What are the Primary California Corporation Classifications?

What is a Corporation?

➲ A Corporation is a legal entity that exists separate from its owners, thus shielding the owners and managers from personal liability for the actions of the Corporation.

Note: A person is liable for their own torts even if they were acting through a Corporation.

Corporation Classifications

⚖️ de jure Corporation

➲ A de jure Corporation [of right, of law - you did it right!] is a business which has complied with all the mandatory requirements of its state incorporation statute and thus is legally permitted to function as a Corporation.

A Corporation with de jure status is allowed to issue stocks in the market, hold board of directors meetings, and conduct day to day business.

Requirements of California's Incorporation Statute

➲ At least one incorporator (who can be a person or another Corporation) must sign and file an articles of incorporation with the Secretary of State [if accepted = conclusive proof of valid formation of a de jure Corporation] that includes the following information:

✅ Initial Registered Agent's name [Legal Representative] for the Corporation - can receive service of process for the Corporation;

✅ Street address for the Corporation's initial Registered Office;

✅ Corporation's name [must include the magic words: Inc., Corp., Incorp., Ltd., or Co.];

✅ Authorised number of shares (maximum allowed), number of shares per class, + information on voting rights and preferences of each class;

✅ Name and address of each incorporator + initial director.

If there is no statement of the Corporation's duration, we presume perpetual existence.

Statement of Purpose is normally general such as "engage in all lawful activity, after first obtaining necessary state agency approval".

In some states, general purpose is presumed and the articles need not say anything about the Corporation's purpose.

The articles of incorporation are a:

1️⃣ Contract between the Corporation and its Shareholders; and also a

2️⃣ Contract between the Corporation and the State.

⚖️ Separate Legal Entity

A Corporation is a separate legal entity.

It can sue and be sued, hold property, be a partner in a partnership, make charitable contributions, etc.

It is taxed on its profits.

In addition, Shareholders are taxed on distributions.

So there is "double taxation" for a standard "C" Corporation.

⚖️ "S" Corporation to avoid double taxation

To avoid double taxation, you can form an "S" Corporation which does not pay tax at the corporate level.

✅ Closely Held Corporation of no more than 100 [human + U.S. citizen or resident] Shareholders;

✅ Not publicly traded;

✅ One class of stock.

⚖️ Foreign Corporation

Any Corporation formed or incorporated outside California is a Foreign Corporation.

Foreign Corporations transacting business in the state must qualify and pay prescribed fees.

Transacting business means the regular course of intrastate (not interstate) business activity.

So it doesn't include:

❌ Occasional or sporadic activity in California; or

❌ Simply owning property in California.

The Foreign Corporation qualifies by getting a certificate of authority from the Secretary of State.

It gives information from its articles and proves good standing in its home state.

It must have a registered agent in California and pay the prescribed fees.

What if a Foreign Corporation transacts business in California without first qualifying?

1️⃣ Civil fine; and

2️⃣ Cannot sue in California (but it can be sued and defend).

Once the Foreign Corporation qualifies and pays back fees and fines, it can sue in California.

However, the Foreign Corporation needs to be fully aware of delays in the process v. statute of limitations deadlines + the equitable defence of laches.

⚖️ Professional Corporation

Licensed professionals, including lawyers, medical professionals, and CPA's may incorporate as a "Professional Corporation" or "Professional Association".

The name must contain one of these phrases or the abbreviations "P.C." or "P.A."

The Articles must state that the purpose is to practice in a particular profession.

Directors, Officers, and Shareholders usually must be licensed professionals.

Non-professionals can be employed, but not to render professional services.

Professionals are still personally liable for their own malpractice.

A person is always personally liable for their own torts.

Shareholders are generally not liable for corporate obligations or for other professionals' malpractice.

Generally, the rules governing regular Corporations apply to the P.C.

⚖️ de facto Corporation

➲ A de facto Corporation exists where there is actual use of corporate power and a good faith, but unsuccessful attempt to incorporate under a valid incorporation statute.

If a Corporation has been defectively formed in good faith (colorable attempt to comply with the statute) such that a de facto Corporation arises, then:

1️⃣ Limited liability: The law will treat the defectively formed Corporation as an actual Corporation and the Shareholders will not be personally liable for corporate obligations.

2️⃣ Determination: The state may deny corporate entity status in a quo warranto proceeding, but third parties may not attack the corporate status.

A quo warranto proceeding is a special form of legal action used to resolve a dispute over whether a specific person has the legal right to hold the office that he or she occupies.

⚖️ Corporation by Estoppel

1️⃣ A person who deals with a business entity believing it is a Corporation; or

2️⃣ One who incorrectly holds the business out as a Corporation.

May be estopped from denying Corporation status.

This applies on a case-by-case basis and only in contract (conscious decision, reliance on corporate status), not to tort cases.

In tort cases you don't decide who you are dealing with.

Credits:

This FAQ was prepared by James D. Ford GAICD | Principal Solicitor, Blue Ocean Law Group℠.

Important Notice:

This FAQ is intended for general interest + information only.

It is not legal advice, nor should it be relied upon or used as such.

We recommend you always consult a lawyer for legal advice specifically tailored to your needs & circumstances.