What is “par value” stock?
October 20, 2008
California no longer recognizes the concept of “par value”, so there is no longer any distinction in California between par and no-par value stock. Cal. Corp Code Sec. 205
What is the benefit of electing to be treated as a “S” corporation?
October 20, 2008
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).
What is the deadline for filing a Subchapter “S” election?
October 20, 2008
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.
Who signs the Articles of Incorporation?
October 13, 2008
The “incorporator” signs the Articles of Incorporation. If initial directors are named in the Articles, they are deemed to be “incorporators” and also must sign the Articles in the presence of a notary public. For convenience and to avoid the need for the Articles to be notarized, the attorney who forms the corporation generally acts as the sole incorporator, and later resigns as the incorporator of the company. A facsimile signature is permitted under California law, but counterpart signatures are not.
What are the powers of a corporation?
October 13, 2008
A corporation has the same rights as a person (except for the right to vote!) unless the Articles specifically prohibit the corporation from engaging in a particular activity.
What is an agent for service of process?
October 13, 2008
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.
How many shares should be authorized?
October 13, 2008
The number of authorized shares is largely irrelevant from the standpoint of ownership of the corporation. It is the percentage of shares owned by a shareholder that determines the shareholder’s ownership interest in the company. For example, if a corporation is authorized to issue 1,000 shares and Joe owns 500 shares, Joe’s ownership interest would be the same as if the corporation was authorized to issue 1,000,000 shares and he owned 500,000 of them. In California, there are no additional fees for authorizing large number of shares. However, in other jurisdictions (e.g.., Delaware) the annual fee owed to the state (i.e., franchise tax) is calculated based on the number of authorized shares. As a result, great care should be taken when initially determining a corporation’s capital structure. For example, in Delaware, it is typically advisable to authorize no more than 3,000 shares of capital stock.
Why are there usually more authorized shares than shares that are actually issued?
October 13, 2008
By authorizing more shares in the Articles than the corporation plans to initially issue (e.g., authorize 1,000,000 shares and issue 10,000 shares), it is possible to later issue more shares without amending the Articles to change the capital structure.
What are the record-keeping requirements for a corporation?
October 13, 2008
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.
What optional provisions may be included in the Articles of Incorporation?
October 8, 2008
When establishing a corporation, unique concepts are either added to the Articles, Bylaws, or an agreement among the shareholders and the corporation (e.g., an investor’s rights agreement or a shareholder’s agreement). Certain concepts are only enforceable if they are included in the Articles. However, in general, Articles should be kept simple and straightforward, because they are public record and can only be changed by amending the Articles. The most common optional provisions that are included in the Articles of Incorporation relate to limitations on the liability of the officers and directors and authorizing indemnification of the officers and directors. These concepts must be included in the Articles to be enforceable.
