business corporation. It may not have more than 100 shareholders and have issues only one class of shares. The election is subject to very specific timelines and the consent of all shareholders.
What if I have a corporation in another state?
Foreign Corporations: A corporation which is created in California is called a domestic corporation. A corporation which is created outside of California, whether in another state of the United States or another country is called a foreign corporation. Both may conduct business in California. A corporation from another state must provide proof of good standing in its state of incorporation, obtain a certificate of qualification from the Secretary of State and provide the name and address of an Agent for Service of Process in the State of California.
An example of Allen’s work:
Jim helped a client form a Limited-liability company that owned and operated a motorcycle repair and accessory business. Unfortunately, the client’s business partners proved untrustworthy by misusing and diverting company assets for personal use. They sued alleging false promises of financial gain. Jim’s strategy allowed his client to exit the company while recouping all of his initial investment. He settled the lawsuit to his client’s benefit for minimal value and, by invoking a buyout clause in the operating agreement.
“James was the attorney for my limited liability company and made sure the necessary paperwork was prepared and filed properly. He prepared our operating agreement, sat in on member management meetings, and represented our company providing sound legal advice when it was discovered that hazardous waste spill information on the property was concealed when we negotiated our lease.” Michael S, Santa Rosa
Breach of Contract: “We approached Jim with a different kind of legal issue which piqued his interest. He didn’t lawyer-speak us with details, he explained in a friendly manner in terms we can understand. Unfortunately, the legal issue morphed into a; different state but Jim went out of his way to find us the best lawyer in that state to take on the case for us. Jim continued to be interested in our case and gave us input for some of the legal wording in the final settlement. He’s very approachable and easy to work with. Just a nice guy. We’ll certainly use him again.” Claudia W.