Maintaining Your Corporate Status in California - Part 4

This is Part 4 of an ongoing series designed to provide California corporations general information on how to maintain their corporate standing. In this edition, we will review the roll and function of corporate bylaws.

Next to the Articles of Incorporate, the corporate bylaws are the most important corporate document. They set forth matters affecting the Shareholders' and Directors' rights, as well as corporate Officers' authority. In addition, they establish the basic administrative rules for the day-to-day legal operation of the corporation, including the procedure for altering the number of Board of Directors members; the calling of, conduct of, convening of, and voting of Board of Directors' meetings and Shareholders' meetings; the election, powers and duties of the corporation's Officers; the issuance of certificates representing shares of the corporation's stock; general financial authorizations; and the procedure for amendment of the Bylaws.

While the Bylaws may be viewed as merely the implementation of a number of corporate formalities, they are essential to resolve potential future problems, as well as to evidence the corporation's adherence to its Articles and other legal requirements. As a practical matter, however, they do not impose any significant operational burdens so long as the shareholders continue to be in basic agreement on corporate directions that the Bylaws may be amended by action of the Directors except an amendment to the Bylaws changing the number of Directors which must be made by the Shareholders.

In essence, the Bylaws are the Constitution for the corporation. The Directors should be familiar with the provisions of the Bylaws or consulting an experience corporate attorney for assistance.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Improved Credit Counseling Options for Bankruptcy Clients

In an ongoing effort to improve the quality of service to our clients, the Law Offices of Carl H. Starrett II is pleased to announce a new partnership with Money Management International ("MMI") to provide mandatory Pre-Filing Bankruptcy Counseling as well as the Pre-Discharge Debtor Education to our clients. MMI is a nonprofit corporation that has been approved to issue certificates in compliance with the Bankruptcy Code. Since 1958, MMI and its affiliate, Consumer Credit Counseling Services, have counseled and educated over one million people.

Our clients will benefit from faster and more convenient service. Once we have registered our clients for the pre-filing bankruptcy counseling, we will upload their information to MMI. Counseling sessions are provided by telephone and Internet, 24/7. In addition, Web chat sessions are available from 9:00 a.m. to 9:00 p.m. Eastern time. Our clients only have to review the imported information for accuracy and call in to speak with a counselor to complete the course. After the courses have been completed, certificates will be downloaded to our bankruptcy software, provided by EZ Filing, for transmittal to the bankruptcy court.

Upon the filing of a bankruptcy, we will also be able register our clients for the pre-discharge education class. These classes can take two hours to complete and are offered 24/7 via the Internet. MMI emails the certificates to our office upon completion.

The new partnership with MMI allows us to take an more active role in managing the bankruptcy counseling services our San Diego area clients receive and to ensure that they successfully complete all steps necessary to obtain a discharge of debts for our clients.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Maintaining Your Corporate Status in California - Part 3

This is Part 3 of an ongoing series designed to provide California corporations general information on how to maintain their corporate standing. In this edition, we will review observance of corporate formalities.

Income Tax Returns. The corporation must file federal and California income tax returns for each of its tax years whether or not it has any income. These returns are due no later than the 15th day of the third month following the close of the tax year unless a timely extension is filed.

Employer Tax and Withholding Responsibilities. As 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.

Federal Taxes

Wage Withholding. You must withhold federal income tax from the taxable wages paid to your employees. You will need to obtain from each employee a properly executed Employee Withholding Allowance Certificate (IRS Form W-4). Before January 31, following the close of each calendar year, you must provide each employee with an annual Wage and Tax Statement (IRS Form W-2).

Social Security Taxes (FICA). Social security taxes are imposed on both employers and employees. You must withhold FICA taxes from each employee's wages and pay a tax equal to the amount paid by each employee.

Return and Deposit of Taxes. With some exceptions, employers subject to either income tax withholding or social security taxes must file a quarterly return of federal Form 841 and must deposit the income tax withheld and the FICA taxes with an authorized commercial bank depositary or a Federal Reserve Bank or branch. IRS Circular E will explain when the required deposits must be made.

California Taxes

Wage Withholding. As a California employer, the corporation must withhold California income tax from the taxable wages paid to employees and must deposit these funds with the state. The process is similar to that for federal income taxes.

California Unemployment Insurance Tax. A California employer is generally subject to an unemployment insurance tax on the taxable wages paid to its employees. The corporation must register at the California Employment Development Department within 15 days after paying $1000 of taxable wages during a calendar quarter. This tax is imposed on the employer, not on the employees.

California Disability Insurance Tax. Although California employees are subject to this tax, the employer has the responsibility of withholding the tax from the wages paid to such employees. However, the employer has the alternative of establishing a state-approved private disability insurance coverage plan. If this option is chosen, employees may be required to make contributions directly to this plan in lieu of the tax payment.

General Considerations. The corporation's responsibilities to pay employment taxes, to withhold taxes imposed on its employees, to file tax returns, and to make periodic tax deposits are substantial. Penalties for noncompliance can be severe: CORPORATE OFFICIALS CHARGED WITH TAX-WITHHOLDING RESPONSIBILITIES MAY BE PERSONALLY LIABLE FOR 10 PERCENT OF THE UNPAID TAXES AND ALSO FOR ANY TAX PENALTIES IF THEY NEGLECT THEIR RESPONSIBILITIES. If you have not already done so, we suggest that you consult your accountant promptly to develop proper tax accounting procedures so that timely tax payments are made.

California Sales and Use Taxes

Permit Requirement. All parties engaged in the business of selling tangible personal property as retail in California must obtain a seller's permit form the California State Board of Equalization. As a practical matter, a permit is usually required 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 of up to a maximum of $10,000 may be required. A business having a seller's permit can purchase 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.

Tax Payment Requirements. If a corporation sells tangible personal property at retail in California, it will be subject to the California sales tax unless the property sold is specifically exempted. California also imposes a "use tax" on most retail purchases that occur outside of California but are intended for use within California. Any retailer engaged in business in California is required to collect the sales and use taxes and remit them to the state. A retailer is deemed to be "engaged in business" in California if it has any kind of an establishment in the state or if it has representatives operating in any kind of sales activity in the state. This law applies whether the retailer is involved directly or through a subsidiary or agent.

The holder of a seller's permit must file sales and use tax returns and pay or prepay the taxes collected, generally on a quarterly basis. The corporation should promptly consult its accountant regarding the dates on which these returns must be filed.

Personal and Real Property Taxes. The corporation must pay annual property taxes based on the value of the taxable real and personal property it owns or possesses on the immediately preceding March 1 (lien date). Usually, this tax is paid to the county assessor of the county in which the property is located. The county has a priority tax lien on the property as of the lien date, which is removed by the payment of this tax.

If the corporation owns taxable personal property with a cost of at least $30,000, it must file each year, on or before the date designated by the County Assessor (usually between April 1 and the last Friday in May), a written property statement. In cases in which the cities do their own assessing, a separate written property statement should be filed with the city. If the corporation owns taxable personal property costing less than $30,000, it must file a written property statement only on the County Assessor's request. Real property taxes are payable in two installments, the first due before April 10th and the second due before December 10th of each year. Personal property taxes must be paid by the due date specified in the County Assessor's notice.

You should consult your accountant for advice regarding filing property tax statements because there are substantial penalties for late payment and there are numerous special provision (e.g., an exemption for "intangibles"). This area is very complex, and competent accounting advice is essential to ensure full compliance.

Other Taxes. Depending on the nature of your business, there may be special taxes imposed by federal, state, or local governments, such as those on alcohol, tobacco, gross receipts, and real estate transactions. Your accountant should be able to assist you in preparing the proper tax forms and in making the necessary tax payments.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Tax Issues After Bankruptcy & Foreclosure

Question: I filed for Chapter 7 bankruptcy and then lost my house to foreclosure because I couldn't make the payments. After the foreclosure sale, the bank sent me a 1099 form because they got less then what I owed at the sale. What should I do?

Answer: Any time a debt is forgiven, it might be considered income under the Internal Revenue Code. Debt forgiveness over $600 must be reported to the IRS as income to the borrower -- money not actually received by the borrower, but money that is taxable. However, debt forgiveness received in bankruptcy is not taxable. You filed bankruptcy before the foreclosure, so the debt forgiveness occurred when you received your discharge and not when the foreclosure sale occurred.

The procedure claim the debt forgiveness as not taxable is relatively simple. You should provide a copy of our discharge order to your tax preparer and then ask them to compete IRS Form 982 and attach it to your tax return. You should not have any further problems with this issue.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

Maintaining Your Corporate Status in California - Part 2

This is Part 2 of an ongoing series designed to provide California corporations general information on how to maintain their corporate standing. In this edition, we will review observance of corporate formalities.

It is easy to underestimate the importance of maintaining the formal integrity of your corporation. It is a separate and distinct entity. All important transactions in your business should be reflected in the corporate minutes. All contracts, including employment contracts, loans, and leases, should be made in the name and on behalf of the corporation. They should be memorialized by appropriate minutes in the corporate Minute Book. When signed, these documents should be kept in the Minute Book.

Without limiting the significance of the foregoing general caution, it is most important to realize that you are required formally to consider, review and act upon the following:

Salary and Bonus. It will be essential for you to establish and adjust, from time to time, the salaries and any bonuses for yourself and other employees of the corporation. A periodic review should be made.

Issuance of Additional Shares of Stock. Suffice it to say, taking in a new shareholder is a serious matter. Before a commitment is made to issue stock to anyone, we advise that you contact legal counsel and your accountant, and an appropriate agreement can be drafted. The should be thoroughly studied before any commitments are made.

Use of the Corporate Seal. Although there is no legal requirement that a Corporate Seal be used on any documents, many financial institutions require that it be used on corporate resolutions, loan documents, notes, and the like.

Loans to Employees. Loans to employees should be well documented. Promissory notes should be used to evidence the loans. Copies should be given to your attorney and your accountant.

The information provided in this article is general information only and is not intended as legal advice. DO NOT use this information as a substitute for obtaining qualified legal advice or other professional help. If your California corporation requires assistance with any of the topic outlined in this article, please feel free to contact us.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.