How to Form a Corporation in California
If you would like to find out more about how to form a corporation in California, Go Vitru’s professionals offer several steps to consider along the way. Can anyone legally set up and maintain a corporation that complies with California’s regulatory framework?
Here is a step-by-step guide, including some crucial information on how an established support structure like Go Vitru can streamline the process.
How a California Corporation Works
As a separate legal entity, a corporation enables a group of people to manage a business under an umbrella of limited liability protection. The protection will shield the shareholders’ assets by giving the corporation the same legal standing as a person in the eyes of the law. For instance, the corporation can hire employees, acquire assets and liabilities, and file or defend itself against a lawsuit.
The Advantages and Disadvantages of a Corporate Structure in California
A corporation’s advantages and disadvantages affect how and why you might form a corporation, particularly in California. Go Vitru lists a few key elements below:
Three Benefits of a Corporation vs. Limited Liability Company
1 Limited Personal Liability
Legal protection for personal assets is essential for those forming a corporation, as it is for an LLC. While the law requires detailed knowledge of a corporation’s activities and risks, it will not hold founders or investors personally liable if the corporation fails. Incorporators remain responsible for the business’ debts, but creditors will not be able to seize their personal assets to settle outstanding claims.
Setting up a corporation in California might be a long process, but it is rarely expensive. Apart from a few initial fees, it is far cheaper than forming or incorporating an LLC.
3 Tax Exemptions
California’s tax exemptions may benefit the bottom line, depending on the type of corporation. Possible exemptions include:
- capital gains, and
- gift tax exemptions.
Two Major Disadvantages of Setting Up a Corporation in California
The law considers owners a separate entity from the corporation, but there are still disadvantages of forming a corporation in California.
1 Costly Maintenance
Forming a corporation in California can be affordable, but it depends on how complicated you make it. For example, you may need to pay a state filing fee, hire an attorney, and incur costs to sell stock within the corporation or transfer ownership out of the corporation.
2 Rules and Regulations
Maintaining a California-based corporation involves complying with myriad state and federal rules. For instance, corporations need all the necessary licenses or permits before employing anybody. It may also mean strict limitations on the number of shareholders and employees.
Other Considerations Before Forming a Corporation in California
Before forming your own corporation, there are various types of business entities to consider, including nonprofit corporations. The choice depends on the business structure, the location, and how you intend to manage the company. Guidance from the state’s corporation’s office can be helpful, especially surrounding the requirements for flawless corporate formation.
Go Vitru also advises the following considerations before forming a corporation in California :
Unpacking the Business Idea
It is impossible to predict how the industry will respond to a new company, but only a promising or lucrative business concept is worth pursuing. Maintaining a corporation is not easy or cheap; without a steady growth rate, it is not worth the effort.
Planning Any Business Development
Forming a successful corporation means planning for growth stages well in advance. Business details should be clear before incorporation so that you can scale them effectively.
Understanding the Drawbacks of Incorporation
There are several disadvantages of incorporating a business, including challenges around how to raise capital. Weigh all the possible disadvantages against the advantages you seek, and only proceed if there is value in tackling the intricacies of this process.
Curating the Corporation’s Members
Knowing when and how to form a California corporation will also depend on how many members the corporation needs and their roles. There are three types: shareholder(s), two or more persons, or sole proprietorship. Opting for shareholders essentially involves forming partnerships and distributing varying ownership levels throughout the corporation (profit share, voting power, and more).
Maximizing the Corporation’s Resources
Maintaining a California corporation can be expensive, from staff to accountants and attorneys. Making sure that the company complies with the state and federal government legal requirements is essential, and resources should be able to cover every eventuality.
How much control would you like to have over the business? Would you prefer being a shareholder and delegating the company’s management to someone else or being personally responsible for all aspects of the business structure? The structure type will depend on these preferences.
Depending on the type of corporation, California imposes different tax implications, such as self-employment taxes and general state income taxes. Take a close look at the details for each type of corporation before deciding on your preferred structure.
How to Form a Corporation in California: Ten Steps
So, what is the best way to form a corporation in California? With the potential advantages and disadvantages above, the following ten steps from Go Vitru’s business professionals should make the process simpler:
1. Choose a Corporate Name for the Business Entity
The first major step is choosing the corporate name. The business name should not be misleading to the public or too similar to an existing one on California’s records. Those interested in forming a corporation can perform a preliminary check of the name’s availability using the Business Entity Search function, a link on California’s website.
The unique corporate name should also contain the word “incorporated” or “corporation,” or an abbreviation of one of these terms. However, the business name cannot include any abbreviations or words that indicate other types of businesses, such as the phrase “limited liability company.”
2. Prepare the Articles of Incorporation
After choosing the business name, file a Name Reservation Request Form online or via postal mail before preparing and filing the articles of incorporation. The formation process might take a while, and filing the name request quickly will reserve the business name for up to one year to prevent anyone else from using it. Then, proceed with the articles of incorporation preparation and administration:
- Submit the corporate filing at the state’s office for small businesses or another appropriate category.
- Attach a copy of the Name Reservation Certificate to the articles of incorporation.
- Pay the filing fee.
Mastering how to form a corporation in California requires the articles of incorporation to include:
- The business name
- The corporation’s purpose
- The number of shares the corporation has the authorization to issue (for multiple investors)
- The incorporators’ names and addresses
- The directors’ names and addresses for the state’s secretary files
- The name and address of the agent for service of process
The state’s office may also require some business structures, like small businesses, to include business hours, business income, and other information for the state’s secretary or state’s corporate filing office.
Specify the Incorporators
Incorporators must sign the articles of incorporation before filing. The California corporation may have one or multiple incorporators, whose responsibilities will end after filing the articles of incorporation. You can also choose someone else to form the corporation at this point.
Specify the Directors
The state’s office requires directors to be responsible for determining the business structure, corporate policies, and related strategies. They are also in charge of overseeing the corporation’s management. At least one director must be above 19 years old, and you must specify multiple directors in the articles of incorporation.
3. Appoint a Registered Agent as for Limited Liability Companies
A registered agent assists with service of process, including government correspondence and accepting the legal papers on behalf of the corporation’s shareholders if another party sues the business. The registered agent can be an individual residing in California , business-related entity, or out-of-state entity with an office in California. Additionally, the registered agent must have a physical address in the state.
If small business administration is part of the decision, you could name an officer or director to serve as the corporation’s initial registered agent and select a different agent later.
4. Establish a Corporate Records Book
The law requires a corporation to document and preserve permanent records of all important company decisions. A corporation’s records book is where it keeps all of these essential entries on hand, including paperwork items such as:
- Minutes of the board of directors and shareholder’s meetings
- Business (net) income details
- Annual reports
- Stock certificates and stubs for those stock certificates
- The articles of incorporation with relevant amendments
- Written communication to the corporation’s stakeholders, including shareholders
- The list of the corporation’s directors’ names, contacts, and addresses
California permits a corporation to keep the corporate records book at the company’s principal office or in a safe location elsewhere.
5. Prepare the Corporate Bylaws
Establishing corporate bylaws involves drawing up an internal document to specify the ground rules that the relevant parties will follow when operating the business. The corporation’s owners or managers do not need to have these bylaws as a legal requirement and do not file them with the state’s corporate filing office. However, these documents are still essential.
Besides governing a corporation’s intended operation, well-formed bylaws add an aura of legitimacy to the corporate structure. It confirms the corporation’s professionalism in the eyes of banks, the IRS, and other creditors. In fact, some financial institutions will request a look at the corporation’s bylaws before agreeing to open a corporate bank account or allowing the entity to apply for loans.
The bylaws should cover a wide range of topics, including:
- The number of directors and corporate officers
- How the committee will elect the directors
- How often the directors will meet
- The types of officer roles
- How the shareholders will conduct votes
- The procedures the corporation will allow for resolving internal disputes
Prepare the bylaws, record them in an internal document to sign and file, and retain them in the corporate records book.
6. Designate the Initial Corporate Directors
As the business owner, you are responsible for selecting the initial board of directors who you will include in the articles of incorporation. You should also think about how to form a corporation in California to maximize the effectiveness of the various roles that will shape the organization.
If you did not include a list of initial directors in the articles of incorporation, it is best to record director appointments in a signed document and file it to the corporate record location. The initial corporate directors will serve as the board of directors only until the first board members’ meeting.
7. Conduct the First Board of Directors Meeting
Once you have prepared bylaws and designated the initial board of directors, California’s laws require the corporation to conduct an initial board meeting. During the first meeting, the initial directors are responsible for:
- Appointing corporate officers to manage day-to-day affairs
- Reviewing, approving, and adopting bylaws
- Adopting an official corporate seal and stock certificate form
- Selecting a corporate bank
- Authorizing the issuance of shares (stock)
- Agreeing upon the corporation’s fiscal year
Go Vitru advises preparing a detailed record of all the key discussions in this initial meeting, distributing them to all board members for a thorough review and feedback. Record all the decisions in the form of corporate minutes for each director to review before filing.
8. Comply with State Tax and Regulatory Requirements (S-Corporation Considerations)
One of the most crucial decisions is choosing taxation as an “S” or a “C” corporation. Most corporations opt for the latter tax status, which garners fewer restrictions. However, C-corporations could take on double taxation—at a corporate level and on the shareholders’ personal tax returns.
The other corporation option offers a “pass-through taxation” clause that eliminates the double taxation issue. It does not incur tax on dividends but is only meant for corporations that:
- Have less than 100 shareholders
- Do not have foreign shareholders
- Only issue one class of stock
- Are not owned by another business
If your corporation satisfies these requirements, you might be better off opting for the S-corporation option. It will require filing Form 2553 Election by a Small Business Corporation, which all shareholders must sign within two-and-a-half months after the start of the corporation’s first tax year. Besides this, California requires the corporation to pay a business privilege tax.
If you choose the C-corporation option, the company will also incur corporate income tax.
Additional Tax Requirements
Additional tax requirements may affect the basic ideas for how to form a corporation in California. For example, you may need to include a Federal Employer Identification Number and other state and local business licenses. The EIN is essential for various federal income tax purposes, including allowing the organization to hire employees, open business bank accounts, and file corporate taxes.
Depending on the type of business that the corporation encompasses, it might also need to pay other taxes, such as property tax or sales and use tax. Check the requirements at a county and city level as well to ensure that the corporation is well-prepared for any additional requirements for legal compliance.
9. Acquire Insurance
Regardless of the type of business, the corporation engages in, the California authorities might require the corporation to carry particular insurance coverage. For instance, one type of insurance a corporation is likely to need will be the workers’ compensation insurance options available in California. It may also be beneficial to acquire other types of insurance like general liability insurance (not a legal requirement by the state, but still extremely useful).
10. Open the Corporation’s Bank Account
In forming a corporation, the final consideration is to keep the organization’s official assets separate from the stakeholder’s personal assets. This arrangement helps the corporation conduct business more efficiently and offers limited personal liability if there is a need for protection by the law.
If you fail to separate the assets, you could find yourself being responsible for the corporation’s liabilities under an unexpected lawsuit or similar legal dispute.
Forming a corporation in California is not an easy decision, with numerous factors involved in incorporating a business with liability protection and regulatory compliance. Even experienced entrepreneurs can benefit from professional input during this process, as the stakes involved are too high to afford mistakes. That’s why Go Vitru offers such a comprehensive service, committed to helping small business owners establish, manage, and grow their corporations in California and beyond.
Our professional contribution does not stop at setting up the company; maintenance is also crucial if you want to continue creating opportunities to achieve your maximum potential. Go Vitru’s team understands the work that goes into gaining traction within a niche while establishing a recognized name for the corporation. Why not find out more about how we can guide you through the process of building a credible, profitable company that serves the local community?
Contact us online today to learn more about how to form a corporation in California with professional and reliable support from Go Vitru’s incorporation service experts.