Whether you are a small business owner or an entrepreneur starting a business in California with a big idea, understanding the legalities of forming a corporation is an important milestone on your road to success.

In this article, we will guide you through forming a Corporation in California to provide you with an understanding of whether a Corporation in California is the right choice for you when starting a California business, the necessary paperwork that must be drafted and filed, and an understanding of the federal and California regulatory landscape for California Corporations.

Why Form a California Corporation?

Forming a California Corporation offers several advantages that are appealing to many business owners.

Liability Protection of Corporations in California

First, it provides limited liability protection, meaning that the personal assets of the shareholders of the corporation are generally safe if the business incurs debt or faces legal judgments.

Raising Capital with a California Corporation

Second, corporations have an easier time raising capital as they can issue shares of stock. This can be a significant advantage for businesses that need funding to grow.

Unlimited Duration of Operation for Corporations in California

Third, corporations have an unlimited life. This means the corporation continues to exist even if the owner leaves or passes away.

Availability of Tax Advantages for Corporations in California

Finally, California corporations may enjoy certain tax advantages like being able to deduct the cost of benefits provided to employees. These are just a few reasons why you might consider forming a California Corporation.

What is a California Corporation?

A California Corporation is a type of business entity that is legally established in the State of California.

Like all corporations, it is a separate legal entity distinct from its owners, known as shareholders. Shareholders elect a board of directors to make high-level decisions, while officers manage daily operations. Corporations in California can issue shares of stock, which is attractive for raising capital.

While there are different types of corporations, the most common type is a California general stock corporation. A Corporation must pay federal taxes at the corporate level to the Internal Revenue Service and California Franchise Tax Board. This means that it is taxed as a separate legal entity and is subject to corporate income tax on its profits. An election for S Corporation status may be used to change the taxation if desired to that of an S-Corp, which passes the obligation to pay tax to the personal tax returns of its shareholders.

The Benefits of Forming a California Corporation

There are several reasons why California residents or businesses should consider forming a corporation within California.

Proximity and Familiarity with State Laws

For a resident or a local business owner, familiarity with California laws and business regulations can be a significant advantage. Additionally, the proximity to the state offices for any necessary paperwork or legal proceedings could simplify the process of forming and maintaining a corporation.

Access to a Vibrant Business Ecosystem

California boasts a vibrant business ecosystem, including a large consumer market, broad industry diversity, and a thriving entrepreneurial culture. This environment could provide a corporation with a broad potential customer base and numerous opportunities for collaboration and growth.

Strong Legal Protections

California corporations enjoy strong legal protections. The personal assets of shareholders are typically safe if the corporation incurs debts or faces legal judgments, offering a level of security that can be particularly appealing to potential investors.

Tax Advantages

Finally, California corporations can access certain tax advantages, including the ability to deduct the cost of benefits provided to employees. These financial incentives can help reduce operational costs and increase the overall profitability of the corporation.

While the decision to form a corporation in California will depend on individual circumstances, the robust business environment in California, coupled with legal protections and tax benefits, makes it a worthy option to consider.

When is Forming a Corporation in Another State Beneficial?

There are several reasons why residents or businesses in California might choose to form a corporation in another state.

Business-Friendly Laws and Regulations

Some states are known for their business-friendly laws and regulations, which may be chosen due to their well-developed and business-friendly corporate law systems.

Lower Costs

The costs of incorporation and ongoing fees can be significantly lower in other states in the form of savings from lower annual reports and franchise taxes can outweigh the convenience of incorporating in the home state.

Privacy Reasons

Some states might offer more privacy to business owners by not requiring disclosure of the names of the officers or directors in public documents.

Access to Different Markets

Incorporating in a different state might be beneficial if the business plans to expand its operations or target customers in those regions.

Registration for Authority to Transact Business in California

If a corporation is formed outside of California and wishes to conduct business within California, it must Register for Authority to Transact Business as a foreign corporation. We discussed this crucial requirement in-depth in a previously published article you can find here, but we will briefly discuss the requirement below.

The process involves filing a Statement and Designation by Foreign Corporation with the California Secretary of State, providing details about the corporation and appointing an agent for service of process. The corporation must also submit a certificate of good standing from its home state.

Registering as a foreign corporation allows the business to legally operate in California and hire employees within California, and failure to properly register can result in fines, penalties, and the inability to access California court systems.

Registering as a foreign corporation also introduces an obligation to pay taxes and comply with reporting requirements in California in addition to those in the state of incorporation, resulting in increased startup and ongoing costs as compared to incorporating in California.

The Process of Incorporating in California

Now that you understand more about why you might form a corporation and have chosen to incorporate in California, here are the steps to take to incorporate in California.

Naming Your Corporation

The first step in forming a California Corporation is choosing a business name for your corporation with a distinctive, identifiable business name that aligns with your California business identity. The business name must comply with the following requirements:

The Corporate Name Must be Unique

The corporation name must be unique and not be too similar to an existing name in the records of the California Secretary of State. You can check the availability of a name by conducting a name search on the website of the Secretary of State.

Inclusion of Indicative Word

The name must include an indicative word, such as “Corporation”, “Incorporated”, “Company” or an abbreviation thereof (Corp., Inc., Co.), to suggest its corporate status.

Corporate Designators in California

In California, corporations may, but are not required to, utilize a specific designator such as “Corporation”, “Incorporated”, or “Inc.” at the end of the corporation name. While not strictly required, generally California Non-Profit Corporations are named without one of these corporate designators, while California For-Profit Corporations use one of the corporate designators.

Avoid the Use of Restricted Words

Certain words and phrases, such as “Bank”, “Trust”, “Insurance”, “City”, “County”, and “State”, may be restricted and might require additional paperwork or a licensed individual to be part of the corporation in California.

Avoid the Use of Professional Corporation Wording

California Professional Corporations are a unique type of business entity in California, designed for licensed professionals. There are certain words a California Professional Corporation may use that are restricted for use only by California Professional Corporations. While too numerous to list here, the use of words that describe a profession required to use a California Professional Corporation is restricted.

Compliance with Other California State Laws

California Corporations Code Section 201(b) specifies that the name must not be likely to mislead the public and it must not be the same as, or too similar to, an existing name on the records of the California Secretary of State, or a name that a corporation has reserved.

Reserving Your Desired Name

After choosing an appropriate name, a name reservation may be requested from the California Secretary of State to reserve the name for sixty days. This is not required, but it can prevent another entity from registering the name while you are in the process of setting up your corporation.

Drafting California Articles of Incorporation

California Articles of Incorporation serve as the foundational document of your Corporation, outlining the main aspects of the business. To draft the Articles of Incorporation for a California Corporation, you must include:

The Name of the Corporation

This should be the unique name you have determined, following the guidelines mentioned previously.

Business Purpose

California requires a broad statement indicating that the corporation will engage in any lawful activity for which corporations may be incorporated in California.

Initial Physical Street Address and Mailing Address

The California Articles of Incorporation must include the initial physical street address in California of the corporation. This refers to the location where the corporation conducts its business activities.

It is important to note that P.O. Boxes are not acceptable as the business address.

Additionally, if the mailing address is different from the business address, it must also be stated explicitly in the Articles. The mailing address is where the corporation receives its mail and it can be a P.O. Box.

Providing both addresses ensures that all official correspondences reach the corporation without any hindrance.

Information About Shares of Stock

Specify the number of shares the corporation is authorized to issue. If you plan to have more than one class of shares, you should provide information about each class.

Registered Agent for Service of Process

Provide the name and street address of your registered agent for service of process in California.

Information About the Incorporator

Share the name and address of each person who is acting as an incorporator.

Other Provisions May Be Provided

The above-stated requirements constitute the minimum information that must be featured in the Articles of Incorporation for every California Corporation. However, these are by no means exhaustive.

The ability to customize the Articles of Incorporation allows corporations to include a variety of other provisions specifically tailored to their individual needs, objectives, and circumstances. These additional provisions can provide further clarifications on the rights and responsibilities of shareholders, outline procedures for making corporate decisions, or set guidelines for dispute resolution, among other things. Thus, while the basic requirements are essential, adding more specific provisions can offer significant benefits in managing and operating a California Corporation.

To ensure legal compliance and appropriateness for your specific situation, it is advisable to seek legal counsel or a professional drafting service when preparing your Articles of Incorporation.

Filing California Articles of Incorporation

After drafting your California Articles of Incorporation, you will have to file them with the California Secretary of State.

You can file Articles of Incorporation by mail, in person, or online together with payment for the filing fee.

After filing the Articles of Incorporation, and the Secretary of State approves them, the corporation is officially formed. However, remember that your corporation is not ready to do business in the State of California until you complete all the other legal requirements.

Drafting California Corporate Bylaws

Corporate bylaws serve as the governing document of the corporation, providing a detailed framework for its operation and management. They are internal documents, not filed with the Secretary of State, but are adopted by the board of directors.

Contents of the Bylaws

Bylaws typically encompass information such as the structure of the corporation, details about the board of directors, the rights and responsibilities of shareholders, procedures for board meetings, and how disputes will be resolved. They may also include procedures for amending the bylaws, handling corporate records, and dissolving the corporation.

Structure of the Corporation

The bylaws lay out the structure of the corporation, detailing the different classes of shares (if any) and their respective rights, the number and type of officers, and the composition of the board of directors.

Details About the Board of Directors

The bylaws usually specify the number of directors, their qualifications, their term of office, and the process for their election and removal. They also outline the duties and responsibilities of the directors.

Rights and Responsibilities of Shareholders

The rights and responsibilities of shareholders, including voting rights, rights to dividends, and rights to inspect corporate records, are typically spelled out in the bylaws. The bylaws may also specify the procedure for shareholder meetings, including notice requirements and quorum rules.

Procedures for Board Meetings

The bylaws establish the frequency, location, and notice requirements for board meetings. They also set out quorum requirements, voting rules, and procedures for director action without a meeting.

Handling of Corporate Records

The bylaws typically provide for the maintenance of corporate records, including financial statements, minutes of meetings, and records of shareholders.

Initial Meeting of the Board of Directors

Upon the formation of a California Corporation, one of the critical steps is to hold an initial meeting of the board of directors.

At the initial meeting, significant corporate decisions are made and approved. Among the main agenda items may include the adoption of the corporate bylaws, election of corporate officers, issuance of shares of stock, setting up a business bank account, and determination of the fiscal year of the corporation.

The minutes of this initial meeting are recorded and maintained as part of the official records of the corporation. They provide a legal record of the decisions made at the meeting and establish the foundation for the operational activities of the corporation.

Registering for an Employer Identification Number

Every corporation operating in the United States must obtain an Employer Identification Number from the Internal Revenue Service. This unique nine-digit number is used by the IRS to identify businesses for tax purposes.

An Employer Identification Number may be obtained in a few different ways. The fastest way is to apply for the Employer Identification Number online via the Internal Revenue Service website, but Internal Revenue Service Form SS-4 may also be completed and submitted by mail or fax.

Issuing Stocks in Your California Corporation

Issuing of shares of stock for a California corporation provides for the ownership of the shareholders.

The Process of Issuing Shares

Once the board of directors authorizes the issuance of shares in the Initial Meeting of the Board of Directors, shares can be offered to individuals, entities, or even to the public, depending on the nature of your corporation and the specific regulations you need to comply with.

Issuing of shares of stock has a direct impact on the ownership structure and equity distribution of your corporation, so careful planning and accurate record-keeping are important.

Federal and California Securities Laws and Regulations

There are also legal considerations and requirements concerning issuing shares.

For example, California corporations must comply with both federal securities laws and regulations and California securities laws and regulations, when issuing shares of stock within California. The securities laws and regulations of other states will also apply if selling to out-of-state investors. Some securities filings require a filing fee, and depending upon the state, the securities filing fee structures may be significant business expenses.

Given the complexity of these laws, it is advisable to seek legal counsel during this process to ensure compliance and protect the corporation and its directors.

Setting Up a Corporate Records Book

Setting up a Corporate Records Book is an essential task for every corporation.

This is a physical or digital repository where important corporate documents are stored and maintained. The contents usually include the Articles of Incorporation, bylaws, minutes of board meetings, stock certificates, resolutions, and any significant contracts or agreements entered into by the corporation.

Establishing a well-organized Corporate Records Book ensures all critical documents are easily accessible and safe, facilitating transparency and good governance.

Business License, Permits, and Fictitious Business Name

It is crucial for corporations to secure the necessary business licenses (a business license is sometimes referred to as a business tax certificate) and permits at the local, state, and federal levels. These legal documents provide authorization to conduct business within a particular jurisdiction. The specific licenses and permits required depend largely on the nature of the business. If the corporation intends to do business under a name other than that on its Articles of Incorporation, a fictitious business name statement must be filed with the county in which the business is located.

File a Statement of Information

The Statement of Information is a document every Corporation in California must file with the California Secretary of State, commencing with the first filing within 90 days of incorporation in California. Following the initial filing, you must file a Statement of Information annually thereafter. Every annual Statement of Information requires payment of a filing fee.

Is Forming a California Corporation Right for You?

The decision to form a California Corporation is a significant one, with far-reaching implications for the sustainability and growth of your business venture. The experienced corporate attorneys at San Diego Corporate Law are ready to provide the guidance you need, ensuring the right choice for your unique situation. We believe in doing things right the first time, and our expertise extends to a thorough understanding of the intricacies of forming a Corporation in California. Contact us today and let us guide you through the decision and formation process, securing your future success.