You have a new California Corporation, what now? By incorporating your business, you have taken an important step towards protecting yourself from business-related liabilities. The corporation is able to protect you from direct liability for its business operations because it is a separate legal person under the law. But this protection, sometimes called the “corporate veil,” can be lost if your corporation is not treated properly.
To keep the “corporate veil” in place, you need to treat the corporation as a separate person in its day to day operations. For example:
- The corporation’s funds must be deposited in its own bank account under its own tax I.D. number. All corporate expenses should be paid from the corporation’s bank account with the corporation’s funds. It is essential to avoid commingling your personal funds with the corporation’s funds.
- In general, the corporation should not pay any of your personal expenses, such as rent, groceries, entertainment, etc. These should be paid from your personal bank account.
- Before you withdraw money from the corporation’s bank account as compensation or shareholder distributions to yourself, be sure that the withdrawal complies with one of the rules described in the next section.
- All contracts relating to the corporation’s business (such as leases, insurance policies, customer contracts, etc.) should be signed in the name of the corporation, not in your individual name. You will be personally liable for any contracts that you sign in your own name.
- Title to the corporation’s assets, including its intellectual property, should be in the corporation’s name.
- Your website, signs, yellow pages listings, and promotional materials should all reflect the corporation’s name.
- All business cards should reflect the corporation’s name as well as the name of the individual officer or employee.
Withdrawing Corporate Funds
As a general rule, you may withdraw corporate funds for your personal use only as
- Reasonable compensation for your services to the Corporation (which must be reasonable in relation to the services you actually performed),
- Repayment of a loan that you made to the corporation, or
- Shareholder distribution based on your ownership interest in the corporation (i.e., a dividend). There are special rules that apply to shareholder distributions.
- Until January 1, 2012, as a general rule, the corporation may make a distribution to its shareholders only to the extent that the distribution comes out of its retained earnings. (There is an exception to this rule if the corporation can meet a complex assets-to-liabilities test.)
- After January 1, 2012, the corporation may generally make a distribution to its shareholders if (1) the distribution does not exceed its retained earnings, or (2) the value of the corporation’s assets immediately after the distribution would equal or exceed the sum of its total liabilities.
Taxes and Accounting
Your accountant will prepare the corporation’s annual tax returns and can assist you with the day-to-day tax and accounting issues that you may encounter.
Books and Records
The corporation must maintain its financial records in a commercially reasonable manner. You may want to retain your accountant or a bookkeeper to assist you with this task.
Summary and Part II
This is a rather brief overview on some of the critical aspects of forming and running a corporation. In particular, I’ve focused on the advantages you and your business could enjoy by designating your corporation as an S-corporation. If you have additional questions about whether your corporation should be designated an S-corporation or a different designation, I’d be happy to discuss this with you. In Part II I’ll briefly touch on Payroll tax, Franchise Tax Fee, Securities, Close Corporation Status, Annual Statement of Information and Fraud Alert.
This is just a basic overview and is not legal advice specific to your situation. If you would like to speak with me about your situation, please email me at email@example.com or call 925-217-3255.