The California General Corporation Law, codified in Division 1 of the California Corporations Code, is the body of statutes that governs how corporations are formed, operated, financed, and dissolved in the state. Every California corporation has to comply with it, and some of its rules, especially around cumulative voting and distributions to shareholders, work differently than they do in Delaware and other common incorporation states.
What follows is a practical walk through the law in the order most owners encounter it: forming the entity, the obligations that attach the moment it exists, how directors and officers run it, what shareholders get to vote on, how shares and distributions are limited, and how a corporation combines with another or shuts down.
Forming a California Corporation
A corporation is created by filing Articles of Incorporation with the California Secretary of State. Section 200 allows one or more persons or entities to form the corporation by executing and filing those articles.1California Legislative Information. California Code Corporations Code 200 – Organization and Bylaws The filing fee is $100.
Section 202 sets out what has to be in the articles:2California Legislative Information. California Code CORP 202
- A corporate name that is distinguishable from existing California entities. Names using words like “bank,” “trust,” or “trustee” need approval from the Commissioner of Financial Protection and Innovation before the Secretary of State will accept the filing.3California Legislative Information. California Code Corporations Code 201 – Organization and Bylaws
- A purpose statement. Most corporations use the standard broad-purpose language for any lawful activity, but professional corporations and insurers must include specific purpose language.
- The name and California street address of an agent for service of process.
- The street address of the corporation’s initial principal office, plus a mailing address if different.
- The share structure: the total number of authorized shares, and if there is more than one class or series, the number of shares in each, their designations, and the rights and preferences attached to each.
Section 204 permits optional provisions in the articles, including preemptive rights for shareholders, special qualifications for who can hold shares, supermajority voting requirements, and language limiting director liability for monetary damages in shareholder lawsuits (with carve-outs for intentional misconduct, self-dealing, and reckless disregard of duties).4California Legislative Information. California Code Corporations Code 204
What a California Corporation Owes After It’s Formed
Federal EIN
Once the Secretary of State approves the articles, the corporation needs an Employer Identification Number from the IRS. Online applications are free and issue the EIN immediately, but the entity has to be legally formed first, and the responsible party’s Social Security number or ITIN is required.5Internal Revenue Service. Get an Employer Identification Number
Statement of Information
Within 90 days of incorporating, the corporation must file a Statement of Information (Form SI-550) with the Secretary of State listing officers, directors, and the agent for service of process. The fee is $25. California corporations file the Statement of Information every year thereafter, not every two years like LLCs.
The $800 Franchise Tax
Every corporation incorporated, registered, or doing business in California owes a minimum franchise tax of $800 a year to the Franchise Tax Board, whether or not it earned any income. Corporations formed on or after January 1, 2020 are exempt from the minimum tax in their first taxable year.6California Franchise Tax Board. Corporations The $800 applies every year after that, revenue or no revenue. Nonpayment leads to penalties, interest, and eventual suspension of the corporation’s powers.
Bylaws and Records
Bylaws govern internal operations and are not filed with the state. They set the rules for meetings, officer appointments, committees, and other governance details. Section 1500 requires every corporation to keep accurate accounting records, minutes of shareholder and board meetings, and a current record of all shareholders showing each person’s name, address, and the number and class of shares held.7California Legislative Information. California Code CORP 1500 – Records and Reports
How the Corporation Is Run
Section 300 vests all corporate powers in the board of directors. The board can delegate day-to-day management to a management company or other person, but ultimate authority has to stay with the directors, and an individual director cannot bind the corporation without specific authorization.8California Legislative Information. California Code CORP – Directors and Management – Section 300
Section 312 requires each corporation to have at least a chairperson of the board (who may also hold the title of president), a secretary, and a chief financial officer. One person can hold more than one of these roles unless the articles or bylaws prohibit it.9California Legislative Information. California Code CORP 312 – Directors and Management The board can remove officers with or without cause unless an employment contract says otherwise.
Under Section 307, a majority of the authorized number of directors is a quorum. The articles or bylaws can require more, but not less than one-third of the authorized board or two directors, whichever is larger.10California Legislative Information. California Code Corporations Code 307 – Directors and Management Directors can also act without a meeting by unanimous written consent.
Indemnification
Section 317 lets the corporation reimburse directors, officers, and other agents for legal expenses, judgments, fines, and settlements they incur in connection with their role, as long as they acted in good faith and reasonably believed they were acting in the corporation’s best interests.11California Legislative Information. California Code Corporations Code 317 The protection reaches both third-party suits and criminal proceedings (in criminal cases, the person must also have had no reasonable cause to believe the conduct was unlawful).
Indemnification is mandatory in one situation: when a director or officer successfully defends a claim on the merits, the corporation must reimburse reasonable expenses, including attorneys’ fees. Indemnification is not allowed where a court has found the person liable to the corporation for breaching duties, unless the court itself concludes indemnification is warranted anyway. Most well-advised California corporations include broad indemnification language in their bylaws and buy D&O insurance in addition.
What Directors Owe the Corporation
Directors owe duties of care and loyalty. Section 309 codifies the duty of care: a director must act in good faith, in the corporation’s best interests, and with the diligence a reasonably careful person in the same position would use.12California Legislative Information. California Code CORP 309 – Directors and Management That includes a duty of reasonable inquiry; rubber-stamping management proposals without checking the facts does not meet the standard.
Courts apply the business judgment rule, which presumes directors acted in good faith absent evidence of fraud, self-dealing, or reckless disregard of duty. A California appellate court in Berg & Berg Enterprises, LLC v. Boyle (2009) held that where a plaintiff fails to plead a breach of duty, the rule shields directors from personal liability as a matter of law.13vLex. Berg and Berg Enterprises LLC v. Boyle
The duty of loyalty bars directors from using their position for personal gain at the corporation’s expense. Section 310 handles conflicts of interest: a transaction between the corporation and one of its directors is not automatically void, but it has to satisfy one of three conditions. Either the director’s financial interest is fully disclosed and the transaction is approved in good faith by disinterested shareholders; or it is disclosed and approved by a disinterested majority of the board and is fair and reasonable to the corporation; or the person defending the transaction proves it was fair and reasonable when it was authorized.14California Legislative Information. California Code Corporations Code 310 – Directors and Management
Fiduciary duties reach beyond directors. In Jones v. H.F. Ahmanson & Co. (1969), the California Supreme Court held that controlling shareholders also owe duties and cannot restructure ownership in ways that benefit themselves while freezing out the minority.15Supreme Court of California Resources. Jones v. H. F. Ahmanson and Co.
Shareholder Voting and Cumulative Voting
Shareholders vote on electing directors, approving mergers, amending the articles, and other major actions. Meetings can be held in person or by videoconference or conference call, as long as the corporation takes reasonable steps to verify voter identity and give everyone a meaningful chance to participate.16California Legislative Information. California Code CORP 600 – Meetings of Shareholders
The feature that most distinguishes California from other states is cumulative voting. Under Section 708, every shareholder entitled to vote in a director election may cumulate votes, multiplying the number of shares held by the number of directors being elected and casting the total for one candidate or spreading it among several.17California Legislative Information. California Code Corporations Code CORP 708 This is a default right; the articles don’t have to authorize it. The only procedural step is that a shareholder must announce the intent to cumulate at the meeting before voting begins, and once anyone does, every shareholder may. Cumulative voting gives minority holders real leverage to elect at least one board seat, and investors in California corporations watch this provision closely.
Shareholders also approve major asset sales. Section 1001 requires both board and shareholder approval for a sale of all or substantially all corporate assets outside the ordinary course of business. When the buyer controls the selling corporation or both share a common parent, the required approval rises to shareholders holding at least 90% of the voting power.18California Legislative Information. California Code Corporations Code 1001 – Sales of Assets
Share Classes and Limits on Paying Shareholders
Section 400 allows a corporation to issue one or more classes or series of shares with different voting rights, dividend preferences, conversion features, and liquidation priorities.19California Legislative Information. California Code Corp 400 – Shares and Share Certificates All shares in the same class carry identical rights unless the class is divided into series. Common stock typically votes and receives dividends when declared; preferred stock often carries a fixed dividend and liquidation priority, and may be cumulative, convertible, or, under Section 402, redeemable on terms set in the articles.
Before a California corporation can pay a dividend, repurchase stock, or make any other distribution to shareholders, Section 500 requires the board to determine in good faith that one of two tests is met. Either retained earnings equal or exceed the distribution amount (plus any cumulative preferred dividend arrearages), or total assets after the distribution still equal or exceed total liabilities plus the amount needed to satisfy liquidation preferences of any senior shares.20California Legislative Information. California Code Corporations Code CORP 500 The board can rely on financial statements prepared under reasonable accounting practices, a fair valuation, or any other reasonable method. These tests apply to every form of distribution, including cash dividends and stock repurchases, and they exist to keep corporations from paying shareholders while leaving creditors exposed.
Mergers
A merger requires the boards of all participating corporations to approve a merger agreement. Section 1101 requires the agreement to set out the terms, including how shares will be converted or exchanged, and shareholders of the same class or series must be treated equally in any distribution of cash, stock, or other property. Shareholders of each participating corporation must also approve the merger.21California Legislative Information. California Corporations Code 1101 – Merger
Section 1110 provides a short-form route for parent-subsidiary combinations. A parent that owns at least 90% of each class of a subsidiary’s outstanding shares can merge the subsidiary into itself or into another subsidiary by board resolution alone, without a shareholder vote. The parent must give minority shareholders at least 20 days’ notice before the merger takes effect.22California Legislative Information. California Code Corporations Code CORP 1110 – Merger of Subsidiary Corporation into Parent Corporation
Dissolving the Corporation
Voluntary Dissolution
A corporation can elect to wind up and dissolve by a vote of shareholders holding at least 50% of the voting power. The board alone can authorize dissolution in limited situations: the corporation is in Chapter 7 bankruptcy, has had no business and no assets for five years, or has never issued shares.23California Legislative Information. California Code CORP – Voluntary Dissolution
Once the corporation is fully wound up, a majority of the remaining directors sign a certificate of dissolution confirming that known debts have been paid or adequately provided for, remaining assets have been distributed to those entitled to them, and a final franchise tax return has been or will be filed. The certificate is filed with the Secretary of State, and legal existence ends on filing.24California Legislative Information. California Code CORP 1905
A dissolving corporation also has to notify the IRS by filing Form 966 within 30 days of adopting a resolution to dissolve or liquidate.25Internal Revenue Service. Form 966 – Corporate Dissolution or Liquidation
Involuntary Dissolution
Section 1800 allows a court to order a corporation dissolved. The people who can file are half or more of the sitting directors, shareholders holding at least one-third of outstanding shares, any shareholder if the corporation’s stated duration has expired, or any other person the articles authorize.26California Legislative Information. California Code CORP 1800 – Involuntary Dissolution Creditors cannot start the proceeding, but may intervene once it has been filed.
Grounds include abandonment of business for more than a year, board deadlock that prevents effective management, persistent fraud or abuse of authority by those in control, and shareholder factions so divided that the business cannot function. In corporations with 35 or fewer shareholders, a court may also order dissolution when liquidation is reasonably necessary to protect a complaining shareholder’s rights. The Attorney General can separately bring a dissolution action against a corporation that has seriously violated corporate statutes, abused its powers, or failed to pay franchise taxes for five years.