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Corporations

Corporations


Corporations are separate legal entities that are owned by the stockholders in the corporation.

A General Corporation can have an unlimited number of shareholders. Due to the legal nature of the corporation, shareholders are generally protected, personally, from the creditors of the corporation, except for certain tort claims or where corporate formalities are not followed and a shareholder is found to be the "alter ego" of the corporation. General corporations are subject to what is known as "double taxation", because the corporate profits are taxed twice. General corporations file and pay state and federal taxes on profits of the corporation, before distributing those profits to the shareholders as dividends. In turn, the shareholders must claim the dividends on their personal taxes and they may also be required to pay personal income taxes on their dividends.

 

A Close Corporation is slightly different from a General Corporation. The shareholders of a close corporation are allowed to substantially modify certain provisions of the Corporations Code regarding things such as the division of profits, the allocation of control over corporate affairs and the usual required corporate procedural formalities as set forth in the Corporations Code. In effect, shareholders may run the corporation as though it were a partnership, but still retain the limitations on liability afforded a corporation. In most states where they are recognized, close corporations are restricted as to the number shareholders. In California that number is 35, and there are other restrictions that may apply regarding the number of shareholders and internal governance. For example, if shares of stock are sold, they are to be offered to existing shareholders first.


S Corporations have the same basic advantages of General or Close Corporations, but there is a major difference in their tax treatment. The Sub-S Corporation eliminates federal and state corporate income tax. The IRS allows S-corporations to "pass through" all profits to the shareholders' personal tax return, thus avoiding being taxed at both the corporate and personal level. An S Corporation is formed from a General or Close Corporation by the filing of additional paperwork with the Internal Revenue Service and the Franchise Tax Board within 75 days of the formation of the corporation. All stockholders must elect the S Corporation status by filing all necessary federal forms. There are certain restrictions on the shareholders of a Sub-S Corporation:


 •  Each stockholder must be a citizen of the United States
 •  Only one class of stock is permitted
 •  No more than 75 stock/shareholders
 •  Only individuals may be stockholders
 •  Can only be a domestic corporation.


For more information on forming and managing corporations please fill out this brief form:


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