Directors of a California corporation owe two fiduciary duties — care and loyalty — and can be held personally liable when they breach them, while the corporation itself faces daily fines, franchise tax suspension, and loss of its legal powers for missed filings or unpaid taxes. The rules on California corporation director duties and penalties sit primarily in the California Corporations Code, with tax-side consequences in the Revenue and Taxation Code and regulatory penalties layered on top for corporations in financial services. What follows is what those duties actually require, what protects a director who follows the process, and what happens when the corporation or its board falls short.
The Duty of Care
Under Section 309, a director must act in good faith, in the best interests of the corporation and its shareholders, and with the care a reasonably prudent person in a similar position would use.1California Legislative Information. California Code CORP 309 – Performance of Duties Built into that standard is a duty of reasonable inquiry. A director cannot rubber-stamp management proposals when circumstances call for questions.
The statute does give directors room to rely on others. Reports and opinions from officers, accountants, legal counsel, and board committees can be relied on in good faith, provided the director has no reason to believe the information is unreliable.1California Legislative Information. California Code CORP 309 – Performance of Duties That protection matters most in complex financial or strategic decisions where no one director can verify every detail alone.
The Duty of Loyalty and Interested-Director Transactions
The duty of loyalty requires directors to put the corporation’s interests ahead of their own. The most common flashpoint is a transaction in which a director has a personal financial stake. Section 310 does not automatically void those deals, but it imposes strict conditions. A transaction between the corporation and an interested director survives challenge only if one of the following is true:
- The material facts about the transaction and the director’s interest are disclosed, and shareholders approve it in good faith (the interested director’s shares do not count toward the vote).
- The material facts are disclosed to the board, a majority of disinterested directors approves the deal in good faith, and the transaction is fair and reasonable to the corporation.
- Neither approval was obtained, but the person defending the transaction proves it was fair and reasonable to the corporation at the time it was authorized.
Not every overlap creates a disqualifying conflict. A common directorship alone is not treated as a “material financial interest,” and setting another director’s compensation does not make you interested merely because you also receive compensation from the corporation.2California Legislative Information. California Code Corporations Code 310
How the Business Judgment Rule Protects Directors
California’s business judgment rule comes from case law rather than statute. When a director makes an informed, good-faith decision with no personal financial interest in the outcome, courts will not second-guess the substance of that decision. The standard is rationality, not perfection. A board that conducts reasonable inquiry, discloses conflicts, and acts without self-dealing sits inside a wide zone of protection, even when the decision turns out badly.
Directors get into trouble when they skip the process. Failing to investigate, ignoring red flags, or approving management recommendations without discussion can strip the rule’s protection and expose a director to personal liability under the Section 309 care standard.1California Legislative Information. California Code CORP 309 – Performance of Duties
When Directors Can Be Indemnified
Section 317 lets a corporation indemnify directors who are sued because of their role. In third-party lawsuits (anything other than a suit brought by the corporation itself), the corporation can cover expenses, judgments, fines, and settlement amounts if the director acted in good faith and reasonably believed the conduct was in the corporation’s best interests. For criminal proceedings, indemnification also requires that the director had no reasonable cause to believe the conduct was unlawful.3California Legislative Information. California Code Corporations Code 317
Mandatory indemnification kicks in when a director successfully defends against any claim on the merits. In that situation the corporation must cover the expenses incurred, regardless of whether the board approves. In every other case, indemnification requires a specific determination — typically by a majority of disinterested directors or by independent legal counsel — that the director met the required standard of conduct.3California Legislative Information. California Code Corporations Code 317
Who Must Serve: Board Size and Required Officers
Before duties attach, the structural requirements have to be met. Bylaws must fix the number of directors at a minimum of three, with narrow exceptions: a corporation with only one shareholder may have as few as one director, and a corporation with two shareholders may have two.4California Legislative Information. California Code Corporations Code 212 – Organization and Bylaws Bylaws can also set a range, such as five to nine, and let the board or shareholders fix the exact number within it.
On the officer side, every California corporation must have a chairperson of the board or a president (or both), a secretary, and a chief financial officer. Unless the articles or bylaws say otherwise, the president or chairperson serves as general manager and chief executive officer. Officers are chosen by the board and serve at the board’s pleasure, though an officer with an employment contract keeps whatever rights that contract provides.5California Legislative Information. California Code Corporations Code 312 – Directors and Management
Penalties for Recordkeeping and Financial Statement Failures
A corporation that fails to maintain shareholder records, prepare required financial statements, or respond to shareholder requests for that information owes $25 per day, capped at $1,500 total per request. The clock starts 30 days after a shareholder’s written demand, and the shareholder must file suit within 90 days of that demand to collect. If multiple shareholders make separate demands on the same day, or about the same failure, the maximum combined penalty is $250 per day.6California Legislative Information. California Code Corporations Code 2200
These penalties are not paid to the state. A shareholder who follows the demand-and-suit sequence collects directly, which gives shareholders both a document-access tool and a financial lever when the corporation stops responding.
Suspension and Forfeiture of Corporate Powers
The heaviest institutional penalty is loss of corporate existence in the eyes of the state. It can be triggered two ways.
The first is Statement of Information failure. Every California corporation must file an initial Statement of Information with the Secretary of State within 90 days of incorporating, and annually after that during a six-month window tied to the month the articles were filed. The filing has to list current directors and key officers (CEO, secretary, and CFO), the principal office address, the agent for service of process, and a description of the corporation’s business activity.7California Legislative Information. California Code Corporations Code 1502 A corporation that fails to file for 24 consecutive months faces suspension. The Secretary of State sends a 60-day warning notice, and if the statement still is not filed, the corporation is suspended.8California Legislative Information. California Code Corporations Code 2205
The second is unpaid taxes. Every corporation incorporated, registered, or doing business in California owes an annual minimum franchise tax of $800, regardless of income.9California Legislative Information. California Revenue and Taxation Code 23153 The Franchise Tax Board can suspend a domestic corporation and forfeit a foreign corporation’s right to do business in the state when taxes, penalties, or interest remain unpaid past the statutory deadline.10California Legislative Information. California Revenue and Taxation Code 23301
A suspended corporation cannot legally conduct business, enter contracts, prosecute or defend lawsuits, or exercise its corporate powers in the state. Reviving a suspended corporation requires curing the underlying default and, in tax cases, paying back taxes plus penalties.
Regulatory Penalties for Financial Services Corporations
Corporations in regulated industries face an additional enforcement layer. The Department of Financial Protection and Innovation (DFPI), formerly the Department of Business Oversight, regulates banks, credit unions, nonbank lenders, money transmitters, investment advisers, and other financial services providers operating in California. Its enforcement division investigates violations of the laws it administers and can impose administrative penalties.11Department of Financial Protection & Innovation. Rules and Enforcement
When the DFPI sets a penalty amount, it weighs the seriousness of the violation, whether consumers were harmed, the company’s history of violations, whether the conduct was intentional or negligent, and how well the company cooperated with the investigation.12Legal Information Institute. California Code of Regulations Title 10 Section 250.70 – Administrative Penalties
ERISA Duties for Directors of Corporations With Retirement Plans
Directors of California corporations that sponsor employee retirement plans take on a second set of fiduciary duties under the federal Employee Retirement Income Security Act. Anyone who exercises discretionary control over plan management, plan assets, or plan administration is a fiduciary, which often includes corporate officers and members of the plan’s investment committee.13U.S. Department of Labor. Fiduciary Responsibilities
ERISA fiduciaries must run the plan solely in the interest of participants and beneficiaries: acting prudently, diversifying plan investments to minimize the risk of large losses, following the plan documents to the extent consistent with ERISA, and avoiding conflicts of interest. A fiduciary who breaches these duties can be held personally liable to restore losses to the plan, and courts can order removal of a fiduciary who fails to meet the standard.13U.S. Department of Labor. Fiduciary Responsibilities These duties run in parallel with the California Corporations Code duties, not in place of them. A director sponsoring a plan can be sued under either regime.