Sun. Jul 14th, 2024

What is Missing from Your California Articles of Incorporation?

Jan 3, 2024


California Articles of Incorporation are the founding document of a California Corporation, California S-Corp, or California Professional Corporation. Whether forming a new California Corporation, California S-Corp, or California Professional Corporation or ensuring the California Articles of Incorporation of an existing California Corporation, California S-Corp, or California Professional Corporation are legally sufficient, it is important to understand exactly what should be included in California Articles of Incorporation.

This article will provide a guide to both required information that must be included in California Articles of Incorporation for California Corporations, California S-Corps, and California Professional Corporations, and some of the most common optional language that may be included in California Articles of Incorporation, if applicable.

Read below to find out what is missing from your California Articles of Incorporation.

Table of Contents

Required Language for California Articles of Incorporation

Understanding and correctly implementing the required language in California Articles of Incorporation is required for legal validity. This section will guide you through the mandatory elements that must be included according to the California Corporations Code.

These elements are not optional and neglecting to include them could result in your corporation’s registration being denied. Let’s delve into what specific language is required for a successful incorporation in the state of California.

The Name of the Corporation is Required Language for California Articles of Incorporation

California Corporations Code §202(a) requires California Articles of Incorporation to set forth the name of the corporation.

California Corporations Code Restrictions on the California Secretary of State for Names in which “Bank,” “ Trust,” “Trustee,” or Related Words Appear

Pursuant to California Corporations Code §201(a), the California Secretary of State’s office will reject and not file Articles of Incorporation in California setting forth a name in which “bank,” “ trust,” “trustee,” or related words appear unless a certificate of approval of the Commissioner of Financial Protection and Innovation is attached thereto. This does not apply to the Articles of Incorporation of any corporation subject to California Financial Code §§1000-1910 on which is endorsed the approval of the Commissioner of Financial Protection and Innovation.

California Corporations Code Restrictions Which May Mislead the Public or Shall be Indistinguishable in the Records of the California Secretary of State

California Corporations Code §201(b) requires the name of a California Corporation, California S-Corp, or California Professional Corporation shall not be a name that the Secretary of State determines is likely to mislead the public and shall be distinguishable in the records of the Secretary of State from all of the following:

  1. The name of any other California Corporation, California S-Corp, or California Professional Corporation.
  2. The name of any foreign corporation authorized to transact intrastate business in California.
  3. Each name that is under reservation pursuant to the California Corporations Code.
  4. The name of a foreign corporation that has registered its name pursuant to California Corporations Code §2101.
  5. An alternate name of a foreign corporation under California Corporations Code §2106(b).
  6. A name that will become the record name of a domestic or foreign corporation upon a corporate instrument when there is a delayed effective or file date.

California Corporations Code §201(c) extends these restrictions to a foreign corporation transacting business in California or that has applied for a certificate of qualification.

California Corporations Code Restrictions for Insurers

The Secretary of State shall not file articles in which the business is to be an insurer unless the certificate of the Insurance Commissioner approving the corporate name is attached thereto. California Corporations Code §201.5.

When an insurer has been approved by the Insurance Commissioner pursuant to California Insurance Code §709.5 to redomesticate to the State of California, the redomesticating insurer shall file with the Secretary of State California Articles of Incorporation that include certain specific provisions. California Corporations Code §201.6.

Designations of Corporate Existence

In order for the corporation to be subject to the provisions of California Corporations Code §158 as a close corporation, the name of the corporation must contain the word “corporation,” “incorporated,” or “limited” or an abbreviation of one of such words. California Corporations Code §202(a).

The California Business and Professions Code and California Corporations Code have various requirements regarding designations of corporate existence and designations denoting status as a professional corporation for California Professional Corporations.

There is no statutory requirement that a California Corporation or California S-Corp that is not a close corporation as set forth in California Corporations Code §158 contain any designation of corporate existence, however typically the lack of a corporate designation informally indicates that the corporations are not for profit corporations (each a California Non-Profit Corporation).

A Statement of the Purpose of the Corporation is Required Language for California Articles of Incorporation

It is required to state the purpose of a California Corporation, California S-Corp, or California Professional Corporation as per the California Corporations Code. The purpose statement should not be altered from the language required by the California Corporations Code for each type of corporation, otherwise, the California Secretary of State will reject and not file the Articles of Incorporation in California.

The California Articles of Incorporation shall not set forth any further or additional statement with respect to the purposes or powers of the California Corporation, California S-Corp, or California Professional Corporation except by way of limitation or except as expressly required by any law of the State of California other than the California Corporations Code or any federal or other statute or regulation (including the Internal Revenue Code and regulations thereunder as a condition of acquiring or maintaining a particular status for tax purposes). California Corporations Code §202.

Purpose Statement for a California Corporation or California S-Corp

Pursuant to California Corporations Code §202(b)(1)(A), the California Articles of Incorporation for a California Corporation or California S-Corp must contain the following statement of purpose:

“The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.”

Purpose Statement for a California Professional Corporation

Pursuant to California Corporations Code §202(b)(1)(B), the California Articles of Incorporation for a California Professional Corporation must contain the following statement of purpose:

“The purpose of the corporation is to engage in the profession of [insert profession permitted to be incorporated by the California Corporations Code] and any other lawful activities (other than the banking or trust company business) not prohibited to a corporation engaging in such profession by applicable laws and regulations.”

The California Articles of Incorporation of a California Professional Corporation are also required to contain the statement required by California Corporations Code §13404. California Corporations Code §202(b)(4).

Purpose Statement for a Bank

In case the California Corporation is subject to California Financial Code §§1000-1910, the California Articles of Incorporation shall set forth a statement of purpose which is prescribed in the applicable provision of California Financial Code §§1000-1910. California Corporations Code §202(b)(2).

Purpose Statement for an Insurer

In case the corporation is a corporation subject to the Insurance Code as an insurer, the articles shall additionally state that the business of the corporation is to be an insurer. California Corporations Code §202(b)(3).

Name and Steet Address of the Registered Agent for Service of Process is Required for California Articles of Incorporation

The name and street address in California of the initial agent for service of process must be included in the California Articles of Incorporation of every California Corporation, California S-Corp, and California Professional Corporation in accordance with California Corporations Code §1502(b). California Corporations Code §202(c).

A registered agent is a person (director, officer, or any other natural person who is a resident of California or a corporation that has complied with California Corporations Code §1505) who is designated by the California Corporation, California S-Corp, or California Professional Corporation to receive service of process in the event the corporation is subject to suit.

California Articles of Incorporation must state the name and complete street address in California of the initial registered agent of each California Corporation, California S-Corp, and California Professional Corporation, who may be either (1) an individual who resides in California and whose business office is identical with such registered office; or (2) a corporation having a business office identical with such registered office.

Initial Street Address and Mailing Address is Required for California Articles of Incorporation

California Articles of Incorporation must include the initial street address and mailing address of the California Corporation, California S-Corp, or California Professional Corporation, as proscribed by the California Corporations Code.

These details provide essential contact and location information for the California Corporation, California S-Corp, or California Professional Corporation. As a key compliance requirement, the omission of this data can lead to the rejection of the Articles of Incorporation by the California Secretary of State.

Initial Street Address

California Articles of Incorporation shall set forth the initial street address of its principal office. California Corporations Code §202(d). The initial street address of the California Corporation, California S-Corp, or California Professional Corporation need not be identical to the address of its registered agent for service of process.

Initial Mailing Address

California Articles of Incorporation shall set forth The initial mailing address of the corporation, if different from the initial street address. California Corporations Code §202(e). If no initial mailing address is provided, it will be assumed that the listed street address of the California Corporation, California S-Corp, or California Professional Corporation is the address where mail should be addressed by the California Secretary of State.

Capitalization Information is Required for California Articles of Incorporation

A declaration of capitalization information by a California Corporation, California S-Corp, or California Professional Corporation is required to be included in the California Articles of Incorporation. Capitalization information includes the total number of shares and detailed information about each class of shares authorized by the California Corporation, California S-Corp, or California Professional Corporation.

One Class of Shares

If the California Corporation, California S-Corporation, or California Professional Corporation is authorized to issue only one class of shares, the total number of shares authorized to issue must be set in California Articles of Incorporation. California Corporations Code §202(f). The total number of shares cannot be zero (0).

More than One Class of Shares

California S-Corps are not permitted to have more than one class of shares.

Pursuant to California Corporations Code §202(g), if the California Corporation or California Professional Corporation is authorized to issue more than one class of shares, or if any class of shares is to have two or more series, the California Articles of Incorporation must include language to establish the following:

  1. The total number of shares of each class the California Corporation or California Professional Corporation is authorized to issue, and the total number of shares of each series which the California Corporation or California Professional Corporation is authorized to issue or that the board of directors is authorized to fix the number of shares of any such series;
  2. The designation of each class, and the designation of each series or that the board of directors may determine the designation of any such series; and
  3. The rights, preferences, privileges, and restrictions granted to or imposed upon the respective classes or series of shares or the holders thereof, or that the board of directors, within any limits and restrictions stated, may determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any wholly unissued class of shares or any wholly unissued series of any class of shares. As to any series the number of shares of which is authorized to be fixed by the board of directors, the California Articles of Incorporation may also authorize the board of directors, within the limits and restrictions stated therein or stated in any resolution or resolutions of the board originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had before the adoption of the resolution originally fixing the number of shares of such series.

If California Articles of Incorporation include the designation and number of shares of one or more series within a class, the stated number of shares for all series within the class shall not exceed, and may be less than, the stated number of shares for the class. California Corporations Code §203.5(a). If so authorized in California Articles of Incorporation, and if California Articles of Incorporation state the number of shares of the class, California Articles of Incorporation may be amended by approval of the board of directors alone to increase or decrease (but not below the number of shares of the series then outstanding) the number of shares of a series. California Corporations Code §203.5(b). If California Articles of Incorporation authorize a class of shares which is stated to be issuable in series, the California Articles of Incorporation shall include either the designation and number of shares for at least one series within that class or an authorization of common shares. California Corporations Code §203.5(c).

Except as specified in the articles or in an agreement among shareholders, no distinction shall exist between classes or series of shares or the holders thereof. California Corporations Code §203.

California Articles of Incorporation Form ARTS-GS and FORM ARTS-PC Do Not Provide Space for More than One Class of Stock

The California Secretary of State forms Form ARTS-GS and Form ARTS-PC for California Corporations and California Professional Corporations, respectively, only provide for a single class of stock. If a California Corporation or California Professional Corporation seeks to issue more than one class of stock, Form ARTS-GS and Form ARTS-PC do not provide for the inclusion of any class beyond common stock. As previously mentioned, a California S-Corp may not have more than one class of stock.

It is worth noting that previous versions of Form ARTS-GS and Form ARTS-PC did have a section for the inclusion of additional information and additional articles, but as of the date of this writing, the most recent revisions of both Form ARTS-GS and Form ARTS-PC (each marked as REV 06/2023) do not provide this previously available section for the inclusion of additional information and additional articles.

Based upon the foregoing, it is a best practice to use California Articles of Incorporation drafted by an experienced corporate attorney rather than Form ARTS-GS and Form ARTS-PC to allow for more than one class of stock in California Articles of Incorporation.

California Articles of Incorporation Must Be Signed by the Appropriate Person or Persons

The act of officially finalizing the California Articles of Incorporation requires obtaining the signature of the appropriate person or persons. This section will discuss the appropriate signatory or signatories of California Articles of Incorporation.

Signature by the Incorporator or Incorporators

The California Articles of Incorporation must be signed by the incorporator or incorporators. The incorporator or incorporators are the person or persons who sign and file the California Articles of Incorporation with the California Secretary of State. California Corporations Code §200(b). The Incorporator(s) may be one or more natural persons.

Signature by the Initial Director or the Initial Directors

If initial members of the board of directors are named in California Articles of Incorporation (an optional inclusion discussed below), each member of the board of directors named in the California Articles of Incorporation must sign and acknowledge the California Articles of Incorporation. California Corporations Code §200(b).

Optional Language for California Articles of Incorporation

The California Secretary of State provides forms for California business entities, including California Corporation, California S-Corps, and California Professional Corporations on its website. The California Secretary of State provides form California Articles of Incorporation (Form ARTS-GS) for California Corporations and Califonia S-Corps, and form California Articles of Incorporation (Form ARTS-PC) for California Professional Corporations. Both forms are available on the website of the California Secretary of State.

The California Secretary of State forms of business entity documents for the formation of a California limited liability company (LLC), California General Partnerships (GPs), California Limited Partnership (LP), California Limited Liability Partnership (LLP), and any other permissible business entity in California or foreign business entity are sufficient for their intended purpose, the form California Articles of Incorporation for a California Corporation, California S-Corp, or California Professional Corporation are limiting based upon the optional information that may be necessary or advisable for inclusion within California Articles of Incorporation.

For example, California limited liability companies (each a California LLC) may establish classes of membership or units in its Operating Agreement without inclusion of that information in its California Articles of Organization, however, a California Corporation, California S-Corp, or California Professional Corporation must include such information in its California Articles of Incorporation to create such different classes.

The remainder of this article will discuss the optional provisions that may be included in California Articles of Incorporation, and these optional provisions must be set forth on a form of California Articles of Incorporation, or amendment and/or restatement thereof, not on the forms provided by the California Secretary of State.

California Articles of Incorporation may set forth any or all of the following provisions, which shall not be effective unless expressly provided in the California Articles of Incorporation.

The Power to Levy Assessments Upon Shares is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions granting, with or without limitations, the power to levy assessments upon the shares or any class of shares. California Corporations Code §200(a)(1).

What is the Power to Levy Assessments Upon Shares?

This power allows the California Corporation, California S-Corp, or California Professional Corporation to impose a financial obligation on shareholders above and beyond their initial investment in their shares of stock. This financial obligation known as an assessment is typically required to be paid by the shareholder within a specified time frame.

When to Use the Power to Levy Assessments Upon Shares?

The power to levy assessments is a tool that can be employed by a California Corporation, California S-Corp, or California Professional Corporation in times of financial distress, or when additional funds are necessary to meet operational needs or strategic goals. When exercised, it can increase working capital without the need to issue additional shares or incur debt.

However, the power to levy assessments can also be seen as a double-edged sword. On the one hand, it can provide a lifeline for a California Corporation, California S-Corp, or California Professional Corporation in need of immediate funding. On the other hand, it can pose a significant financial burden on shareholders, especially those who might be unable to meet the additional financial obligation. This could potentially lead to a detrimental effect on the relationships with shareholders and the perceptions of the financial stability of the California Corporation, California S-Corp, or California Professional Corporation.

The decision to include a provision making shares of stock subject to assessments in the California Articles of Incorporation should be made with significant consideration. It is advisable to use this provision when the business model anticipates frequent need for additional capital, or in industries where income is unpredictable and potential for high capital need exists. Regardless, California Corporations, California S-Corps, and California Professional Corporations should also consider other less intrusive ways of raising additional capital such as through loans, issuing additional securities, or through retained earnings.

Preemptive Rights of Shareholders are Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions granting to shareholders preemptive rights to subscribe to any or all issues of shares or securities. California Corporations Code §200(a)(2).

What are Preemptive Rights of Shareholders?

Preemptive rights, often referred to as anti-dilution rights, give existing shareholders the first option to purchase new shares issued by the corporation. This right allows them to maintain their proportional ownership and voting power.

When a California Corporation, California S-Corp, or California Professional Corporation issues new shares of stock for the purpose of raising additional capital, the ownership stake of existing shareholders can be diluted. This dilution can impact control over the California Corporation, California S-Corp, or California Professional Corporation and the value of individual shares. Preemptive rights protect shareholders from such dilution by giving them the opportunity to purchase additional shares before they are offered to new investors.

When to Use Preemptive Rights of Shareholders?

The decision to include a provision for preemptive rights in the California Articles of Incorporation should depend on a variety of factors. If the California Corporation, California S-Corp, or California Professional Corporation anticipates a need for additional rounds of financing, specifically through the issuance of new shares, shareholders may appreciate the inclusion of preemptive rights to protect their investment. However, if the California Corporation, California S-Corp, or California Professional Corporation plans to seek financing through other avenues that would not dilute ownership stakes, such as debt financing, preemptive rights may not be as necessary.

It is worth noting that preemptive rights can also slow down the process of issuing new shares as the California Corporation, California S-Corp, or California Professional Corporation must first offer them to existing shareholders and wait for their response before offering them to new investors. Therefore, preemptive rights should be considered in light of the future financing needs of the California Corporation, California S-Corp, or California Professional Corporation, the interests of the shareholders, and the potential impact on operations.

Special Qualifications of Who May Be a Shareholder are Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions creating special qualifications of persons who may be shareholders. California Corporations Code §200(a)(3).

What are Special Qualifications of Who May Be a Shareholder?

These special qualifications can range from professional credentials to residency requirements, or other prerequisites as deemed necessary by the incorporator or board of directors of the California Corporation, California S-Corp, or California Professional Corporation.

When to Use Special Qualifications of Who May Be a Shareholder?

This provision grants California Corporations, California S-Corps, or California Professional Corporations the flexibility to ensure that their shareholder base aligns with their strategic goals or specific business models.

For example, a California Corporation or California S-Corp whose operations heavily rely on cutting-edge technology may want its shareholders to have a solid understanding of the tech industry. In such cases, they may set forth a qualification that shareholders must have a background in technology or relevant fields.

Similarly, a locally-focused California Corporation, California S-Corp, or California Professional Corporation might want its shareholders to have a vested interest in the local community. In this instance, they may require shareholders to be residents in the same state or even in the same city as the headquarters or primary operations.

However, the inclusion of such special qualifications should be used with careful consideration. Restricting the pool of potential shareholders could limit access to capital, and might alienate potential investors who do not meet the qualifications but are otherwise interested in the success of the California Corporation, California S-Corp, or California Professional Corporation.

In addition, California Corporations, California S-Corps, or California Professional Corporations should also consider the administrative burden of enforcing such qualifications. Verifying compliance with these requirements could require substantial resources. Therefore, while special qualifications can serve as an effective tool to align shareholder interests with those of the California Corporation, California S-Corp, or California Professional Corporation, they should be employed judiciously and in a manner that does not impede growth or operations.

Limiting the Duration of Corporate Existence is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth a provision limiting the duration of the existence of the California Corporation, California S-Corp, or California Professional Corporation to a specified date. California Corporations Code §200(a)(4).

What is Limiting the Duration of Corporate Existence?

This means that the California Corporation, California S-Corp, or California Professional Corporation has a predetermined end date, after which it will cease to exist. Such a provision can be useful in specific circumstances, such as when a California Corporation, California S-Corp, or California Professional Corporation is created for a single, time-bound project, or when shareholders agree upon a definitive timeline for business objectives.

When to Limit the Duration of Corporate Existence?

For example, if a California Corporation, California S-Corp, or California Professional Corporation is established to complete a large construction project, the California Articles of Incorporation might specify that the California Corporation, California S-Corp, or California Professional Corporation will dissolve upon completion of the project. Similarly, a California Corporation, California S-Corp, or California Professional Corporation created to manage a finite resource, such as an estate or trust, might include a provision to terminate its existence once the resource has been fully distributed.

However, this provision should be used judiciously, as it effectively places a clock on the lifespan of the California Corporation, California S-Corp, or California Professional Corporation. It limits the flexibility of the California Corporation, California S-Corp, or California Professional Corporation to adapt to future circumstances and may deter potential investors who prefer long-term business endeavors. Therefore, before including this provision, it is crucial to weigh the benefits of having a fixed end date against the potential drawbacks and to consider carefully whether it suits the intended purposes of, and shareholder interests in, the California Corporation, California S-Corp, or California Professional Corporation.

It is also worth mentioning that ending the existence of a California Corporation, California S-Corp, or California Professional Corporation involves a formal process of dissolution and winding up, during which debts must settled, assets must be distributed, and legal reporting requirements must be fulfilled, and this formal dissolution and winding up would still be required at the end of the corporate existence.

Increasing Required Vote for Corporate Actions are Optional for California Articles of Incorporation

California Articles of Incorporation may set forth a provision requiring, for any or all corporate actions, except as provided in California Corporations Code §§303, 402.5(b), 708(c), and 1900, the vote of a larger proportion or of all of the shares of any class or series, or the vote or quorum for taking action of a larger proportion or of all of the directors, than is otherwise required by this division. California Corporations Code §200(a)(5).

What is Increasing Required Vote for Corporate Actions?

This allows a California Corporation, California S-Corp, or California Professional Corporation to stipulate in its California Articles of Incorporation that certain corporate actions require a larger proportion of votes, or even unanimous votes, from shareholders or directors than what is usually required by law. This essentially means that the California Corporation, California S-Corp, or California Professional Corporation can raise the voting bar for certain decisions to ensure broader consensus or to prevent hasty or unilateral decision-making.

When to Increase the Required Vote for Corporate Actions?

For example, decisions related to mergers, acquisitions, or dissolution, which have profound implications for the future of the California Corporation, California S-Corp, or California Professional Corporation could be subject to such higher voting requirements. This provision would mandate a more extensive agreement among shareholders or the board of directors before such significant actions are undertaken. This can help avoid division and conflict among shareholders or members of the board of directors, fostering a more collaborative decision-making environment.

However, the use of such a provision should be carefully deliberated. Raising the voting threshold might make decision-making slower and more cumbersome, particularly in situations where quick action is necessary. It may also give minority shareholders disproportionate influence over certain decisions, potentially leading to deadlock situations. While this provision can serve as an effective governance tool, it needs to be used judiciously, taking into account the specific dynamics and needs of the corporation.

Additionally, it should be noted that the California Corporations Code §§303, 402.5(b), 708(c), and 1900 are exceptions to this provision. Therefore, the requirement for a higher voting proportion cannot be applied to the corporate actions covered under these sections.

Limitations or Restrictions on Business or Powers are Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions limiting or restricting the business in which the corporation may engage or the powers which the corporation may exercise or both. California Corporations Code §200(a)(6).

What are Limitations or Restrictions on Business or Powers?

This essentially means that the corporation can define its scope of activities and operations right at the outset, providing a clear framework within which the corporation must operate.

Such limitations or restrictions could be applied to various aspects, such as the type of products or services that the California Corporation, California S-Corp, or California Professional Corporation can offer, the geographical regions where it can operate, the industries it can venture into, or the investments it can make, among others. Similarly, restrictions on powers can dictate what kind of decisions the officers or board of directors of the California Corporation, California S-Corp, or California Professional Corporation can make, or what measures it can adopt.

When to Use Limitations or Restrictions on Business or Powers?

The use of this provision provides a method to ensure that the California Corporation, California S-Corp, or California Professional Corporation stays true to its original purpose and goals and does not deviate into unrelated areas. It can also serve to protect the interests of shareholders, ensuring that their investments are used for the specific business purposes they had envisioned.

However, it is important to note that applying such limitations or restrictions can also limit the flexibility of the California Corporation, California S-Corp, or California Professional Corporation. The business environment is dynamic, and opportunities and challenges can arise from unforeseen quarters. If a California Corporation, California S-Corp, or California Professional Corporation has placed restrictions on its business activities or powers, it may not be able to fully capitalize on new opportunities, or may be hindered in its ability to tackle new challenges.

The decision to include such a provision in the California Articles of Incorporation should be made after careful deliberation, taking into account the nature of the business, its long-term vision and strategy, and the potential implications of such limitations or restrictions.

Providing Creditors the Right to Vote is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions conferring upon the holders of any evidences of indebtedness, issued or to be issued by the California Corporation, California S-Corp, or California Professional Corporation, the right to vote in the election of the board of directors and on any other matters on which shareholders may vote. California Corporations Code §200(a)(7).

What is Providing Creditors the Right to Vote?

This essentially means that the California Corporation, California S-Corp, or California Professional Corporation can offer voting rights to its creditors, which is a significant deviation from the norm where only shareholders, as owners of the corporation, have the ability to vote on corporate matters.

When to Provide Creditors the Right to Vote?

The rationale for providing creditors with voting rights primarily rests on the idea that they, as providers of capital, have a vested interest in the operations and management of the California Corporation, California S-Corp, or California Professional Corporation. This is particularly true for those creditors whose financial exposure to the California Corporation, California S-Corp, or California Professional Corporation is significant. By granting them voting rights, the California Corporation, California S-Corp, or California Professional Corporation acknowledges their role and stake in its affairs and gives them a platform to influence decisions that could impact their interests.

However, this provision is not to be used without thorough consideration. It is imperative to keep in mind that the interests of creditors may not always align with those of the shareholders or the long-term vision of the California Corporation, California S-Corp, or California Professional Corporation. Creditors generally prioritize risk mitigation and debt recovery, and their voting decisions might reflect these priorities rather than the broader strategic objectives of the California Corporation, California S-Corp, or California Professional Corporation.

Therefore, a California Corporation, California S-Corp, or California Professional Corporation might consider granting voting rights to creditors in specific circumstances. For instance, this could be an attractive option in a startup environment where traditional equity-based financing might dilute ownership stakes. In such a case, debt financing with creditor voting rights could be a viable alternative, appeasing creditors with a say in the affairs of the California Corporation, California S-Corp, or California Professional Corporation without eroding the equity interests of the original owners.

This provides a flexible tool to manage financial structure and involve key stakeholders in decision-making, however, it is a provision that must be used judiciously, taking into consideration the specific circumstances and strategic objectives of the California Corporation, California S-Corp, or California Professional Corporation.

Shareholder Rights to Determine Consideration for Share Issuance is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions conferring upon shareholders the right to determine the consideration for which shares shall be issued. California Corporations Code §200(a)(8).

What are Shareholder Rights to Determine Consideration for Share Issuance?

This means that shareholders, rather than just the board of directors, have the power to decide what the California Corporation, California S-Corp, or California Professional Corporation receives in exchange for issuing shares of stock.

This provision might typically include cash, property, services rendered, or a promissory note or other obligation to contribute cash or property or to perform services. The value of such consideration is usually determined by the board of directors, but under this provision, shareholders can have a say in this process.

When to Give Shareholder Rights to Determine Consideration for Share Issuance?

This kind of arrangement can be especially useful in situations where the shareholders are actively involved in the management of the California Corporation, California S-Corp, or California Professional Corporation, or where shareholders want to have more direct control over the financial structure.

However, it is important to note that giving shareholders this power can also complicate the process of issuing shares and could potentially lead to disagreements or conflicts among shareholders about the value of the proposed consideration. Therefore, this provision should be used judiciously and in situations where its benefits clearly outweigh potential drawbacks.

Before including such a provision in the Articles of Incorporation, the California Corporation, California S-Corp, or California Professional Corporation should consider its long-term goals, the composition of its shareholder base, and the potential implications for its financial and operational flexibility. Like other provisions that alter default governance rules, the decision to adopt a provision under California Corporations Code §200(a)(8) should be made after a thorough analysis of the specific circumstances and needs of the California Corporation, California S-Corp, or California Professional Corporation.

Shareholder Rights to Approve Any or All Corporate Actions are Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions requiring the approval of the shareholders under California Corporations Code §153 or the approval of the outstanding shares under California Corporations Code §152 for any corporate action, even though not otherwise required by the California Corporations Code. California Corporations Code §200(a)(9).

What are Shareholder Rights to Approve Any or All Corporate Actions?

This allows California Corporations, S-Corps, or Professional Corporations to set forth in their California Articles of Incorporation that any corporate action, not otherwise mandated by the law, requires shareholder approval. This means that, apart from the actions that the law requires shareholder approval for (like mergers or sale of assets), the California Corporation, California S-Corp, or California Professional Corporation can decide to seek shareholder approval for other corporate decisions as well.

When to Use Shareholder Rights to Approve Any or All Corporate Actions?

This provision enhances shareholder participation in the affairs of a California Corporation, California S-Corp, or California Professional Corporation and can be beneficial in instances where shareholders have a significant interest in operations. It provides a channel for shareholders to voice their opinions and to directly influence the strategic direction of the California Corporation, California S-Corp, or California Professional Corporation. This could be particularly useful in smaller California Corporations, California S-Corps, or California Professional Corporations where shareholders may be more involved in day-to-day operations or in family-owned businesses where all shareholders are family members.

However, this provision should be used thoughtfully as it can potentially slow decision-making processes, making it more difficult for the California Corporation, California S-Corp, or California Professional Corporation to adapt quickly to changing business conditions or opportunities. Moreover, if there are conflicts among shareholders, it might lead to deadlock situations, hampering smooth operations.

A California Corporation, California S-Corp, or California Professional Corporation considering this provision should weigh the benefits of increased shareholder participation against the potential drawbacks of slower decision-making and potential disagreement. The California Corporation, California S-Corp, or California Professional Corporation should reflect on its long-term strategy, the nature and size of its shareholder base, and the dynamics among its shareholders before adopting this provision.

While increasing shareholder rights in corporate decisions offers a means to increase shareholder involvement in corporate affairs, it is a tool that needs to be used judiciously, keeping in mind the specifics of the circumstances and objectives of the California Corporation, California S-Corp, or California Professional Corporation.

Eliminating or Limiting the Personal Liability of a Director is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions eliminating or limiting the personal liability of a director for monetary damages in an action brought by or in the right of a California Corporation, California S-Corp, or California Professional Corporation for breach of a director’s duties to the California Corporation, California S-Corp, or California Professional Corporation and its shareholders, as set forth in California Corporations Code §309, provided, however, that: (A) such a provision may not eliminate or limit the liability of directors: (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (ii) for acts or omissions that a director believes to be contrary to the best interests of the California Corporation, California S-Corp, or California Professional Corporation or its shareholders or that involve the absence of good faith on the part of the director; (iii) for any transaction from which a director derived an improper personal benefit; (iv) for acts or omissions that show a reckless disregard for the director’s duty to the California Corporation, California S-Corp, or California Professional Corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to the California Corporation, California S-Corp, or California Professional Corporation or its shareholders; (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the California Corporation, California S-Corp, or California Professional Corporation or its shareholders; (vi) under California Corporations Code §310; or (vii) under California Corporations Code §316; (B) no such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when the provision becomes effective; and (C) no such provision shall eliminate or limit the liability of an officer for any act or omission as an officer, notwithstanding that the officer is also a director or that his or her actions, if negligent or improper, have been ratified by the directors. California Corporations Code §200(a)(10).

What is Eliminating or Limiting the Personal Liability of a Director?

Allowing for the elimination or limitation of the personal liability of the members of the board of directors provides a measure of protection for members of the board of directors from monetary damages in lawsuits brought by or in the right of the California Corporation, California S-Corp, or California Professional Corporation for breach of the duties of a member of the board of directors to the California Corporation, California S-Corp, or California Professional Corporation and its shareholders.

However, these provision does not offer absolute immunity. These provisions do not protect members of the board of directors against intentional misconduct, knowing violations of law, actions contrary to the best interests of the California Corporation, California S-Corp, or California Professional Corporation, transactions benefiting the director improperly, or reckless disregard for duties leading to significant risk of harm to the California Corporation, California S-Corp, or California Professional Corporation or its shareholders. These provisions are also inapplicable to acts or omissions that amount to an abdication of duty, under California Corporations Code §§310, 316. Moreover, it does not protect a director for any act or omission occurring prior to the date when the provision becomes effective, or an officer for any act or omission as an officer, even if ratified by the board of directors.

When to Eliminate or Limit the Personal Liability of a Director?

While this provision can be a powerful tool to attract and retain third-party members of the board of directors by offering them a degree of protection against personal liability, it should be applied judiciously. If the provision is too broad, it could unintentionally foster a culture of negligence or recklessness, potentially harming the interests of the California Corporation, California S-Corp, or California Professional Corporation. A California Corporation, California S-Corp, or California Professional Corporation should consider including this provision when the nature of its business involves considerable risk, and it is necessary to attract competent and experienced members of the board of directors despite these risks.

However, for a California Corporation, California S-Corp, or California Professional Corporation wherein the shareholders are also members of the board of directors and there are no third-party members of the board of directors, the decision to include this provision is considerably easier as shareholders are less likely to become reckless or engage in negligent behavior in their role on the board of directors when they are also the shareholders. In such small business California Corporations, California S-Corps, or California Professional Corporations, the benefit of such provisions often outweighs any potential for negative consequences.

Indemnification of Agents is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions authorizing, whether by bylaw, agreement, or otherwise, the indemnification of agents (as defined in California Corporations Code §317) in excess of that expressly permitted by California Corporations Code §317 for those agents of the California Corporation, California S-Corp, or California Professional Corporation for breach of duty to the California Corporation, California S-Corp, or California Professional Corporation and its stockholders, provided, however, that the provision may not provide for indemnification of any agent for any acts or omissions or transactions from which a director may not be relieved of liability as set forth in the exception to California Corporations Code §200(a)(10) or as to circumstances in which indemnity is expressly prohibited by California Corporations Code §317. California Corporations Code §200(a)(11).

What is the Indemnification of Agents?

Indemnification of agents can be an impactful provision in California Articles of Incorporation of a California Corporation, California S-Corp, or California Professional Corporation because it allows the agents to be indemnified beyond what is allowed in California Corporations Code §317. This can include costs, charges, expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any person is or was an agent of the California Corporation, California S-Corp, or California Professional Corporation.

As defined in California Corporations Code §317, agent means any person who is or was a director, officer, employee, or other agent of a California Corporation, California S-Corp, or California Professional Corporation, or is or was serving at the request of the California Corporation, California S-Corp, or California Professional Corporation as a director, officer (e.g., Chief Executive Officer, President, Secretary, Chief Financial Officer, Treasurer, etc.), employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the California Corporation, California S-Corp, or California Professional Corporation or of another enterprise at the request of the predecessor corporation.

When to Use the Indemnification of Agents?

It is crucial to understand that these provisions cannot be used to indemnify any agent for actions from which a director may not be relieved of liability, as detailed in the exception to California Corporations Code §200(a)(10). Essentially, these can include intentional misconduct, knowing violations of law, or any transaction from which the agent derived an improper personal benefit. Moreover, the provision cannot be applied in circumstances where indemnity is expressly prohibited by California Corporations Code §317.

The decision to include this indemnification provision in the Articles of Incorporation should be made thoughtfully and with an analysis similar to that of California Corporations Code §200(a)(10).

Caution must be exercised when there are third-party agents to prevent fostering an environment where negligence or misconduct might be inadvertently encouraged, however, it can be beneficial to attract qualified third-party agents when the business operations involve substantial risk, or when there is a need to attract high-quality, experienced agents who might otherwise be deterred by personal liability risks.

Similarly, for a California Corporation, California S-Corp, or California Professional Corporation wherein the shareholders are also the agents and there are no third-party agents, the decision to include this provision is considerably easier as shareholders are less likely to become reckless or engage in negligent behavior in their role as agents when they are also the shareholders. In such small business California Corporations, California S-Corps, or California Professional Corporations, the benefit of such provisions often outweighs any potential for negative consequences.

Reasonable Restrictions Upon the Right to Transfer or Hypothecate Shares is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth provisions for reasonable restrictions upon the right to transfer or hypothecate shares of any class or classes or series, but no restriction shall be binding with respect to shares issued prior to the adoption of the restriction unless the holders of such shares voted in favor of the restriction. California Corporations Code §200(b).

What are Reasonable Restrictions Upon the Right to Transfer or Hypothecate Shares?

Reasonable restrictions upon the right to transfer or hypothecate shares of any class or classes or series allows a California Corporation, California S-Corp, or California Professional Corporation to impose conditions or limits on the transfer of its shares. This could include restrictions such as a right of first refusal, where the California Corporation, California S-Corp, California Professional Corporation, or the other shareholders must be given the opportunity to purchase the shares on the same terms offered by a potential third-party buyer.

Hypothecation refers to the use of shares as collateral to secure a debt. Any restrictions on this limits the ability of a shareholder to use their shares as collateral for loans. A California Corporation, California S-Corp, or California Professional Corporation might choose to restrict this right to prevent the shares from falling into the hands of a creditor who might not have the best interests of the California Corporation, California S-Corp, or California Professional Corporation in mind.

However, California Corporations Code §200(b) mandates that no restriction will be binding with respect to shares issued before the adoption of the restriction unless those shareowners voted in favor of the restriction.

When to Use Reasonable Restrictions Upon the Right to Transfer or Hypothecate Shares?

Including such restrictions in California Articles of Incorporation should be a well-calculated decision. A California Corporation, California S-Corp, or California Professional Corporation might choose to include these restrictions when it wants to maintain control over who owns its shares, to ensure that the shares do not end up with a competitor or a non-friendly party. However, these restrictions might make the shares less attractive to some investors as their ability to transfer or hypothecate the shares would be limited.

It is important to ensure that these restrictions are reasonable. Unreasonable restrictions could be challenged in court and if found to be unfair, might be declared invalid.

Appointment of the Initial Directors is Optional for California Articles of Incorporation

California Articles of Incorporation may set forth the names and addresses of the persons appointed to act as the initial board of directors. California Corporations Code §200(c).

What is the Appointment of the Initial Directors?

This provision allows the names and addresses of individuals chosen to act as the original board of directors of the California Corporation, California S-Corp, or California Professional Corporation, to be stated in the California Articles of Incorporation.

The initial directors are typically the individuals who manage the affairs of the California Corporation, California S-Corp, or California Professional Corporation until the first annual meeting of shareholders, where the next board of directors is elected.

When to Appointment of the Initial Directors?

The decision to include this provision requires careful consideration. By including this provision, the California Corporation, California S-Corp, or California Professional Corporation provides a clear and transparent record of the individuals who will initially guide the affairs of the California Corporation, California S-Corp, or California Professional Corporation. This can present a sense of stability and trustworthiness to potential investors and shareholders.

However, this provision could also restrict flexibility. Once included in the Articles of Incorporation, any amendment or restatement of the California Articles of Incorporation would not remove the names or addresses of the initial members of the board of directors. Therefore, this provision should be used when the initial directors are certain and unlikely to change. It is also important to remember that the identities of the initial directors become a public record when listed on the California Articles of Incorporation, and these individuals will forever be listed on the original California Articles of Incorporation. This could especially become a disadvantage if one or more of these individuals have any negative public history that could affect the image of the California Corporation, California S-Corp, or California Professional Corporation.

Finally, listing the initial members of the board of directors requires each such initial member of the board of directors to sign the California Articles of Incorporation before they may be filed with the California Secretary of State. Conversely, without listing the initial members of the board of directors in the California Articles of Incorporation, an experienced corporate attorney or any other person with proper authority may sign the California Articles of Incorporation as the incorporator before naming the initial members of the board of directors in an action of incorporator. Except for some possible exceptional circumstances, there is not much of an advantage to listing the initial members of the board of directors in California Articles of Incorporation compared to the inconveniences and possible negatives caused by listing the initial members of the board of directors in California Articles of Incorporation.

Other Optional Provisions for California Articles of Incorporation

There are an unlimited number of other provisions that may be added to California Articles of Incorporation. Any other provision, not in conflict with law, for the management of the business and for the conduct of the affairs of a California Corporation, California S-Corp, or California Professional Corporation, including any provision which is required or permitted by the California Corporations Code to be stated in the bylaws may be stated in California Articles of Incorporation. California Corporations Code §200(d). California Articles of Incorporation may contain any provision that is required or permitted to be stated in the bylaws, but the converse is not true. California Corporations Code §204(d).

Get Started Today with Your California Articles of Incorporation

Do not miss out on the opportunity to build a solid foundation for your California Corporation, California S-Corp, or California Professional Corporation. Allow the experienced attorneys at San Diego Corporate Law to guide you through the process of drafting your California Articles of Incorporation, business licenses, fictitious business name statements, and related filing fee information and ensure every detail aligns with your unique business needs. We would even be happy to introduce you to some trusted accountants for income and franchise tax advice. Contact San Diego Corporate Law to schedule a consultation today!





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