Corporation Matters
Inhouse Co's Corporation practice regularly provides advice to corporate management, boards of directors and board committees on governance matters, including corporate governance, legal compliance, fiduciary duties and board oversight responsibilities. This aspect of our practice has been particularly useful to our clients in light of the recent changes in US securities regulation and related initiatives from regulatory agencies.
We also advise corporations, majority stockholders, management groups and other parties on matters where the interests of individual directors, officers or large stockholders might differ from the interests of the corporation as a whole-transactions with affiliates.
Some areas of corporate matter and concerns:
Employer Identification Number
A corporation must obtain an Employer Identification Number by filing Form SS-4 with the Internal Revenue Service (IRS). An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN
Election of Tax Year
Generally, a corporation may elect to be taxed using either a calendar tax year or a fiscal tax year; however, a personal service corporation and an S corporation usually must use a calendar tax year. The period chosen must be the same as that used by the corporation to compute its book income. The initial adoption of a taxable year does not require the consent of either the IRS or the California Franchise Tax Board (FTB). Instead, the corporation simply files its initial federal and state income tax returns on the basis of the taxable period selected. A subsequent change in the accounting period generally requires advance consent.
Election of Accounting Method
Corporate taxpayer is generally required to report its income and expenses for both federal and California income tax purposes on an accrual basis. Exceptions to this rule will be made for farming businesses, qualified personal service corporations, and entities with gross receipts not exceeding certain preset amount. For corporations qualifying for the exemption, an election to use the cash method of accounting may be made by filing initial federal and California income tax returns in accordance with the cash basis accounting method. Otherwise, income tax returns should be filed using the accrual basis accounting method. Once an accounting method is used on an income tax return, prior approval of a subsequent change to another method must be obtained.
California law provides that a federal election to be taxed as an S corporation will operate as a simultaneous California state election, unless the taxpayer elects not to be taxed as an S corporation for state tax purposes. California law also contains provisions granting favorable tax treatment for small business stock.
S Corporation Election
Sometimes it is advantageous to elect S corporation tax treatment for federal and California state tax purposes so that the corporation's profits or losses are passed directly to the shareholders. This avoids double taxation of dividend income and allows shareholders to deduct the corporation's losses against their income. Because of a statutory deadline, this election should be filed with the IRS within two and a half months of the date of incorporation.
Filing Federal and State Tax Returns and Installments of Estimated Tax
Federal income tax returns and California franchise tax returns are due on the 15th day of the third month following the close of the corporation's tax year. In addition, most corporations are required to make periodic estimated federal tax payments by depositing such payments at either a Federal Reserve Bank or an authorized commercial bank. The corporation's accountant can handle these arrangements, or you may obtain additional information from IRS Form 1120-W, which can be obtained from any IRS office. California also requires the filing of a declaration of estimated franchise tax on FTB Form 100-ES. For further information, see FTB publications FTB 1060 (Guide for Corporations Commencing Business in California), which can be obtained from any office of the Franchise Tax Board. You should consult with the corporation's accountant regarding the timely filing of these returns.
Employer Tax and Withholding Responsibilities
If you are an employer, you will be responsible for certain employer taxes. In some cases, you will have to pay the tax directly. In other cases, your employees pay the tax, but you are responsible for withholding the tax payment from their wages and making periodic deposits of these funds in an authorized bank. See IRS Circular E, Employer's Tax Guide and Tax Guide for Small Businesses, both available from the IRS. See also Employer's Tax Guide for the Withholding, Payment, and Reporting of California Income Tax (Form DE 44) and Employer's Tax Guide (Form DE 4525), both available from the California Employment Development Department.
To see more:Federal Level
Property, Sales and Other Taxes
All parties engaged in the business of selling tangible personal property at retail in California must obtain a seller's permit from the California State Board of Equalization. As a practical matter, a permit is usually requites even though the corporation sells such tangible personal property at wholesale. A separate permit must be obtained for each retail business location and must be conspicuously displayed. A substantial security deposit may be required. A business having a seller's permit can purchases tangible personal property for resale without having to pay sales tax to the seller, provided it gives the seller a signed resale certificate in a form prescribed by the State Board of Equalization.
To see more:Taxes
Personnel Practices
Nearly every business is subject to a variety of federal and state regulations that govern the personnel practices the business must follow. Although a full discussion of the corporation's obligations under these various laws is beyond the scope of this letter, the following information should provide a useful overview of some of the rules that apply to an employer. Because of the complexity of personnel practice law, and the great expense required to defend against legal actions in this area, we recommend that you contact us for further advice on this subject matter if you have any questions.
To see more:Hiring Practices
Licensing
Most businesses will not require any type of federal license. However, if your corporation engages in export activities, the licensing of technology, the manufacture or sale of munitions, or in hazardous activities, a federal license may be required before operations may begin.
If the corporation intends to employ an alien to carry on substantial trade principally between the United States and the alien's country, a "Treaty Trader" visa entitling the alien to remain in the United States for extended periods of time may be required.
To see more:Licenses
Internal Governance
The board of directors is charged with the management of the corporation and is held accountable for the ultimate direction of the corporation's business and affairs. Although day-to-day management of the corporation is generally delegated to the officers, the directors are responsible for approving major corporate action, setting goals and policy for the corporation, and monitoring the performance of management in achieving these goals. In performing these functions, the directors are fiduciaries for the benefit of the shareholders. The directors will be held liable to the corporation's shareholders if they fail to exercise "reasonable care" or if they fail to act in the best interests of the corporation ("duty of loyalty").
Directors exercising a duty of care are required to act as prudent persons would act in similar circumstances. In doing so, the directors may rely on the advice of independent experts, but they must make a reasonable inquiry into the facts on which such experts base their advice. The directors' duty of loyalty includes a prohibition against a director profiting from a transaction at the expense of the corporation and its shareholders. A corporate transaction in which a director has a material financial interest will not be invalid if the transaction is fair to the corporation and the material terms and the director's interest are disclosed to and ratified by the shareholders or by uninterested directors acting in good faith.
To meet the fiduciary requirements of directing the corporation, the board should convene regularly to discuss the corporation's business and to vote on required actions. Such meetings may be conducted by a conference call if all directors can hear each other simultaneously.
California corporation law also requires that shareholders meet at least annually to elect directors and to conduct other shareholder business. A shareholders' vote is required for a number of significant events, including election of directors, most amendments to the articles of incorporation, the sale of substantially all of the corporation's assets, and certain mergers and reorganizations of the corporation. Shareholder action by written consent is a permissible alternative to a meeting if the consent process satisfies statutory requirements.
Minutes to both directors' and shareholders' meetings should be kept. The minutes must identify the issues before the groups and must state the result of the vote on each issue. The minutes, together with copies of the notice of the meetings or waivers thereof, should be placed in the corporation's minute book. A copy of these minutes, certified by the secretary, is pram facie evidence that the meeting took place and that the matter stated in the minutes transpired.
California law requires that the accounting books and records, and the minutes of proceedings of shareholders and board of directors meetings, be open for inspection by any shareholder, director, or holder of a voting trust certificate. Further, corporations are required to send an annual report to shareholders not later than 120 days after the close of the fiscal year. This requirement can be waived in the bylaws by corporations with fewer than 100 shareholders. The annual report must contain a balance sheet, and income statement, and a statement of changes in financial position for the fiscal year, and also must be accompanied by a report thereon by the company's independent accountants or, if there is no such report, by a declaration by an authorized officer of the corporation that the statements were prepared without audit.
Corporations with 100 or more shareholders that are not subject to federal securities reporting requirements also must comply with additional disclosure requirements. These include describing any significant transactions between the corporation and any director, officer, or 10 percent or greater shareholder.