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Operating a Business | Catapult Consulting - Catapult Consulting
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Bishop Ranch #1
6101 Bollinger Canyon Road,
Suite 365
San Ramon, California 94583

p: 925.830.2102

Operating a Business

Operating a Closely Held California Corporation

By George S. Cabot

This article outlines certain procedures and operations relevant to privately-held California corporations, especially those that are newly formed. The summaries provide a basic understanding of the legal requirements that a California corporation should follow and should not be considered a complete analysis of the areas discussed. Because this discussion is general in nature, it should not be relied upon as complete information regarding any of the matters discussed, but rather, should be used as a general guide.

1. Articles of Incorporation

A California corporation is considered to be in existence when its Articles of Incorporation have been filed with the Secretary of State’s Office. Generally the Articles are brief, because very few items must be covered in the Articles to make them effective; however, there are many matters that the corporation might choose to include.

The Articles must include the name of the corporation; a statement of business purpose; the name and address of the corporation’s initial agent for service of process; and a statement of the total number of shares of stock and a description of the different classes of stock (if there is more than one class).

Certain provisions are only effective if contained in the Articles, such as granting the corporation the power to levy assessments on shares; granting shareholders preemptive rights; creating special qualifications for shareholders; limiting the corporation’s duration; increasing the required number of votes for actions by shareholders and directors over the amount set forth by statute; restricting the powers of the corporation or the businesses in which it may participate; giving debt holders voting rights; limiting certain liabilities of directors and permitting certain indemnification of corporate agents; and granting shareholders the right to determine the consideration for which corporate stock shall be issued.

California law allows a corporation to amend the Articles in any way it desires, so long as the amendment is lawful at the time the corporation chooses to add it to the Articles. Before the corporation has issued its stock, the Articles may be amended by a writing signed by a majority of the incorporators, if directors have not been elected and have not been listed in the original Articles, or by a majority of the directors, if they have been elected or have been named in the original Articles. Once stock has been issued, the Articles generally may be amended or repealed by approval of the Board and a majority of the outstanding shares entitled to vote. Once an amendment is adopted, the corporation must file a Certificate of Amendment with the Secretary of State to make the amendment effective.

2. Bylaws

The Bylaws of the corporation set forth various corporate procedures and matters affecting the governance of the corporation. The Bylaws set forth in general terms the responsibilities of the directors and corporate officers, the number of directors, the manner of calling meetings of the shareholders and directors, the maintenance of corporate records, the issuance of reports to shareholders, the voting and proxy procedures, the regulation of the transfer of corporate stock, and other general corporate matters.

Bylaws generally may be adopted, amended, or repealed by either the Board or by a vote of the shareholders; however, the Bylaws may limit the Board’s powers in this respect. Certain provisions in the Bylaws require the approval of a majority of the outstanding shares before they may be adopted or changed, such as a change in the number of directors.

3. Following Corporate Formalities

Corporate status generally shields the shareholders of the corporation from individual liability for the acts of the corporation. Courts allow this corporate privilege to exist only as long as the corporation remains properly organized, adequately capitalized, and completely separate as a legal entity. If a court finds that the corporate privilege has been abused, the corporate entity may be disregarded for the purpose of remedying the specific abuse and the corporate shareholders may be liable for the corporation’s acts relating to that abuse.

The legal theory upon which shareholder liability is based is generally called the “alter-ego doctrine.” An individual attacking the corporate status to achieve shareholder liability will try to “pierce the corporate veil,” to prove that the corporation is merely an agent of the individuals behind it. An individual trying to pierce the corporate veil and assert the alter-ego doctrine must generally prove two things: first, that there is a unity of interest and ownership between the corporation and the shareholders, such that the corporation and the shareholders are no longer separate or individual; and second, that an injustice or fraud will occur, if the corporation’s actions are treated solely as the acts of the corporation.

A corporation can reduce the possibility that the individual shareholders will be subject to liability for the corporation’s actions by following the guidelines listed below:

a. The corporation should ensure that it is adequately capitalized from the time of its organization to enable it to carry on its business.

b. The corporation should obtain insurance to cover all of its reasonably insurable business risks. It is suggested that the corporation consider coverage including general liability insurance, fire and casualty insurance, life and disability insurance for key personnel, insurance to fund share repurchases in the event of death or disability of a shareholder, business interruption insurance, and workers’ compensation insurance.

c. The corporation should observe all post-formation corporate formalities, including but not limited to, holding annual shareholders’ meetings and holding regular directors’ meetings; keeping minutes of such meetings and clear records of all corporate activities; maintaining up-to-date Bylaws at the corporate executive offices; maintaining separateness and arm’s-length dealings between the corporation and the directors and/or principal shareholders and requiring full disclosure of any competing interests; and assuring approval of the corporation’s transactions either by the directors or the shareholders as appropriate.

d. The officers and other authorized persons should execute all letters, contracts or other documents, signed on behalf of the corporation, in the corporation’s name rather than in their individual capacity. To do this, a signature should give the name of the corporation and then the officer’s signature, name, and title. By way of example, the signature block is generally drafted as follows:

[Corporate Name], a California corporation

[Type president’s name]

[Type secretary’s name]

A corporation may be asked by its bank or someone else to have its corporate seal impressed on a bank resolution or other formal document. The corporate seal will not affect the validity of an instrument if there is failure to affix it to a document. The reason is that effective January 1, 1977 section 207(a) of the California Corporation Code provides that a corporation has power to: “(a) Adopt, use and at will alter a corporate seal, but failure to affix a seal does not affect the validity of any instrument.” (Emphasis added.) When the banker or other person is quoted this provision, they usually drop their request for the seal.

e. Corporate funds should not be commingled with the funds of the individual shareholders or any other entity involved with the corporation. Furthermore, the corporation should maintain separate operations and records from those of other entities or subsidiaries and its shareholders.

f. All withholding tax payments should be made.

4. Actions by the Board of Directors

The Board of Directors is responsible for managing the affairs of the corporation and all corporate powers must be exercised by or under the Board’s direction. The Board is to make decisions as a Board; the individual directors should not act alone. The Board should make decisions involving corporate policy; election of officers and determination of the officers’ duties and compensation; issuance of securities; adoption, amendment or repeal of the Bylaws; participation in various business transactions; execution of material leases and contracts; declaration of dividends or redemption of shares; determination of the corporation’s budget; corporate borrowings; and other major corporate transactions. The officers of the corporation carry out the day-to-day functions of the corporation pursuant to the direction and policies established by the Board.

The Board’s actions are generally taken at meetings of the Board, at which a quorum is present. These meetings may either be regular meetings of the Board or special meetings. Regular meetings are established in the Bylaws or are fixed by the Board and require no notice. Special meetings, which require notice, may be called by the corporate Secretary, the Chairman of the Board, the President or various other authorized people. Notice of such meeting is required. The corporation’s Bylaws should be consulted concerning when notice must be given. In lieu of notice, directors can waive notice by executing a waiver of notice and consent to meeting. Meetings may also be conducted by telephone conference call, if all parties can hear each other. Action may also be taken by unanimous written consent, signed by all directors. The Secretary should keep the minutes of the meetings and any written unanimous consents in the corporate Minute Book.

The Board of Directors may establish committees of Board members to exercise Board authority in various areas. The California Corporations Code, however, reserves certain authority to the full Board only. The Bylaws will typically include a procedure for establishing such committees. Generally, committee meetings and action are subject to the same procedures as Board meetings and action with respect to notice, voting, resolutions, and minutes.

5. Actions by the Shareholders

Various actions of the corporation require shareholder approval. Some of these actions include: merger, consolidation, reorganization, or dissolution of the corporation; sale or transfer of all or substantially all the corporation’s assets; and amendment of the Articles of Incorporation.

A corporation is required under California law to hold an annual shareholders’ meeting. The date, place and time for the meeting is usually designated in the Bylaws, or the Bylaws may specify a procedure for fixing such information. The first annual meeting must be held within 15 months of incorporation and future annual meetings must be held within 15 months of the previous meeting. If a meeting is not timely held, a shareholder may apply to the superior court for an order demanding that the meeting be held.

The main purpose of the annual meeting is for the shareholders to elect corporate directors whose term of office expires with each annual meeting. Note that under California law, shareholders usually have the right to vote cumulatively for directors if proper procedures are followed. Of course, any other proper corporate business may be transacted at the meeting. Unless the Articles of Incorporation state otherwise, a majority of the shares entitled to vote establishes a quorum. Any shareholder action generally requires that a majority of the shares establishing the quorum at the meeting vote affirmatively for the action. The corporation must generally give shareholders advance written notice of any meeting at which the shareholders are required or permitted to vote. The notice should specify each matter to be voted upon by the shareholders. A record date (that is, the date on which a person must have been a shareholder to vote at the meeting) must be established by the Board of Directors and should be stated in the notice.

Under certain circumstances, shareholder action may be appropriate through written consents. Notice of such actions must generally be given to all shareholders. Please consult with counsel if such a written consent is proposed to ensure that all requirement formalities are met.

6. Federal and State Regulation of Securities

Both the federal government and the states regulate the offering, issuance, and sale of corporate stock and other securities. Securities regulation is an extremely complex area of law. Whenever the corporation is considering offering, issuing, or selling its stock or options (whether to employees or to outside third parties), it must be cognizant of the requirements of the Federal Securities Act of 1933, the California Corporate Securities Law of 1968, and the securities laws of the other states.

Various exemptions from qualification and registration requirements may be available to the corporation. In particular, “private placement” exemptions may be available where the stock issuances are to be made to 35 or fewer persons who are provided designated information about the corporation, where no advertising or general solicitation is employed, where certain regulatory filings are made, and where certain other requirements are met. Because of the complexity in this area of law, counsel should be contacted prior to taking any action involving the offering, issuance, or sale of the corporation’s securities.

7. Books, Records, Minutes and Inspections

The corporation should keep records, consents, notices, and minutes of the meetings of its shareholders, Board of Directors, and committees of the Board in a Minute Book. A corporation share register should also be kept, and should record certificate numbers, names and addresses of shareholders, number of shares owned, any transfers of stock, and canceled or reissued certificates. The Minute Book should be kept and maintained at the corporation’s principal executive office.

There are various inspection rights afforded to shareholders and directors of a corporation. All shareholders have the right to inspect the corporation’s Bylaws, at all times during reasonable business hours. Up-to-date Bylaws must be kept at the corporation’s principal executive office in the state or if its executive offices are not in California, at its principal business office in the state.

Under California law, certain shareholders have the right either to inspect and copy all the shareholders’ names and addresses or to receive such a list from the corporation. Upon written demand on the corporation, any shareholder has the right at any reasonable time, during business hours, to inspect the accounting books, records, and minutes of the meetings of the shareholders, the Board of Directors, and the committees of the Board. Each director of the corporation has the absolute right, at any reasonable time, to inspect and copy all the books, records and documents of the corporation and to inspect the physical property of the corporation.

8. Biennial Information Filing with the Secretary of State

Within 90 days of filing its original Articles of Incorporation and every two years thereafter, a corporation must file with the Secretary of State an information statement (the “Statement by Domestic Stock Corporation”), which states the names and addresses of the corporation’s incumbent directors, chief executive officer, secretary and chief financial officer; the number, if any, of vacancies on the Board of Directors; the address of the corporation’s principal executive office or if such office is not in California, the address of the corporation’s principal business office in the state; and a statement describing the principal business of the corporation. The statement must also designate an agent for service of process in the state. The corporation is required to file this statement every two years during the calendar month in which the corporation’s original Articles were filed or in any of the immediately preceding five calendar months. The office of the Secretary of State generally sends the required form to the corporation. The form states the last date on which it may be filed. The corporation, however, is not excused from compliance with the filing requirement if it does not receive the form. There is a $250 penalty for a late filing and a corporation may have its corporate powers, rights, and privileges suspended for failing to file the statement.

If the designated agent for service of process (or his or her address) changes, the corporation must file a form designating the new agent with the Secretary of State.

9. Annual Reports

A corporation with less than 100 record shareholders is not required to send an annual report to its shareholders if the corporation’s Bylaws expressly waive the annual report requirement. Nevertheless, as a matter of good shareholder relations, it is advisable to send the shareholders some report of the activities of the corporation.

A corporation generally should send an annual report to its shareholders, not later than 120 days after the end of the fiscal year and at least 15 days prior to the annual shareholder meeting. The report should contain a balance sheet as of the end of that fiscal year, an income statement, and a statement of any changes in the corporation’s financial position for that fiscal year. The report should be accompanied by any report from the corporation’s independent accountants, and if no accountant’s report exists, by a certificate of an authorized corporate officer stating that the statements were prepared without audit of the corporation’s books and records.

10. Buy-Sell Agreements

Many start-up companies restrict the transfer of securities held by their shareholders through a buy-sell agreement.

A buy-sell agreement typically may cover the following:

1. Restrictions on transfer: when a shareholder may or may not transfer his shares; to whom, if anyone, the shareholder may sell the shares without consent; and the terms of a right of first refusal for the other shareholders;

2. Mandatory repurchase: when the corporation and/or other shareholders must repurchase the corporation stock, including such incidents as death of a shareholder;

3. Optional repurchase: when the corporation and/or other shareholders may repurchase the corporation stock, such as upon termination of employment of a shareholder with the corporation; and

4. Price and terms of sale: what valuation method will be used to determine the price of the stock and what terms of payment will be required.

11. Fictitious Business Name

If the corporation plans to transact business under a name other than that which is listed on its Articles of Incorporation, it is required to file a Fictitious Business Name Statement with the clerk of the county in which the corporation has its principal place of business. It is also prudent to file a statement in the other counties where the corporation will be transacting business. Once the statement is on file with the county clerk, it must also be published in a newspaper of general circulation, in the same county, once a week for four consecutive weeks. Within 30 days of completion of publication, an affidavit of publication must be filed with the county clerk.

Fictitious Business Name Statement forms may be obtained from the county clerk’s office of the county in which the corporation intends to file, or the newspaper that will be publishing the statement. Fees for publication vary according to which newspaper is used for publication. For information on publication fees for Fictitious Business Name Statements contact the Legal Advertising Department of a newspaper of general circulation in the county in which the corporation intends to file.

12. Doing Business in Other States

If the corporation is considering doing business in any state other than California, the corporation should determine whether prior to doing business, it is necessary for the corporation to be qualified or registered to do business in that state. The scope and extent of the corporation’s activities will govern whether such qualification will be necessary.

The corporation should also consider reviewing the state’s labor laws, taxing policies, and other business-related regulations to determine what other state regulations will affect the corporation’s business in that state.

13. State and Local Business Licenses

Many trades, professions, businesses, and occupations are regulated by the State of California. The state requires that corporations meet various qualifications before granting certain certificates of registration or business licenses. The California Department of Economic and Business Development publishes the “California License Handbook,” which lists sources of licensing requirements, regulating agencies, and information about licensing procedures. The handbook may be obtained, for a small fee, by contacting the Office of Small Business Development in Sacramento. Many cities also require that corporations doing business within the city limits obtain a local business license. For information regarding licensing, contact the office that handles business licenses in the cities where the corporation will be doing business.

14.Labor Laws

Employers are required to comply with numerous state and federal laws which regulate employment conditions, including, but not limited to the following: National Labor Relations Act (union organizing); Fair Labor Standards Act (minimum, overtime pay, etc.); Americans with Disabilities Act (discrimination against the disabled); Civil Rights Act (race, sex discrimination in employment); Age Discrimination in Employment Act (age discrimination); Family and Medical Leave Act of 1993 (family care and medical leave); California Labor Code (minimum wage, overtime pay, manner of payment); California Government Code (race, sex, age, medical condition, physical handicap discrimination in employment); Cal OSHA (safety); California’s Fair Employment & Housing Act (family leave); and common law theories (wrongful discharge). Corporations should seek the advise of competent labor law advisors to ensure compliance with these laws.

15. Verification of Employment Eligibility

Employers are required by the Immigration Reform and Control Act of 1986 (“IRCA”) to verify the work authorization of each person hired within three business days of the date of hire. An employer must complete and maintain INS Form I-9 for all employees, whether they are temporary, part-time or full-time workers.

16. Employer Federal Taxpayer Identification Number

A new business is required to obtain an Employer Identification Number from the I.R.S. The number must be used on various federal tax returns and documents. It is also necessary in order to open bank accounts in the name of the corporation. Application is made on Form SS-4 and should be filed with the I.R.S. as soon as possible after the business begins or in time to include the number on any return or document to be filed with the appropriate I.R.S. office. Until a number is received, the corporation may file forms stating that the corporation has filed for the number and giving the date on which the application was filed.

17. Employer’s Payroll Withholding Taxes

Under federal tax laws, a corporate employer generally must withhold both income and social security tax from an employee’s taxable wages. The procedures to be followed for these withholding taxes are detailed in the IRS publication IRS Circular E, “Employer Tax Guide.” Willful failure on the part of an employer to collect, account for and pay withholding taxes subjects the employer to a significant monetary penalty. Also, officers of the corporation or others responsible for remitting the withholding tax may be held personally liable for failure to act.

A general description of the federal withholding procedures follows. However, when computing these taxes please refer to Circular E, mentioned above, or contact the corporation’s accountant. An employer should have every employee complete an IRS Form W-4, “Employee’s Withholding Allowance Certificate.” The employer should use the information furnished in the form along with the tax tables provided in Circular E to determine the amount of the employee’s income which must be withheld for income taxes and the employee’s portion of social security and Medicare taxes. An employer must also pay the employer’s portion of social security on Medicare taxes on wages paid to its employees. The money the corporation owes as a result of withholding and social security taxes should be deposited with the IRS in the manner specified in Circular E. Deposits are generally required to be made on a semi-monthly or monthly basis, depending on the amount of the deposit. A federal withholding tax return, I.R.S. Form 941, “Employer’s Quarterly Federal Tax Return,” generally must be filed on or before the end of the month following each calendar quarter. Before January 31 of each year, an employer must furnish each employee with a combined federal and state withholding statement, IRS Form W-2, “Wage and Tax Statement,” for the preceding year. If an employee has been terminated, this form must be furnished at an earlier time.

Although California’s withholding procedures are similar to those of the federal government there are many differences between the two systems. For information on California withholding taxes, review Form DE-44 “Employer’s Tax Guide for the Withholding, Payment, and Reporting of California Income Tax,” and the “Employer’s Guide” (Form DE 4525), which may be obtained from most offices of the California Employment Development Department. The corporation’s accountant will also be helpful in answering questions and completing all tax-related documents.

A corporation subject to the personal income tax withholding requirements or the unemployment Insurance Code must register with the California Employment Development Department and file an Employer Registration Form (Form DE-1) with any local Employment Tax District Office. This will enable the corporation to obtain an Employment Development Department account number. Like the federal withholding system, the California system requires that all employees complete withholding information forms. The withheld tax is generally submitted to the state on a quarterly basis.

18. Federal Income and California Franchise Tax Returns

Federal corporate income tax returns must be filed on or before the fifteenth day of the third month following the close of the corporation’s taxable year. Generally, a corporation will file its return on Form 1120. The California corporate franchise tax is due on or before the fifteenth day of the third month after the close of the corporation’s taxable year. Corporate officers should coordinate with the corporation’s accountant to ensure compliance with all tax requirements.

19. Estimated Tax Installments

Both federal tax laws and the California franchise tax laws require corporations to pay estimated taxes. Federal law requires all active corporations to pay the estimated tax in installments. The first installment is generally due on the fifteenth day of the fourth month of the corporation’s taxable year. The estimated tax is to be deposited in an authorized commercial depository or a Federal Reserve Bank by the end of the day on which the payment is due.

California requires all corporations to file a declaration of estimated taxes. The declaration should be made on Franchise Tax Board Form 100-ES. The California tax is imposed on the corporation in advance of the year the tax reflects, for the privilege of conducting business in California during that next year. Generally, the tax is the greater of an amount determined based upon the corporation’s net income for the preceding year, or $800 a year. This $800 minimum tax is generally known as the “minimum franchise tax” or “MFT”. However, the first and second year MFT may be less than this (or zero) depending upon the date of incorporation.

In each of 1996, 1998 and 1999, the California legislature has provided MFT relief for corporations. Effective for corporations formed on or after January 1, 1997 the rules were changed to provide that the MFT for a corporation’s first year of existence would be $600 if the corporation reasonably estimated that it will have less than $1 million of gross receipts during its first tax year. In 1998 this was changed so that eligible corporations would pay a MFT of $300 for the first year and $500 for the second year. However, the eligibility rules were tightened to require that the corporation be conducting a new business (i.e., sole proprietorships and partnerships that are converting to corporate status are not eligible). In 1999 the Legislature provided that any corporation formed in California on or after January 1, 2000, and any foreign corporation qualifying in California after January 1, 2000, will pay no MFT for its first two years of existence. Because the MFT is paid a year in advance, the result is that a corporation that is formed after January 1, 2000 will first be required to pay a MFT with the first estimated tax payment it makes with respect to its second fiscal year. For example, a calendar year corporation that incorporates on January 1, 2000 will be required to pay at least $800 with its estimated tax payment due on April 15, 2001 (the fifteenth day of the fourth month of its second taxable year). If a corporation’s estimated taxes will be greater than the MFT, the tax must be paid in quarterly installments. Thus, if a corporation has taxable income in any year, including the first two taxable years, it will be required to pay estimated taxes based upon the estimated taxable income. For example, suppose a corporation is formed on January 1, 2000 and the corporation estimates that it will have taxable income which will result in it owing $400 in tax for its first taxable year of Jan. 1, 2000 through Dec. 31, 2000. Since the actual tax of $400 is greater than the MFT (which is zero as a result of the 1999 legislation), the corporation is required to pay estimated taxes of $400, the first installment of which must be paid by April 15, 2000 (the fifteenth day of the fourth month of the taxable year).

The rules governing payment of federal estimated taxes are found in Internal Revenue Code Sections 6154 and 6655. Instructions for filing are found in Form 1120-W. California filing requirements will be found in the Franchise Tax Board publication F.T.B. 1060, “Guide for Corporations Commencing Business in California.” Instructions for paying estimated installment taxes are found in the Franchise Tax Board publication F.T.B. 1062.

20. Accounting Elections

A new corporation generally may elect to be taxed either on a calendar year or fiscal year basis, so long as the taxable year for income purposes is the same as the accounting year. A corporation initially elects its filing period by filing a timely income tax return at the end of its first (whole or partial) taxable year.

The corporation must also choose between the cash and accrual accounting methods. The new corporation makes this selection on its first federal income tax return and its first California franchise tax return. The method chosen should be employed both in keeping the corporation’s books and computing income.

21. S Corporation Election

S Corporation status allows the shareholders of certain small business corporations to be taxed more or less as if their business were operated as partnership, with “flow through” tax treatment of income or losses to the shareholders.

A small business corporation may elect S Corporation status by meeting certain requirements and filing Form 2553 with the I.R.S. The filing must be made by the 15th day of the third month of the taxable year. In general, all persons who are shareholders on or before the day of the election for the tax year in which the election is made must consent in a signed statement to the election. While the election is effective, the corporation must file an annual return on Form 1120-S.

To be eligible for S Corporation status, a corporation must meet a number of requirements. Among these are (a) that the corporation has no more than 75 shareholders, all of whom are individuals (none of whom can be nonresident aliens), estates, certain types of trusts, qualified pension, profit-sharing and stock-bonus plans, and charitable organizations, (b) the corporation has only one class of stock, and (c) the corporation is not a member of an affiliated group. An S Corporation must follow prescribed procedures if it wishes to discontinue its S Corporation status.

California also recognizes S Corporation status. However, California law imposes a 1.5% corporate-level tax on S Corporations. Corporations electing S Corporation status under federal law will be taxable as S Corporations in California unless they elect not to be so treated. Shareholders of S Corporations who are not California residents must file a statement consenting to be taxed on their share of the corporation’s income derived in California.

A decision to elect S Corporation status should be made in consultation with the corporation’s tax advisors.

22. Employee Benefit Plans

Federal law allows a corporation to establish a variety of tax-favored employee benefit plans. A corporation may establish stock bonus, pension, and profit sharing plans, which allow a corporation an immediate deduction but defer income recognition for the employee. For example, Section 401(k) plans may be established relatively inexpensively by even small corporations. Medical and dental plans, including “cafeteria” plans, may be provided for employees and their dependents, allowing the corporation to deduct the expense without taxable income to the employee. Certain formalities will need to be followed and tailored documents prepared. In addition, state tax consequences should be reviewed.

23. California Sales and Use Tax

California has complementary sales tax and use tax regimes. If a corporation is engaged in the retail sale of tangible personal property within California, it is required to pay sales tax to the state. Typically, the seller will seek reimbursement of the sales tax from the purchaser, however, the incidence of the sales tax is on the seller; therefore, absent a contractual obligation by the purchaser to reimburse the seller for the sales tax, the purchaser is not liable for the sales tax. The use tax is applied to sales transactions occurring outside the state and in which the property will be stored, used, or consumed within the state. The use tax is the liability of the user; however, the seller in certain circumstances is obligated to collect the use tax and remit it to the state. Leases of personal property are generally subject to the state sales and use taxes.

Corporations expecting to sell tangible personal property, which would be subject to the California Sales and Use Tax when sold at retail, must obtain a seller’s permit from the State Board of Equalization. This is done by submitting the prescribed application to the Board, signed by an officer or any other authorized person, certifying that the applicant corporation will be actively engaging in business as a retail seller. A separate permit is necessary for each place of business the corporation operates. Corporations selling tangible personal property outside the state for use, consumption, or storage within the state also must register with the Board.

The State Board of Equalization generally requires a permit holder to file a return and pay the sale and use tax on a quarterly basis. Prepayments are required in some cases.

24. Other Miscellaneous Taxes

California requires payment of a tax on certain personal property owned or possessed on March 1 of each year. If a corporation owns taxable personal property with a combined worth of $30,000 or more, the corporation must file a property statement, signed by an officer of the corporation or an authorized agent, in the county where the property is located. The statement should be filed in the county assessor’s office, generally between April 1 and the last business day of May of that same year. A lien attaches to the property subject to the tax on March 1, however, payment is not delinquent until August 31 at 5:00 p.m. (for personal property taxes that are not secured by real property) or December 10 at 5:00 p.m. (for personal property taxes that are secured by real property). All counties may authorize semi-annual installment payments of the tax.

Many cities also impose a gross receipts tax on corporations conducting business in that city. Counties and cities may also impose other special taxes. It would be advisable for the corporation to contact the county and/or city assessor to determine if it is subject to any of these taxes.

The corporation should also be cognizant of the federal and state requirements regarding funding of unemployment benefits. The accountant for the corporation should be consulted to ensure that all appropriate filings and payments are timely made.

25. California Workers’ Compensation

Almost every California employer is subject to the California Workers’ Compensation laws. The laws subject an employer to liability for industrial accidents, regardless of the employer’s negligence, while at the same time precluding employee lawsuits that might result in large damage awards. However, in certain narrow situations, the employer may also be liable for damages in a civil suit. The laws provide a schedule of benefits to be paid to the disabled employee for injuries or, if the employee is killed, to the employee’s dependents or heirs. The corporation should obtain sufficient workers’ compensation liability insurance from an authorized private carrier of workers’ compensation insurance or from the local office of the State Compensation Insurance Fund. A corporation may also choose to self-insure. This procedure may be accomplished by obtaining a certificate of consent to self-insure from the State Director of Industrial Relations who certifies the corporation’s ability to pay any compensation that may be found due an employee. Should the corporation fail to follow the Workers’ Compensation laws, it will be subject to penalties and legal action by the injured employee or the employee’s dependents.

This Article provides general information only. For more information regarding this subject, please contact George Cabot [(925) 937-3600 or e-mail gcabot@mmblaw.com of our business and tax group.

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