How to Form a Corporation in California

By: Brad Nakase, Attorney

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After years of hard work, Sam has finally made his small hardware business in the Los Angeles successful. Not only does he sell hardware and appliances, but he operates a “fix-it” service, where handymen go out to install hardware or help people with home projects or problems. However, Sam is a little worried. He has taken on a lot of responsibility with this business, and he has a family to take care of. If his business is held liable for something, he will go down with ship as its owner. One of Sam’s friends also owns a business and suggested that Sam consider forming a corporation. If Sam makes his business a corporation, the friend said, then Sam is not liable for any judgements made against the company. This means Sam’s car, home, and assets would be safe. Sam feels like incorporating is the best move for him and his business, but he doesn’t how to form a corporation in California.

If forming a corporation in California is the right next move for your business, then the following steps will help you understand how to form a corporation in California.

1. Choosing a Name

When a business owner chooses a name for his corporation, the name must not be too similar to an existing corporation’s name in the California Secretary of State’s records. Nor can it mislead the public. The corporation may include the words “Corporation,” “Incorporated,” or “Limited,” or a relevant abbreviation. While it is not necessary, some business owners might feel it lends legitimacy to their brand or business.

In order to check a name’s availability, an owner can check the Business Search Database. He or she may also mail a filled-out “Name Availability Inquiry Letter” to the Secretary of State’s office in Sacramento. One cannot submit an inquiry via email or online.

A name can be reserved for 60 days if an owner fills out a Name Reservation Request Form and files it with the California Secretary of State. The form must be either mailed or delivered in person.

2. Articles of Incorporation

By filing Articles of Incorporation – General Stock, a corporation is legally created. To do this, a business owner should fill out Form ARTS-GS and file it with the California Secretary of State. The articles need to provide the following:

  • The corporate name
  • The corporation’s street address and mailing address (if different)
  • The name and street address of an agent for service of process
  • The number of shares the corporation is allowed to issue

When mailing the Articles of Incorporation to the Secretary of State, an owner must include the Mail Submission Cover Sheet. The form can be filed by either mail or in person. There is also a $100 filing fee.

3. Registered Agent

In California, a corporation is required to have an agent for service of process that is located in the state. This can be a person or a corporation that will accept legal papers on the corporation’s behalf if it is sued. A corporation cannot be its own agent for service of process. Before designating an agent for service of process, an agent should agree to the status.

The agent can be a California resident. They can also be a corporate agent that has filed Form 1505 with the Secretary of State. Form 1505 is the shorthand for Registered Corporate Agent for Service of Process Certificate. This agent needs to have a physical street address in California. It is common for small corporations to designate a director or officer to serve as the agent. It is possible to name a different agent later.

If an owner cannot think of a good candidate for agent, they can consult the Secretary of State’s list of private service companies that can act as the agent for service of process. The list, it should be noted, is not exhaustive.

4. Corporate Bylaws

Bylaws provide basic rules by which a corporation operates. They are essentially an internal corporate document created at the time of incorporation. While a corporation is not legally required to have bylaws, it is a good idea to have them. This is because bylaws establish operating rules for a corporation. They also help demonstrate to banks, creditors, and the IRS that the corporation is legitimate.

5. Directors and Board Meeting

The person who signed the Articles is known as the incorporator. The incorporator is in charge of appointing corporate directors who will serve on the company board until the first shareholders meeting. The incorporator needs to fill in an “Incorporator’s Statement.” This shows the names and addresses of the corporation’s starting directors. The statement must be signed and a copy kept in corporate records. The statement, however, does not need to be filed with the state of California.

A first board meeting should be held to appoint corporate officers, adopt bylaws, select a bank, authorize issuance of stock, discuss the fiscal year, and adopt a corporate seal. The meeting’s proceedings should be recorded in corporate minutes. Also, if the corporation is to be an S corporation (S corp), then the directors must approve the status.

6. Stock

Owners should issue stock to shareholders in exchange for their contributions of capital. Shareholders can contribute capital in the form of money, property, services, or all of these. Small corporations will normally issue paper stock certificates. It is not necessary for corporations in California to establish a par value – an amount below which stock cannot be sold. The board is responsible for assigning the initial value and number of shares.

Stock is classified as a security under state and federal securities laws. That said, if a corporation is issuing shares to 35 or fewer people, then federal securities laws do not apply. On a state level, one can earn a similar exemption by filing a Section 25102(f) Notice Filing – Limited Offering Exemption Notice (LOEN) with the California Department of Business Oversight. There is a filing fee of between $25 to $300, but it can be filed online. This notice should be filed within 15 days after the corporation begins issuing stock.

7. Statement of Information

A corporation in California must file a Statement of Information with the Secretary of State. It must be filed within 90 days of filing the Articles of Incorporation, as well as every year after during the relevant filing period (the calendar month during which the original Articles were filed).

The form California corporations must file is known as Form SI-550. This form can be filled out and submitted online or printed and dropped off in person. There is a fee of $25.

8. Tax Requirements

All California corporations must pay taxes to the California Franchise Tax Board (FTB). The annual minimum tax is $800, which must be paid during the first quarter of each accounting period. For new corporations, tax is based on their first year’s income. After that, the minimum tax is $800.

An additional fee may be applied to corporations with income over certain levels. Their fee is based on annual income.

In California, corporations need to file California Form 100, a Corporation or Income Tax Return. This must be completed by the 15th day of the third month after the close of the year. S corporations should fill out Form 100S.

A corporation must also get an EIN, a federal employer identification number. A corporation can get this number by filling out an online application with the IRS. This is free to do.

When a corporation pays wages of over $100 in any quarter, it must comply with the state’s payroll tax requirements. This applies even if the corporation has no employees. The California Employment Development Department provides employer account numbers and gives payroll taxes. These include unemployment insurance, state disability insurance, employment training tax, and California personal income tax withholding.

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