I want to form a corporation in CA and elect to be taxed as an S Corp. I eventually want to grow my business to be public traded. Does it matter if I choose close corp or general stock when filing my articles? What are the ramifications of each?
You will not be able to publicly trade a close corporation, because by definition, a close corporation in CA cannot have more than 35 shareholders. While there are certainly less formalities to meet for a close corporation, if your ultimate goal is to take your business public, you should do a general stock corporation.
There are also other requirements for a close corporations.
Consult with a corporate/business attorney. I handle this type of work.
You have incorrectly analyzed your options if you intend to grow your business to be publicly traded. Neither a close corporation or an S Corporations are good vehicles for a potentially publicly traded corporation. An S Corp. has severe limitations as to the number of shareholders, and as a pass through entity has not equity buildup. A close corporation has similar restrictions as to the number of of shareholders, and requires shareholder's agreement that typically restricts ownership of stock in the company.
It sounds like you are forming the corporation yourself which is a very bad idea if you do not a have strong background in securities. You must register your stock with the Department of corporations, You will probably need more than one class of stock which will require an extremely sophisticated Articles of Incorporaton.
You need to seek a consult with a securites attorney ASAP.
Hope this helps!
Phillip M. Smith Jr.
Los Angeles Tax & Business Attorney
Licensed in the United States Tax Court
Main: 323-292-4116 ❘ Cell: 562-505-1004
THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mr. Smith is licensed to practice law throughout the state of California with offices in Los Angeles County. He is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. His phone number is 323-292-4116 or his email address is firstname.lastname@example.org.
Mergers / Acquisitions Attorney
The truth is that you can begin operating as, and derive the tax benefits of, being an S Corp and as your business grows and you need to bring in outside capital with more complex capital structures, you can simply convert to a C Corp. There's no need for you to start out as a C Corp. As to whether to opt for a Close Corporation or General Stock Corp, the only significant difference is that a Close Corp cannot have more than 35 shareholders and you can dispense with most of the corporate governance formalities of a General Stock Corp. The 35 shareholder limitation of a Close Corporation might quickly become unduly restrictive given your aggressive growth objectives and complying with the corporate formalities is a good idea in every case.
Uri Litvak www.UriLitvak.com
This response does not constitute legal advice but rather general information about a complex legal issue.
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