Shareholders meetingAs discussed in our earlier post, Four Reasons to Incorporate Your Business, after successful incorporation, you must continue to preserve the liability protection afforded by your corporation.  California state provides limited liability to shareholders only if the corporation adheres to formation requirements. For example, there are filing requirements and record keeping requirements that must be satisfied in order to maintain a business presence, which is especially why enlisting the services of a qualified business attorney can help assure your corporation is compliant with state requirements and that your personal assets remain protected.

  1. Filing Requirements

Statement of Information (SOI)

California law requires that corporations update their records with the Secretary of State’s office. Every year, your California Corporation must file an Annual Statement of Information reporting the corporation’s addresses, officers, directors and registered agent.  The fee for filing the annual Statement of Information is $20, plus a $5 disclosure fee (domestic stock corporations only), for a total of $25 made payable to the Secretary of State. If you miss the filing due date, the Secretary of State will assess a $250 penalty.

Corporation Franchise Tax

Every year, your California corporation must file an Annual Franchise Tax Return with the Franchise Tax Board.   Both C and S Corporations are subject to franchise taxes, which is the fee you pay to the state for the privilege of doing business as a corporation.  The franchise tax is a tax of net income. California imposes an annual minimum franchise tax of $800, regardless of the amount of annual income or profits.  If you are a new corporation, you are subject to the applicable tax rate with no minimum for the first year.  Franchise tax is due the 15th day of the 3rd month for the previous year’s tax year, or March 15th for calendar year filing.

  1. Governance Requirements

Annual Meeting

In addition to adopting and maintaining a copy of their bylaws and having a special meeting of the board of directors whenever a significant corporate act occurs, every California corporation is required to hold an annual shareholders meeting. The only action required to be taken by the shareholders at an annual meeting is the election of the board of directors, but any other proper business may also be acted on, if it was in the meeting notice. The annual meeting should be held on a date and time that is stated in the bylaws.

Required Notice

All shareholders who are entitled to vote are entitled to written notice of the annual meeting as well as any special meeting.  Notice must include the date, time and place of the meeting and how shareholder may attend.  The notice of an annual meeting, or any special meeting where directors will be elected, must also include the names of those individuals who have been nominated.  Written notice of the annual meeting must be given at least 30 but no more than 60 days before the scheduled meeting.  Once at the meeting, shareholders can waive notice or any defect therein, which is often how closely held corporations avoid the notice requirement, however, with larger corporations, or if there are divergent interests among shareholders, you will always need to ensure your notice complies with all requirements.

Meeting Minutes

When the corporation holds a shareholder or director meeting the corporation must prepare minutes of the meeting or actions by unanimous consent which are to be signed by the shareholders or directors.  These documents, along with copies thereof are to be stored in a corporate minute book held by the corporation.  These minutes must be carefully drafted and contain adequate and accurate information because they are private only until they are subpoenaed in a suit against the corporation or until the IRS conducts an audit.

Consult an Experienced Attorney

While all corporations must meet certain requirements to continue to provide liability protection, each corporation is unique.  Each corporation is subject to the specifics of its corporate documents.  A familiarity with those documents along with an understanding of the applicable law is necessary to ensure continued compliance with corporate formalities. Unfortunately, most small businesses fail to adhere to these formalities and by doing so jeopardize the very protection they sought to gain by incorporating.  For businesses wanting to avoid such rick, it often makes sense for a business owner to consult a trusted attorney, who can assure that corporate filing and governance requirements are timely met and that your personal limited liability protection is maintained.