Ok, so you’ve decided to form a corporation, great! Read on to learn more about the different types of corporations available to you.
1. The Corporate Form, In General
Upon creation, a corporation is a distinct legal entity which allows the corporation’s founders to have limited personal liability for the corporation’s business operations. However, in order to maintain this separateness, you must ensure that the corporation complies with certain formalities. For instance, corporations must file Articles of Incorporation with the state, appoint a board of directors, and create corporate bylaws that the directors and officers of the corporation must abide by. A corporation must hold its first organizational meeting, where it elects the board of directors (or additional directors), adopts the bylaws, appoints officers, designates a bank as a depository for corporate funds, and approves the sale of stock to initial shareholders. Corporate shareholders and corporate directors must each hold annual meetings and keep meeting minutes, which are written records that describe the details of the meeting including who was present, the actions taken and the topics discussed. A corporation that does not abide by these formalities risks subjecting the corporation’s directors and officers to personal liability for disregarding the corporate form. However, a corporation that chooses the closed corporation form may disregard complying with these formalities – more on that next!
2. Close Corporation: For Less Formalities
A corporation may choose to incorporate as a statutory “close corporation.” California lawmakers created close corporations after recognizing that participants in small corporations often agree among themselves about control and financial matters, and thus do not operate through shareholders’ and directors’ meetings. As long as the corporation complies with the close corporation requirements (described below) it can avoid most of the corporate formalities described for a standard corporation above.
Close corporation status requires:
- No more than 35 shareholders;
- The Articles of Incorporation must contain a statement that the corporation is a close corporation and it must specify that the corporation’s shares may not be held by more than 35 shareholders;
- Shareholders’ Agreement: The shareholders must agree to which matters they (rather than the board) will control in a written shareholders’ agreement; and
- All share certificates, or in the case of uncertificated shares the transaction statement, must contain a specific, restrictive legend indicating that the corporation is a close corporation.
Unlike regular corporations, close corporations are not required to hold annual shareholder and director meetings. A close corporation form may be more suitable for those corporations with a single/few shareholder(s), in which the shareholders plan to be substantially involved with the corporation’s operation and management. This differs from a regular corporation, where shareholders often appoint directors and officers to operate and manage the corporation.
On the other hand, for those corporations who may seek investment from several investors, close corporation status would not be preferable since the corporation is limited to 35 shareholders and a close corporation’s shares contain transfer restrictions. Also, for those corporations primarily operated by a board of directors and officers, in which shareholders are minimally involved, close corporation status would not be preferable since annual director and shareholder meetings would be a desirable and beneficial part of a corporation’s operation.
3. Benefit Corporation: For Doing Some Social Good
A corporation may also form as a benefit corporation, which is a relatively new type of corporation that allows the company to operate for-profit, while also pursuing a “general public benefit.” Benefit corporations operate very similarly to regular corporations, except the benefit corporation provides greater protection to its officers and directors to pursue objectives that benefit society, the environment, and the corporation’s employees. Benefit corporations must also create an annual report detailing how it achieved its “general public benefit” according to an independent third-party standard. Read our article for more information on benefit corporations.
4. Professional Corporations: For Licensed Professionals, It’s the Only Option
Certain professionals in California have no choice — they must incorporate as a professional corporation. Professional corporations (abbreviated as PC) often consist of those professionals required to have a state license to practice their profession. Corporations required to incorporate as a professional corporation include:
- Accountancy Corporations
- Acupuncture Corporations
- Architectural Corporations
- Audiology Corporations
- Chiropractic Corporations
- Clinical Social Worker Corporations
- Dental Corporations
- Law Corporations
- Marriage, Family, and Child Counseling Corporations
- Medical Corporations
- Nursing Corporations
- Optometric Corporations
- Osteopathic Corporations
- Pharmacy Corporations
- Physicians’ Assistant Corporations
- Physical Therapy Corporations
- Psychological Corporations
- Podiatry Corporations
- Shorthand Reporting Corporations
As you may have noticed, we use the designation, “PC” after our name.
But what about S corporations? Contrary to popular belief, an S corporation is not a distinct business entity. Learn more about S corporations here.
By: Jenna Macek – 05/10/16
- 10 Steps to Form Your Business
- Should My Business Be an LLC or Corporation?
- Understanding the S Corp
Disclaimer: Although this article may be considered advertising under applicable law and ethical rules, the information in this article is presented for informational purposes only. Nothing should be taken as legal advice. Reading this article does not form an attorney-client relationship with us. An attorney-client relationship is formed through a signed engagement agreement. If you would like further information, wilkmazz pc would love to help you out! Feel free to reach out with any questions.
Photo Credit: Ashley Gutierrez.