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CALIFORNIA CORPORATE & SECURITIES LAW

FTB Publishes Disinformation About Corporations

Recently, I happened across a summary of the “key features” of a corporation on the California Franchise Tax Board’s website.  Recognizing that it is always a challenge to summarize accurately complex legal matters, I do beg to differ with some of the FTB’s assertions.

A corporation must register with the California Secretary of State before conducting business operations and file appropriate paperwork.

A foreign corporation is required to register with the California Secretary of State only if it is “transacting intrastate business”.  See Cal. Corp. Code § 2105.

A corporation must create bylaws (e.g., how the corporation will operate) that cover items such as stockholder meetings, director meetings, number of officers, and their responsibilities.

I can’t speak to every state’s laws, but neither California nor Nevada impose such a requirement.  See Are Bylaws Required?

If formed as a corporation, the owners of the corporation are not liable for the losses of the businesses and creditors may only look to the corporation and the business assets for payment.

That is not always the case.  Courts can, and do, apply the common law doctrine of “alter ego” to hold shareholders liable.  Even when the alter ego doctrine is not applied, a shareholder may incur personal liability if they guaranty a corporation’s debts.  Finally, a shareholder of a California corporation may be liable to return any dividend or other distribution made in violation of Chapter 5 of the General Corporation Law.  See Cal. Corp. Code § 506.

I could point out other inaccuracies in the FTB’s summary, but I do agree with one of its points: ” Consult an attorney for guidance on setting up your corporate entity.”

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