Business Law and Corporation
Business Law is an amazingly wide area of law that transcends virtually all forms of operations of business entities such as Corporations (C-Corp and S-Corp), Limited Liability Companies, Partnerships (Limited and General), and Sole Proprietorship. This list is by no means exclusive.
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. Corporations formed “for profit” are governed by the General Corporation Law (Corp C §§100–2319) of California’s Corporations Code
A Statutory close corporation refers to a corporation that conforms to the requirements of Corp C §§158 and 300(b), as discussed in §§9.4–9.9. In general, a close corporation is a corporation with relatively few shareholders who may wish to dispense with the normal formalities of corporate governance or to structure control of the corporation so as to allocate management responsibilities in a way that would otherwise be appropriate only among partners. They are easy to form and operate, and offer benefits comparable to those offered by partnerships and limited liability companies (but without the related gross receipts tax). Through the effective use of a shareholders’ agreement, shareholders may design their own corporate governance regime, including a waiver of mandatory meetings of the board of directors and shareholders. For example, typical characteristics of a close corporation include an emphasis on simplified and informal procedures, general participation by most or all shareholders in decision making (which may even extend to the day-to-day operation of the business), and restrictions on share transfer to limit shifts in shareholdings. This flexibility not only enables a corporation to operate more efficiently and effectively, but may also operate to protect the interests of minority shareholders.
Despite these advantages, use of the statutory close corporation form is infrequent in California. Perhaps because of a perceived risk of increased personal liability of shareholders or a perceived risk of involuntary dissolution, California practitioners have been reluctant to recommend close corporations to their clients. However, the use of the close corporation structure is becoming increasingly common.
Corporations that meet certain qualifications, listed in §2.129, may file an “S election” with the Internal Revenue Service under IRC §1362. The election to be treated as an S corporation also obviates the concern over whether salary payments to shareholder employees might be found excessive and thus disguised dividends subject to corporate level taxation under IRC §162(a) and Treas Reg §1.162–8. Because S corporation shareholders are taxed on net corporate income, certain additional federal income taxes (e.g., corporate alternative minimum tax, personal holding company tax, and accumulated earnings tax) do not apply.
S corporations have their disadvantages. Internal Revenue Code §1361(b) limits S corporations to no more than 100 shareholders, who must be individuals, estates, tax-exempt organizations, or certain trusts; no shareholder may be a nonresident alien
An LLC is a statutorily authorized non-corporate entity that, with certain exceptions, may engage in any lawful act or activity. In the normal course, the owners of an LLC (called "members") have no personal liability for the obligations of an LLC. Members have the freedom to structure shares of profit and loss, distributions, management control, and voting rights in virtually any way they wish. An LLC may have only one member. generally governs the activities of the LLC, relations among the members, and the rights and duties of managers is governed by an operating agreement.
Unless an LLC affirmatively elects otherwise, the LLC will be classified as a partnership for income tax purposes, in which case the income, gains, losses, deductions, and credits of the LLC will flow through to the members for reporting on their personal tax returns. Under the California Revised Uniform Limited Liability Company Act (RULLCA) (Corp C §§17701.01-17713.13), an LLC is formed when articles of organization are filed with the California Secretary of State. Corp C §17702.01(d)
A general partnership is an association of two or more persons to carry on a business as co-owners, whether or not the persons intend to form a partnership. Corp C §§16101(9), 16202(a). Individuals and entities may be partners in a general partnership. Corp C §16101(13). A partnership is an entity distinct from its partners and may be formed by written, oral, or implied agreement among the partners. See Corp C §§16101(8), 16201. Although an oral or implied agreement among the partners is legally sufficient to create a general partnership, a written partnership agreement is recommended for certainty of the terms intended. General partners are personally liable, jointly and severally, for all debts and obligations and most wrongdoing of the partnership, unless agreed otherwise by the claimant or provided by law, and except for any partnership obligation incurred before a person is admitted as a partner. Creating a general partnership currently requires no filing with the Secretary of State or any other governmental authority. However, a general partnership may file a statement of partnership authority (see Corp C §16303(a)) with the Secretary of State’s office along with a filing fee
Limited partnerships are governed by the Uniform Limited Partnership Act of 2008 (Re-RULPA) (Corp C §§15900–15912.07). Under Re-RULPA, a limited partnership is a partnership formed by two or more persons or entities and having both (1) one or more general partners, who engage actively in the management and control of the business and have unlimited personal liability for the partnership’s debts and obligations, and (2) one or more limited partners, who are not personally liable for the partnership’s debts and obligations unless they participate in the control of the business. A limited partnership is formed by the partners signing and acknowledging a Certificate of Limited Partnership (Secretary of State Form LP-1), recording it with the Secretary of State, and paying a filing fee
Creating a sole proprietorship does not involve registration with any governmental agency, except possible filings to obtain a local or municipal government business license and a fictitious business name (also called colloquially a “DBA,” for “doing business as”). If a fictitious business name is used, the owner must file a DBA with the county recorder in the county where the proprietorship’s principal place of business is located and may also file in any other county. Bus & P C §17915. The filing fee is usually modest. Periodic renewals of registrations are required. A sole proprietor has unlimited personal liability for the debts and obligations of the business.