Choosing the Right Type of California Corporation

California is a leader in great companies and household names. From Silicon Valley to Los Angeles, the state houses some of the biggest technological and entertainment businesses on the planet.

For entrepreneurs with big dreams, starting a corporation is a powerful way to show your commitment and bring those ideas to life. In this guide we’ll take you through everything you need to know about how to start a corporation in the state of California.

What Type of California Business Entity Should You Choose?

When it comes to starting a business in California, you have a few options for the type of business you want to create. This is known as your “legal business entity” and defines how your business will be treated by the state, the law, the IRS and other official bodies.

Most new entrepreneurs have a choice of several business types: sole proprietorship, partnership, Limited Liability Company (LLC), S Corporation or C Corporation.

Here’s a quick overview of each.

• Sole proprietorships and partnerships are the simplest type of business. They do not provide any special protections or benefits to entrepreneurs and can make your personal assets vulnerable. We do not recommend them.
• Limited Liability Companies (LLCs) are a great option for smaller businesses. They are quick and easy to create, inexpensive to administer, light on regulation and have simple taxation and rules. You can learn how to create an LLC in California here.
• S Corporations are the simplest type of corporation an entrepreneur can create, and are good for many types of businesses. The regulations, taxation, compliance and legalities are more complex than for an LLC, but they do provide tax advantages for their owners. You can find more information on S Corporations here.
• C Corporations are the most complex type of corporation. They are best for large businesses, and are a necessity if the business will be traded on public stock markets. C Corporations have much more significant regulation, compliance and legal requirements, and they are not as tax-efficient as S Corporations or LLCs. You can find more information on C Corporations here.
• Other business entity structures include nonprofits, Limited Liability Partnerships (LLPs) and B Corporations, but they will not be relevant for the majority of entrepreneurs.

Advantages of a Corporation Over an LLC

There are several reasons an entrepreneur might choose to form a corporation instead of an LLC in California.

• If you want to pay lower self-employment taxes than an LLC, you will need an S Corporation.
• If you want to easily transfer ownership through buying and selling stock, you will need a C Corporation or an S Corporation.
• If you want up to 100 shareholders who are U.S. citizens or residents, and want to issue one type of stock, you will need an S Corporation.
• If you want more than 100 shareholders, want to issue more than one type of stock or have international shareholders, you will need a C Corporation.
• If you want to allow the public to buy and sell shares in your company after an Initial Public Offering (IPO), you will need a C Corporation.

Here’s a side-by-side comparison between the various business types. This table focuses on the areas apart from company stock and shareholders.

This table shows the differences between California business entities when it comes to issuing, buying and selling stock.

A Quick Note on the Differences Between California S Corporations and C Corporations

Although C Corps and S Corps are treated differently for tax purposes, from a legal standpoint California treats them identically. In the view of California, all corporations are seen as either C Corporations or nonprofits.

When a corporation is initially created, it is automatically assumed to be a C Corporation, and only becomes an S Corporation (and will be taxed as such) if you file the IRS Small Business Tax Election Form 2553.

In most cases when we discuss “corporations” in this guide, we’re talking about both C Corporations and S Corporations. If anything is relevant to just one or the other, we will declare that.

Advantages of Forming a Corporation in California

California corporations have several benefits for business owners.

• Corporations provide the strongest form of liability protection possible. They insulate your personal assets and finances from those of your business.
• This means that any liabilities created by your corporation (debts, obligations, damages, bankruptcy or other liabilities) should not impact on your personal money, property or assets — they are considered to be completely separate from a legal perspective.

Advantages of Forming an S Corporation in California

In addition to the general benefits above, California S Corporations provide several other advantages.

• S Corporations can have up to 100 shareholders.
• Running an S Corporation in California is simpler than running a C Corporation.
• It is easy to transfer ownership in an S Corporation by selling your stock.
• In some cases, part of the income from an S Corporation can be paid as a “distribution” rather than “salary” and would not be subject to self-employment tax. Find out how this can save you money.
• LLCs can choose to be taxed as S Corporations to take advantage of this.
• You can find more advantages of forming an S Corporation in California.

Advantages of Forming a C Corporation in California

In addition to the general benefits above, California C Corporations provide several other advantages.

• Ownership in a C Corporation is very fluid and is determined by who owns stock in the business.
• C Corporations can list their shares on a public stock exchange. This stock can be bought and sold by anyone.
• C Corporations can sell stock to investors inside and outside the U.S.
• C Corporations can issue more than one type of stock.
• C Corporations can raise more funds by issuing more stock.

Points About Forming a Corporation in California

Here are some areas to be aware of when you’re creating a corporation in California.

• Corporations are formed on the state level. You will need to form a new corporation for any state where you want to have an office or do business.
• All California corporations must issue stock to shareholders.
• All California corporations must hold Annual General Meetings (AGMs).
• All California corporations must have an elected Board of Directors.
• All California corporations must appoint officers.
• Money earned by California C Corporations will be subject to “double taxation” through tax paid on both company profits and on dividends paid to shareholders.
• Only U.S. citizens and residents can own stock in California S Corporations.
• S Corporations are limited to 100 shareholders and one class of stock.
• All California corporations must follow stringent compliance, rules, and regulations. This includes financial reports, adopting bylaws, corporate formalities and the like.

Are you ready to start your California corporation? If so, we can help. We provide comprehensive, value-for-money corporation formation services for both S Corporations and C Corporations in California.