California Close Corporation Formation Guide

A "close corporation" is a specific legal status under California Corporations Code § 158 with defined requirements (35 shareholder limit, transfer restrictions in Articles, etc.). A "closely-held corporation" is a general term for any corporation with few shareholders and no public market for its stock. A closely-held corporation might not qualify as a statutory close corporation. To get the benefits of close corporation status (like eliminating the board), you must formally elect close corporation status in your Articles.

Yes. Close corporation status is a California corporate law matter, while S-Corp is a federal tax election. A California close corporation can file Form 2553 with the IRS to elect S-Corp tax treatment, assuming it meets the S-Corp requirements (100 or fewer shareholders, one class of stock, etc.). The 35-shareholder limit for close corporations is stricter than the S-Corp 100-shareholder limit, so this isn't usually an issue.

No, that's one of the key benefits. California close corporations can eliminate the board of directors entirely if the Articles of Incorporation so provide. In that case, shareholders exercise the powers that would otherwise belong to the board. This creates a partnership-like management structure while maintaining corporate liability protection. However, you can also keep a traditional board if you prefer—it's optional.

Yes. California allows close corporations with a single shareholder. This can be useful for a sole proprietor who wants corporate liability protection with minimal formalities. The sole shareholder can be the only officer and (if the board is eliminated) exercise all corporate powers. Even with one shareholder, transfer restrictions must still be included in the Articles.

To convert an existing California corporation to a close corporation, you must amend the Articles of Incorporation to add the close corporation statement and required transfer restrictions. This requires approval by 100% of all shareholders (not just a majority). All shareholders must consent because close corporation status significantly changes shareholder rights, particularly regarding share transfers. You must also ensure you have 35 or fewer shareholders.

If a close corporation exceeds 35 shareholders, it automatically loses close corporation status and becomes a regular corporation. This means it must comply with all standard corporate formalities, including maintaining a board of directors, holding annual meetings, and keeping formal minutes. The corporation doesn't dissolve, but the relaxed governance rules no longer apply. This is why strong transfer restrictions are critical.

Yes. Close corporations are subject to the same $800 minimum California franchise tax as regular corporations and LLCs. There is no franchise tax advantage to close corporation status. The benefit is simplified governance, not tax reduction. However, close corporations can elect S-Corp status to achieve pass-through taxation and potentially reduce self-employment taxes on distributions.

It depends on the profession. Many licensed professionals (doctors, lawyers, CPAs, etc.) are required to form professional corporations under specific statutes that may have their own governance requirements. However, a professional corporation can potentially also be a close corporation if it meets both sets of requirements. The close corporation provisions about eliminating the board may not apply if professional corporation rules require a board. Consult with an attorney familiar with your specific profession's requirements.