What Is a Stock Corporation in California – General Requirements?

A stock corporation in California raises capital by selling shares, granting investors ownership and voting rights while maintaining limited liability. These corporations, classified as C or S, follow specific legal steps, including filing Articles of Incorporation and drafting corporate bylaws.

By Brad Nakase, Attorney

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Table of Contents

1. What does it mean to have a stock corporation?

2. The Function of Stock Corporations

3. Different Forms of Stock Corporations

4. Benefits and Drawbacks of Stock Corporations

5. Analyzing the Benefits

6. Analyzing the Drawbacks

7. Stock Corporation Formation Procedures

8. In Summary

What does it mean to have a stock corporation?

Find out if a stock corporation is the best business structure for your new venture by reading this article, which includes an example of how a stock company works, the many kinds of stock corporations, and the benefits and drawbacks of each.

In order to obtain funds, for-profit businesses known as stock corporations offer shares of stock to investors.

To raise money, for-profit businesses called stock corporations distribute shares of stock to people who buy into the business. Each share represents a little piece of the firm and gives the owner some say in how the business runs. It is important to note, though, that the company and its owners are regarded as different legal entities.

The Function of Stock Corporations

There are a number of choices you’ll need to make if you want to shape your company into a corporation, a legal body. The first consideration is the general kind of corporation you wish to establish; stock and non-stock corporations are the two most common.

Forming a stock corporation is necessary if you intend to organize for profit and raise capital via the sale of stock. Company stock is a common way for for-profit businesses to attract investors and pay for operating expenses and future development plans. In contrast, non-stock firms aren’t in it for the money and can’t legally issue stock.

Directors, shareholders, and officers all play unique roles in stock corporations and have distinct rights and duties:

Individuals who possess a portion of a company through stock shares are known as shareholders. As a shareholder, you have a number of rights, such as the ability to earn dividends on your shares, a voice in the company’s future through board elections, and the opportunity to vote at the annual meeting. The board of directors is responsible for appointing officers and supervising the company’s overall operations. A group of people called officers oversee the day-to-day running of the company.

Take XYZBiz as an example. They are currently unincorporated but are considering becoming a stock corporation so they may acquire capital for an exciting new product range. Shareholders are a group of investors who purchase shares from the board of directors. In addition to receiving dividends from XYZBiz, shareholders have a voice in electing new board members. In return for access to financing, the corporation has granted shareholders voting rights and a cut of the profits; in exchange, the shareholders have helped the company grow and develop its products and services.

Keep in mind

Members of a non-stock corporation may nevertheless have voting rights even when the company does not issue shares.

Different Forms of Stock Corporations

In most cases, there are two types of for-profit businesses:

For federal income tax reasons, C corporations—which are stock corporations—are considered distinct taxpayers from their owners. In other words, both the company and its stockholders are subject to taxation on the money that comes in. No business may claim its own losses as a tax deduction, and neither can shareholders claim the dividends paid out by the company.

S companies are a type of stock company that uses “pass-through” taxes. This means that for income tax reasons, each shareholder gets a copy of the company’s profits, losses, deductions, and credits, and there are no more than 100 shareholders in a S corporation.

Benefits and Drawbacks of Stock Corporations

The Benefits

Power to raise capital by selling shares
Power to transfer the ownership
Find and hire top talent
Limited liability
Minimal taxation

The Downsides

More expensive
Additional administrative work
C companies are taxed twice

Analyzing the Benefits

A stock corporation has several benefits, such as:

Stock corporations can raise capital through the sale of shares of stock. This can happen during an initial public offering (IPO) or at a later date, depending on the company’s Articles of Incorporation, and it allows them to fund growth-oriented projects.

When one person leaves the firm or if there is a desire for a change in governance, another person can take over ownership of the company by transferring shares of stock.

Gaining a stake in the company and the chance to reap earnings is a great way to entice top talent and may even motivate current workers to stay around. In doing so, a company might increase its chances of attracting top talent.

One advantage of forming a corporation is the limited liability that it affords its owners. This shields them from personal responsibility in the event that the owners go bankrupt, protecting both the company and their wealth.

C corporation owners file taxes apart from their company. They are liable for paying taxes on their own income, but not on dividends paid to shareholders.

Analyzing the Drawbacks

Some disadvantages of stock corporations are:

Forming and maintaining a corporation, especially a C corporation, is more expensive than other business organization types such partnerships, limited liability companies, sole proprietorships, and other non-corporate structures. As an illustration, businesses are often required to pay a one-time charter charge (which may range from $75 to over $2,500) and an annual renewal fee (which can also range from $100 to $1,000) to the state.

Administratively, corporations have it worse than other types of entities since they are subject to more federal, state, and even municipal regulations. This means they have to keep more records, file more paperwork, and report more frequently (like an annual report).

Companies that fall under the “C” tax category are subject to double taxation: first, on profits made by the business, and then, on dividends paid out to shareholders. But S companies get away from this trap.

Stock Corporation Formation Procedures

Each state has its own unique set of rules and procedures for founding a corporation. Nevertheless, a common first step for entrepreneurs is to register their company with the state’s corporate commission and choose a name. Corporation name and address, directors, company objective, stock classes and numbers, and offering details are all required components of this document.

Keep in mind

Filing updated articles of incorporation allows you to alter certain features of the organization, such as the name or the kind of business (for example, changing it from stock to non-stock).

After that, draft the bylaws that will lay out the regulations for everyone involved, including the shareholders, directors, and officers. These will include things like the minimum number of votes needed for an issue to be approved by the board and the conditions that shareholders must follow in order to sell their shares.

The incorporators should next select a bank and a corporate seal, create an accounting period, allow the issuance of shares, adopt a stock certificate form, adopt the rules, and organize a meeting to elect directors and officials.

First things first: the corporation has to have all the necessary permissions to lawfully do business in their location before it can start issuing stock certificates to the initial shareholders.

In Summary

Companies organized as stock corporations accept investments from the public in return for ownership stakes in the company and the promise of future profits in the form of dividends.

Members of this group include directors who are responsible for the overall direction of the company and its operations, shareholders who possess shares and have a say in corporate governance, and officers who are in charge of the day-to-day running of the company.

Corporations can be structured as either S or C, with the former using pass-through taxes and the latter using double taxation. Common steps in forming a corporation include drafting bylaws, holding an organizational meeting, issuing share certificates, and filing Articles of Incorporation.

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