Dreaming about starting your own company? Do you have a business idea that you know will work and are curious about setting up a California Corporation? You are not alone. There are many people in California just like you who have turned their own business dreams into successful companies. So why not turn your dreams into reality?
This article outlines some advantages of forming a California corporation and provides a basic overview of the steps required to set up a California corporation. Let’s get started!
Why Incorporate in California?
By incorporating, your business will enjoy the following advantages:
- Limited liability – incorporating your business limits the owners’ liability for business debts and/or judgments against the business.
- Tax advantages – you can distribute business income between yourself and your corporation to lower your income taxes.
- Access to capital – corporations are more attractive to venture capitalist than other types of business entities and are better positioned to raise capital by selling shares of the company.
- Employee perks – owners who work for the business may be treated as employees and enjoy the same perks.
Moreover, you can take advantage of the following tax deductibles and corporate benefits:
- Pension plans
- Stock options
- Stock bonus plans
- Medical expense reimbursement
- Life insurance coverage
Before You Begin to Incorporate (Pre-Incorporation Matters)
Before you begin incorporate a California corporation there are four important things to consider:
- The name of your company?
- Who will serve as your registered agent?
- Whether you will operate as regular corporation vs S-corporation?
- How will the corporation be owned and managed?
1. Choose a Corporate Name
You should select two or three names that you like and verify that a name is available by submitting a Name Availability Inquiry Letter to the California Secretary of State. Your business name must end with a corporate designator or its abbreviation, as John Doe Incorporated (Inc) or Jane Doe Corporation (Corp). Reserving your business name is optional. However, if it is available and you choose to do so, you can pay a $10 fee and file a Name Reservation Request Form with the Secretary of State to reserve your name for 60 days.
If you plan on having a website and want your domain name to be the same as (or similar to) your business name, you will need to verify that your business name is available to be used as a domain name by using a service such as GoDaddy.
2. Select a Registered Agent
Next, you must select a registered agent for service and process. A registered agent is someone who consents to being served legal documents on your company’s behalf and to forward those documents to you in a timely fashion. Your registered must be named in your Articles of Incorporation.
In selecting a registered agent for your company, here are a few tips to keep in mind:
- Your registered agent does not have to be an officer, director or shareholder of your company.
- Your registered agent can be either a California resident or an active California 1505 Corporation registered with a California street address.
- Your corporation cannot be its own registered agent for service and process.
- You can act as a registered agent for your company, provided that you reside in California and have a California street address.
- Your registered agent must be available during normal business hours.
- You can consult the California Secretary of State’s list of available service companies. Determine if you will operate as a regular corporation or an S-corporation
3. Determine if you will operate as a regular corporation (C-Corp) or an S-corporation
Although structured the same a regular corporation, an S-corporations, for the most part, is not taxed federally. Instead, their shareholders account for their share of the corporation’s profits and losses individually on IRS Form 1040.
S-corporation are, however, taxed at the state level and required to meet other obligations in order to claim S-corporation status.
4. Determine the number of shares to authorize
Finally, before you begin to incorporate your business, you must have some idea of the class and quantity of shares to be authorized. California does not base your filing fee on the number of shares you specify in your Articles of Incorporation. Therefore, you can authorize as many shares as you wish.
Incorporating your Business in California
Once you have completed the previous 4 steps, you will be ready to move on to the first step in involved incorporating your business, which is preparing and filing your Articles of Incorporation. This will require you to have the following information ready:
- Company name
- Company street and mailing address
- Business purpose
- Registered agent name and address
- Number of authorized shares
5. Prepare and File Articles of Incorporation in California
Your Articles of Incorporation is the first document you need to file when forming your corporation. This document is filed with the state and is what initially establishes your corporation. It included information such as:
- The name of your company
- Your company’s address
- The various classes of your company’s shares
- The name of the designated incorporator––the person who is actually executing the incorporation.
- The initial powers of the Board of Directors
Furthermore, it gives you the right to amend the Articles of Incorporation overtime. In essence, it sets up the basic and then establishes the right to change things if you need to.
After you have completed your Articles of Incorporation, you must file it with the Secretary of State. You will then receive a stamped copy of your filed Articles of Incorporation at the address you specified in the letter of transmittal. This document should be kept with your company records in your corporate records book.
6. Designate your Business as an S-corporation with the IRS
If you have decided to designate your business as an S-corporation, you must file an S-Election with the IRS using IRS Form 2553 no later than 2 months and 15 days after filing your Articles of Incorporation. Miss this deadline and you may lose the ability to claim S-corporation status for that year. See here for more information on IRS requirements for S-corporations.
7. Set Up a Corporate Records Book
Your corporate record book is extremely important because it holds all of your corporate records and renders them readily accessible to potential buyers, investors and the IRS. It is essentially a binder in which keep important corporate documents such as your:
- Articles of Incorporation
- Corporate minutes
- Corporate seal
- SS-4 state filing
- Business licenses
- Seller’s permits
- Insurance policies
- Stock ledger
Keeping all of your corporate documents together in once place will help to ensure that they are not lost and that you can retrieve them whenever needed. The loss of some documents can expose you to liability for which you would otherwise been provided protection by the corporation.
8. Prepare Corporate Bylaws
Corporate bylaws, as the name suggests, establishes the rules governing how the company will operate. This includes things like:
- Meeting requirements pertaining to stockholders meetings, Board of Directors meeting, etc.
- The rules governing the Board of Directors such as how often they need to meet, how many members, what is required to become a member of the Board of Directors, what happens when a member leaves the Board of Directors, etc.
- How officers for your company will be appointed.
Your corporate bylaws are required in order for your business to be in legal compliance. Therefore, it is recommended that they be prepared with the assistance of a qualified attorney. If not prepared properly, your business my fall out of compliance and you may lose the protection afforded to you by your corporate status.
9. Appoint Initial Corporate Directors
The incorporator (person who signed the Articles of Incorporation) is responsible for appointing the company’s temporary corporate directors. These persons will sit on the company’s board of directors until board members are elected by the shareholders during the Initial Meeting of the Shareholders.
The requirement for appointing members to your company’s Board of directors for a California Corporation are as follows:
- Your board of directors must be made up of three individuals unless it has less than 3 shareholders, in which case the number of board members must be equal to or greater than its number of shareholders. Therefore, if your company has 2 shareholders, you must have 2 board members or more. Likewise, if your company has a single shareholder, you must have 1 or more board members.
- The number of board members must be stated in either your Articles of Incorporation or your corporate bylaws.
- No age or residency requirements apply.
Furthermore, the names and addresses of your temporary corporate directors must be stated in an Incorporator’s Statement which must be signed and kept within the company’s corporate records book after having been filled out and signed by the incorporator.
10. File a Statement of Information for your California Corporation
Within 90 days of filing your Articles of Incorporation, you must file form SI-200 Statement of Information and include a $20 filing fee and a $5 disclosure fee, and as a matter of ongoing compliance, this form must be filed annually.
11. Hold Your First Board of Directors Meeting
This meeting is a very important as it accomplishes a variety of important tasks including:
- Ratifying your incorporation and bylaws
- Providing for a minute book and establishing rules for how minutes are to be recorded.
- Appointing corporate officers to various positions such as president, CEO, and secretary
- Approving the issuance of stock to shareholders
- Choosing a corporate seal
- Ratifying your registered agent
- Establishing financial rules related to the company’s bank account, reimbursement of expenses, and adopting a tax year (fiscal or calendar)
- Approving S-corporation Status
Failure to hold this meeting may jeopardize your compliance with state and federal rules and regulations governing the formation and operation of a corporation.
12. Issue Stock
After you have formed your California corporation and established the number of authorized shares that will be distributed, you must prepare stock certificates and issue them to the shareholders according to the number of shares they own.
Each share represents a unit of ownership in the company, so you want to be absolutely sure that they are prepared properly. It is therefore recommended that you enlist the help of an experienced attorney to ensure their accuracy.
Furthermore, the original stock certificates should store in the corporate records book to avoid being lost, stolen, or sold without the corporation’s knowledge. If they are prepared improperly, lost or stolen, ownership of the company could be challenged in court.
Post-Formation Tasks for a California Corporation
After your California corporation has been formed there will be a number of post formation tasks that will need to be performed, such as:
– Complying with Federal and State Tax Requirements
First of all, you must obtain our Employee Identification Number (EIN) also referred to as your Federal Employer Identification Number (FEIN) by submitting IRS form SS-4. This is used to identify your corporation for tax purposes and is required by the IRS.
You must also pay taxes to the California Franchise Tax Board (FTB). All California corporations doing business in California are required to pay an $800 state franchise tax by the 15th day of the third month after the close of your company’s tax year.
This tax is paid annually by filing California Form 100 (Corporation Franchise or Income Tax Return), regardless of whether your corporation has operated at a profit or loss, or was not doing any business at all. For new corporations in their first year, the amount payable will be based on an estimate of that year’s income. S-corporation must file California Form 100S.
Furthermore, if you pay more than $100 in wages during any quarter of the calendar year, you must comply with California’s payroll tax requirements and obtain an EDD number (also referred to as a State Employer Identification Numbers or SEIN) from The California Employment Development Department. For more information go to the EDD website.
– Applying for a business license at the applicable city or county
Business licenses are generally affordable and easy to obtain, but they are frequently overlooked. However, depending on the type of business your company is engaged in, a business license may be required to legally transact business as a California Corporation. In fact, in many cases, engaging in business without the necessary business license can be considered fraud and lead to penalties being levied against your newly formed corporation. For more information on the licenses you business may require, contact the Governor’s Office for Business and Economic Development.
– Opening a company bank account
It is always best to keep your business’s finances and your personal finances in separate accounts. An easy way to do this is to establish a bank account for your corporation as soon as possible.
In order to open a corporate bank account, you will first need to obtain a Certificate of Good Standing from the California Secretary of State and have the following information ready:
- Your tax id (EIN)
- The date your business was formed
- Your Business address
- Your legal business name
Furthermore, you will need a copy of your Articles of Incorporation and a corporate resolution, if the names of those who are authorized to sign are not listed in your Articles of Incorporation.
Setting up a California Corporation can offer your company many advantages not available to sole proprietorship or partnerships. However, forming your California corporation will require a bit of preparation and some assistance from an experienced and qualified attorney. But by following the necessary steps to form and maintain your new corporation, you will be well on your way to building a sound foundation for future business success.