A corporation is a limited liability entity in which the owners, called shareholders, are generally not liable for the corporation’s debts and obligations solely by reason of the owners’ status as shareholders. Professional corporations are formed as “for profit” corporations and include additional restrictive language in their articles of incorporation, limiting ownership to certain licensed professionals. Most professional corporations protect the shareholders of the corporation as to the malpractice of the other shareholders to a limited extent but leave open the personal assets of each individual shareholder to be at risk for their own malpractice.
A California corporation is created by filing articles of incorporation with the California Secretary of State and payment of a filing fee, currently $100. In addition, bylaws must be adopted, setting forth the corporate housekeeping rules of the corporation. The shareholders may negotiate and enter into an optional, separate shareholder “buy-sell” agreement including restrictions on the sale or transfer of shares, a formula or appraisal procedure for valuation of the shares upon a transfer, supermajority voting provisions, and other clauses.
Shareholders are not ordinarily personally liable for corporate debts and obligations unless the shareholders:
- Personally guarantee corporate debts or obligations;
- Engage in tortious conduct;
- Receive improper distributions;
- Fail to keep up with the required corporate formalities or take other actions that a court deems warrant the corporate veil to be pierced;
- Are subject to “alter ego” claims for commingling personal and corporate matters; or
- Breach duties to other shareholders or the corporation.
Shareholders who also serve as officers and directors may have additional liability exposure due to the additional control they have over corporate matters.
What is the Difference Between an S Corporation and a C Corporation?
C Corporations and S Corporations are both types of tax entities.
A C corporation is a corporate entity (either U.S. or non-U.S.) that carries its own legal status, separate and distinct from its owners. A U.S. corporation is organized in a single state, although the corporation may do business in many states. Ownership of a corporation is in the form of stock. There is no limit to the number of shareholders that can own a single C corporation. In addition, there is no limit on the number of classes of stock that can be issued. A corporation comes into being when its organizers file articles of incorporation with a state (or country, in the case of a foreign corporation). A C Corporation is subject to two levels of taxation. Once at the corporate level and a second time at the individual shareholder level when dividends are ultimately distributed to its shareholders.
An S corporation is a U.S. corporation that elects to be taxed as an S corporation by filing Form 2553. A U.S. corporation is organized in a single state, although the corporation may do business in many states. Ownership of a corporation is in the form of stock. An S corporation can have no more than 100 shareholders, and can have only one class of stock. In addition, eligible shareholders include only individuals, certain estates, certain trusts, and certain other S corporations. A corporation comes into being when its organizers file articles of incorporation with a state; and an S corporation is created by filing an S corporation election with the Internal Revenue Service. An S Corporation is a flow though entity and pays no federal tax at the entity level and income is flowed out the individual shareholder level via Form K-1’s. In California an S Corporation pay’s the larger of a $800 minimum tax or 1.5% of its annual net income to the California Franchise Tax Board.
