California Close Held Corporation

A California Close Corporation is a special type of California Corporation designed for small privately owned businesses. A Close Corporation is a California Corporation, with all of the liability protection benefits of a standard corporation and can either be taxed as separate entity (same as a C Corporation) or elect to have its taxes passed through onto the shareholder’s personal tax return (an S Corporation)*. Why does CCC specialize in the formation of Close Corporations? Because in our opinion it improves the liability protection aspects of small privately owned corporations.

The main benefit of a Close Corporation is that it is easier for a small business owner to run and less likely to be pierced, because the shareholders of a Close Corporation can choose to waive some of the corporate formalities required of standard corporations, such as the requirement to hold annual shareholder’s and director’s meetings. The shareholders of a Close Corporation can also appoint themselves as “Managers” of the corporation, merging their separate offices (shareholder, officer and director) into one.

The primary reason most people incorporate is for liability protection. Of course, plaintiff’s lawyers don’t like the fact that you have assets shielded from exposure to their claim, so the will try to pierce through the corporation to your personal (or other business) assets. This process is called “piercing the corporate veil”. There are a number of elements such a lawyer must prove in order to pierce through the corporate veil. One of the most important of these elements, which frequently trips up small business owners, is the requirement to maintain corporate formalities, particularly the requirement to hold annual meetings and keep minutes of such meetings.

Failing to maintain corporate formalities is one of the most frequent causes of the corporate veil being pierced if you are not a Close Corporation. The problem is that small business owners are busy running their businesses and frequently fail to hold their meetings or keep minutes of those meetings (however infrequent) that they do hold, exposing their personal assets to the corporation’s liabilities. The California Close Corporation is designed to alleviate that risk, by allowing the shareholders of the corporation to sign an agreement with the corporation that the requirement of annual meetings be waived. That’s right, the annual meeting requirement is waived! The benefit of this is obvious and can potentially save your personal assets from exposure to business liabilities. This is not to say that there aren't good reasons to still have meetings and keep minutes of them (speak with your attorney or CPA about this), but now not doing so will not destroy your business.

In addition to improving the liability protection of your corporation, a close corporation’s principals can elect to merge their multiple offices (shareholder, officer and director) into one office called a “Manager”. The benefit in doing this is improved simplicity in running the business. As a manager, the corporate owner can act in every capacity authorized under the bylaws and California law without having to worry about whether she or he is technically authorized to do so. In a Close Corporation, the managers simply run the business, period.

If you choose to form a Close Corporation, in addition to all of the other incorporation documents prepared for you, CCC will prepare a Shareholder’s Agreement, waiving the requirement for annual meetings and converting the shareholders, officers and directors into “Managers”. CCC will also include a buy/sell provision in the Shareholder’s Agreement, which addresses the issue of shareholder sales and other transfers of their corporate stock, at no additional charge. If you desire to add additional provisions to your Shareholder’s Agreement, especially if such provisions will cause shareholders to be treated economically differently, please consult with your attorney and tax advisor.

A Close Corporation is not for everyone. Review the following and/or consult with your attorney and tax advisor to determine whether this form of corporation is best for you.

When should I consider forming an Close Corporation?

• If your corporation will not have more than 35 shareholders.
• If your corporation will issue only one class of stock (common stock) (if you anticipate an investor requiring preferred stock, consult an attorney).
• If your corporation will be owned and run by a small number of family members or close personal friends.
• If you do not plan on bringing in outside investors.
• If you desire a less formal form of management and do not mind losing the formality and defined structure of a standard corporation.

When should I Consider NOT forming a California Close Corporation?

• If you anticipate that your corporation will have more than 35 shareholders.
• If you plan to have shareholders who are not also directors (in a Close Corporation, a non-director shareholder may be held responsible as a director).
• If you plan to bring in outside investors who may require preferred stock.
• If you desire to treat shareholders differently in the rights, privileges or obligations of stock ownership, such as preferred dividends or disparate distribution of profits (such treatment might be considered a second class of stock, which is not allowed in a Close Corporation).
• If the participants in the corporation desire a more formal management and corporate governance structure or desire to limit the rights of shareholders to seek involuntary dissolution of the corporation to those defined in the California Corporations Code (ANY shareholder of a Close Corporation can seek involuntary dissolution; whereas, only a shareholder (or group of shareholders) who hold 33% or more of stock can seek dissolution in a standard corporation.

California Standard Corporation

A California Standard Corporation is a standard form corporation, providing asset protection and allowing for the most growth potential of any California Corporation. The C Corporation is viewed as a separate legal entity for both liability protection and taxation purposes. A Corporation is taxed separately from its shareholders.

When should you choose a C Corporation over other forms of business entities?

You should consider forming a C Corporation if one or more of the following applies to your situation:

• You will have more than 35 shareholders or plan on taking the company public (registering it with the SEC so the company’s stock can be traded on the Stock Market.)
• You plan to issue more than one class of stock (i.e. preferred stock in addition to common stock).
• You desire to deduct the cost of benefits, such as health insurance premiums through a “cafeteria plan”, as a business expense. This is a complex issue; consult a benefits professional if considering implementing a benefits plan.
• You desire to have foreign owners or investors.
• You desire for the corporation to be taxed as a separate entity.
• You do not mind having to maintain full corporate formalities, including, but not limited to, holding annual meetings and maintaining written meeting minutes in compliance with California Corporations Code requirements.

So what is the bottom line on C Corporations?

A C Corporation is usually best for the business owner with big plans, and who doesn’t mind the additional formalities required by the California Corporations Code. A C Corporation can go public, while a Close Corporation or LLC cannot be taken public (although these latter may be converted to a C Corporation if you decide to go public at a later date).

Our California Standard Corporation incorporation process includes:

1.     Checking to make sure your selected business name is available;

2.     Completely preparing all of the incorporation documents, including the Articles of Incorporation, Bylaws, First Organizational Meeting Minutes, Stock Certificates with legends, Notice of Transaction and Statement of Information;

3.     Filing the Articles of Incorporation with the California Secretary of State;

4.     Obtaining your Federal Employer Identification Number (FEIN);

5.     Supplying your Corporate Kit which includes a three ring “Minute Book” binder with appropriate tabs for your corporate documents and your corporate seal; and

6.     One year of California Corporation Company’s Registered Agent for Service of Process service.