See the steps to form a California corporation, from naming and filings to bylaws, shares, and agents. Get key tax, compliance, and structure details for small business incorporation in California.
By Brad Nakase, Attorney
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Launching and establishing a corporation in California is a methodical process. You must take certain actions to officially sign up your corporation. You will be in charge of issuing shares, preparing internal business documentation, filing paperwork, and adhering to state and federal tax regulations.
To establish your corporation in California, follow these eight steps.
You’ll need to follow a series of legal and administrative steps to officially register your corporation.
The name of your company cannot be too similar to or identical to an existing name that is registered with the California SOS (Secretary of State). Additionally, your name cannot mislead the public by suggesting a relationship with a local or state government or by using words such as “bank” when your business is not a recognized financial institution.
The following terms (or an acronym for them) may appear in the corporation’s name, but they are not required unless it is a close corporation:
“Corporation,” “Incorporated,” or “Limited.”
The SOS offers a guide on business entity name restrictions that explains the many laws and regulations related to corporate names.
Using the SOS’s company search database, you may make a free initial check to see if a suggested name is available. By submitting a Name Reservation Request Application to the SOS, you may secure a name for sixty days before actually forming your corporation. The completed form can be filed via the BizFile Online or mailed in. The cost to reserve a company name is ten dollars.
Each California Corporation is required to have an agent for process service within the state. An individual or business that consents to accept legal documents on behalf of a corporation in the case that it is sued is known as a registered agent. When it comes to process service, a business cannot act as its own agent. Before accepting the designation, your agent should consent to take documents on behalf of the business and be aware that their contact information will be made public.
The registered agent for your company may be:
Instead of a post office box, the agent needs to have an actual street address in California. An officer or director is usually designated as the first agent by small businesses. It is always possible to name a new agent later.
Although not all of these businesses are on the list, the SOS has an inventory of private service providers that are qualified to serve as process agents.
By submitting the Articles of Incorporation (Form ARTS-GS) to the SOS, your corporation is formally established. BizFile Online allows you to submit the material online. The filing fee for submitting your articles of organization is $100.
Your articles have to contain:
If your company will issue various classes or a set of shares, you ought to indicate the number of shares that can be issued within each series or class, together with the identification of each series or class. You should also mention any specific rights, privileges, limits, or preferences that a series or class may have.
Each corporation must abide by a set of regulations that specify how it will conduct business. A corporation’s bylaws specify these regulations. Bylaws do not have to be submitted to the state because they are an internal company document.
Bylaws are not normally mandatory for your corporation. However, you must draft bylaws that stipulate the number of directors in your corporation if you don’t already.
Whether or not bylaws are mandatory for your company, having them is very beneficial for a number of reasons:
All of your company’s essential paperwork, such as minutes from director and shareholder meetings, should be stored in a corporate records book. A corporate records kit can be purchased from a corporate kit vendor, or you can utilize a three-ring binder. Keep it at the principal office of your company.
Many entrepreneurs ask, “How to incorporate in California?” The process involves the creation of the bylaws.
The first corporate directors of the corporation must be chosen by the incorporator, who executed the articles. These directors will continue to be on the board till the very first yearly shareholder meeting, at which point the shareholders will choose new members to the board or extend the terms of the incumbent board members.
An “Incorporator’s Statement” with the original directors’ names and addresses should be filled out by the incorporator. A copy of the statement must be signed by the incorporator and included in the corporate documents book. The statement is not required to be submitted to the state.
The board of directors shall convene for the first time to:
In corporate minutes, note all of the directors’ decisions and actions. The directors must also endorse an election of status as an S corporation at the initial meeting if you want your company to be taxed as such.
You should give the shareholders stock in exchange for their capital contributions once all the basic issues have been resolved at the initial directors’ meeting. Cash, real estate, & services might be contributed by shareholders.
A. Agreement between Shareholders
A shareholders’ agreement (sometimes known as a “stockholders’ agreement”) outlining their rights and responsibilities as shareholders is usually signed by shareholders upon receiving their shares.
Small businesses often give paper stock documents to indicate stock ownership, even though this is not required by law in the majority of states. The certificate must have the corporate seal or be signed by one of the company’s executives or directors.
Enter the name and contact details of every shareholder in the company’s stock transfer ledger. California corporations are exempt from having to set a par value for their stock, which is a fixed figure below which it cannot be sold. The initial share count and value are determined by the board.
B. Exemptions and Securities Laws
Shares of business stock are often categorized as securities under both state & federal securities regulations. Companies must adhere to specific regulations set forth by securities legislation when offering & issuing shares. For example, registering the transaction with the U.S. SEC (Securities and Exchange Commission). You must be mindful of the relevant securities laws when you issue shares for your company.
However, securities regulations are not a concern for many small businesses. Federal legislation exempts private offers from being categorized as securities, and small firms often undertake private offers for their shares. A “private offer” is a sale to a small group of people (usually 35 or fewer) that isn’t publicized. Therefore, federal securities laws are not a concern if you are issuing stocks to 35 or fewer people.
This federal exemption is different in California. In California, you must submit a Limited Offering Exemption Notice to the Department of Business Oversight (California) to claim a restricted offering exemption according to state law. After your company issues stock, you have 15 days to file the notice.
The notice can be submitted online. The notification will cost between $25 and $300.
How to incorporate in California? The key lies in completing state filings and setting up proper corporate structures.
A Statement of Information (Form SI-55) must be submitted to the SOS by all California corporations and foreign corporations registered in California:
BizFile Online allows you to submit the form online. The Statement of Information has a $25 filing cost.
California taxes must be paid to the California FTB (Franchise Tax Board) by all California corporations and international corporations conducting business in California.
You can move forward with confidence and build your business on a strong legal foundation after understanding “how to incorporate in California.”
In California, incorporating a corporation can offer a business owner substantial asset protection, in contrast to general partnerships & sole proprietorships. In essence, a partner or sole proprietor takes on no limits on liability or obligation for the debts and liabilities of their business. The owner’s personal assets (house, car, savings) could be at jeopardy if anything goes awry for the company, like a judgment being rendered against it.
In contrast, corporations safeguard business owners from prospective judgments by allowing them to maintain their personal assets outside the company. A corporation or LLC owner has no reason to fret about losing their house or vehicle due to a legal issue their company is having.
1. Safeguarding Individual Asset
Business owners can safeguard their private wealth by isolating it from the company by incorporating it into an LLC or corporation. This implies that a business owner should have little culpability for the debts and liabilities of a well-managed and established company.
2. Authenticity
A business with “LLC” or “Inc.” following its name could gain credibility or a perception of authority. Vendors and consumers may react more favorably to businesses that are recognized as legitimate and have the incorporation mark.
3. Availability
All fifty states and Washington, D.C., recognize corporations and LLCs.
4. Safeguarding a Company’s Name
In accordance with the state, a corporation is shielded from another company operating in the same state using its exact name.
5. Perpetual Existence
Corporations & LLCs will endure even if ownership or management shifts. A corporation or LLC endures forever, in contrast to partnerships and sole proprietorships, which terminate when an owner departs the business or dies. This is due to the fact that corporations are viewed as being comparable to individuals in the United States.
6. Lower Taxes
If a company chooses S tax status after forming in California, it can avoid paying dividends & corporate profits twice. Likewise, an LLC may apply to be taxed like a corporation.
7. Expenses That Are Deductible
Before allocating earnings to shareholders of corporations or LLCs, standard business expenses such as salaries might be subtracted.
Both offer security for the personal assets of the business owner. If a company wants to look for investors, corporations are an excellent option. Small, owner-managed companies that desire flexibility without a great deal of corporate formalities prefer LLCs. Because they combine the ease of a corporation with the tax benefits of a partnership, LLCs are frequently preferred by small-time business owners. Both individuals and companies can have an LLC.
When it comes down to their surplus profits, corporations provide greater flexibility. An LLC’s members receive all of its income, but an S corporation can transfer profits and losses to the stockholders.
We discussed the tax benefits that companies enjoy above. The type of company one establishes truly determines the type of tax restrictions. Among these rules are the following:
C corporations, sometimes referred to as C corps, submit a Form 1120 to the IRS for the purpose of recording their earnings. The company’s profits will be subject to corporation tax rates from the IRS. Dividends paid to shareholders are going to be subject to individual tax rates in the interim. Therefore, a C corporation is liable for double taxation.
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