Step by Step Guide: How to Incorporate in California
A corporation is a business entity that is legally separated and differentiated from its owners (shareholders). This means that the owners are protected through limited liability and would not be held personally responsible for the corporation's debts. A corporation can be created by an individual or a group of people and hold many of the same legal rights as individuals. A corporation can own assets, own and sell property, loan and borrow money, pay taxes, and can file lawsuits and have lawsuits filed against them. Ownership rights can easily be transferred, and capital can easily be raised as these functions are managed through stocks.
The following list is a broad overview of all of the steps you will need to take in order to properly incorporate in California.
Steps for Incorporating in California
- Choose a Name for your California Corporation
- Appoint your Corporation's Directors
- Get a California Registered Agent
- Prepare and file your Corporation's Articles of Incorporation
- Create your Corporate Bylaws
- Write a Shareholder's Agreement
- Hold a Preliminary Board of Directors' Meeting
- Issue Shares of Stock
- Obtain All Required Business Licenses and Permits
- File Necessary Forms with the IRS and State and Local Tax Agencies and Obtain an EIN (Employer Identification Number)
- Open a Separate Corporate Bank Account
1. Choose a Name for your California Corporation
Choosing the name for your corporation is a vital step in correctly forming your corporation.
You may need to include a corporate designation in your name such as "Corporation," "Incorporated," or "Limited." This indicates that your business is a California corporation. You will also need to avoid specific words that are not allowed by the state to be used in the name of a corporation. Additionally, you will need to make sure that your name is not already being used by an existing corporation. You can find out if your chosen name is indeed available by checking with your secretary of state's office. Usually, your corporation's name will be registered once you complete and file your Articles of Incorporation.
In certain situations, it may be beneficial for you to set up a DBA (doing business as) to operate your business under a different name than your corporate name. Laws regarding DBAs differ from state to state. You can check with your local office of business development or corporations to get more specific details.
2. Appoint your Corporation's Directors
Forming a board of directors requires thoughtful planning and dedication. A competent board of directors can increase the success, profits, and reputability of your corporation.
The board of directors is appointed or elected, and they oversee how the corporation is operated. A board of directors meets regularly to discuss the operations, policies, and progress of the corporation. They represent the views of the owners and hold their best interests in mind. Together, a board of directors oversees the CEO (chief executive officer) and can make decisions based on how the CEO fulfills their role in the company.
Owners of a corporation typically are the ones to appoint its directors. Oftentimes, owners will appoint themselves as directors, but a director does not need to be an owner. The number of directors needed for your corporation will vary from state to state. Some states require that based on the number of owners your corporation has, you will need a certain amount of directors, while in other states, this factor is irrelevant.
The duties of a corporation's board of directors can include the following:
- Defining the purpose and aims of the corporation.
- Selecting individuals who will be appointed to high-level officer positions within the corporation that function as the executive management.
- Supporting the work of corporate officers /executive management and reviewing their performances.
- Determining the salaries of corporate officers/executive management.
- Managing the corporation's financial resources.
- Managing dividend policies and payments.
- Evaluating and making recommendations on stock splits.
- Creating and serving on sub-committees.
- Finding new potential board members.
- Advance the corporation forward.
- Manage any corporate mergers or new acquisitions of the corporation.
The size of the board of directors is usually equivalent to the size of the corporation. This helps ensure that the board is effective in making decisions on behalf of your new California corporation and, in essence, governing it. Having a good board of directors will provide a diversity of perspectives while also creating an environment of professionalism, dedication, and commitment where the proper decisions that are best for the corporation can be made. Having an odd number of directors can ensure that no ties will occur in the process of voting on decisions.
3. Choose Your California Registered Agent
Every corporation is required to have a designated registered agent in the state in which it files its Articles of Incorporation.
A registered agent is an individual or company (registered agent service) that is in charge of receiving official documents from the state or service of process, the required notice you would receive if your corporation should have legal action taken against it. The role of your registered agent can be fulfilled by someone inside of your company or by an outside registered agent service. Your registered agent will need to be available at all times during standard business hours at a physical location in order to receive important legal documents and notifications. Your corporation's registered agent will be identified within your Articles of Incorporation. You will need to have a designated registered agent in order to complete your Articles of Organization and file them.
Order Registered Agent Service4. Prepare and File Your California Corporation Articles
Articles of Incorporation are required in order to document the official formation of your corporation.
Articles of Incorporation may also be known as Certificates of Incorporation or Charter, depending on the state in which you are filing. The information required may vary from state to state, but in general, your Articles of Incorporation detail basic and necessary company information.
The following is a list of information you may need in order to complete your Articles of Incorporation:
- The name of your corporation.
- Name and address of your corporation's registered agent.
- The type of corporate structure of your corporation (nonprofit corporation, profit corporation, etc.)
- Information on the initial board of directors (names and addresses).
- The amount of type of authorized stock.
- How long the corporation is meant to last, if not indefinitely.
- Name, signature, and address of the incorporator (person who is in charge of overseeing the setting up of the corporation).
5. Create your Corporate Bylaws
Corporate bylaws are the set of internal rules under which your corporation will operate.
The state may not require you to set bylaws, but they are an important component of operating a corporation. Bylaws set forth the rights and responsibilities of a corporation's various shareholders, officers, and directors. Having a set of bylaws can help maintain corporate formalities, which help streamline the process of running a corporation. Bylaws can help mitigate or prevent conflict within the corporation and allow it to run more smoothly and efficiently. Having corporate bylaws also helps establish your corporation's credibility, as banks and lenders may ask to see your bylaws before allowing you to open a corporate bank account or offer your business loans.
6. Write a Shareholder's Agreement
A shareholder's agreement is optional but can be a very helpful component to consider adding while forming your corporation. A shareholder's agreement is designed to uphold the shareholders' rights and ensure they are treated according to the agreement.
For example, this agreement can detail how the shares should be priced and how existing shareholders can go about selling their shares if they wish to leave the corporation. Additionally, a shareholder's agreement can allow shareholders to control how new parties may become shareholders and provide protections for minority owners.
In the case of the death or illness of an owner, a shareholder's agreement can also come in handy as this shareholder may need to transfer their ownership shares. This agreement can help maintain the interests of the other owners. A shareholder's agreement can become complicated, and working with a qualified business attorney can help you in writing a shareholder's agreement that meets all of the owners' needs and interests.
7. Hold a Preliminary Board of Directors' Meeting
While getting started in operating your corporation, it is important to hold a preliminary board of directors meeting.
There is a lot to discuss in the initial stages of starting a corporation and it's important to cover all of these topics in the beginning. This preliminary meeting can discuss topics such as what will be included in the bylaws, who and how individuals will be appointed as corporate officers, and the shareholder's agreement. It is important to get these initial matters out in the open at the beginning, where they can be discussed freely, and to prevent any potential issues regarding them from arising.
8. Issue Shares of Stock
Another critical step in the beginning stages of starting a corporation is issuing shares of stock.
Shareholders who have contributed financial resources, services, or other property or assets to the business are entitled to a percentage of ownership interest (stock) in the corporation. The proportion of stock in relation to shareholders' contributions will have been worked out prior to the issuance of stock and would be a part of the process covered in the preceding steps.
Stock certificates will need to be created and issued to the shareholders. These activities will need to be recorded in the corporation's share ledger, which keeps an account of who owns shares and the amount they own. Therefore, it is required and essential for corporations to keep an up-to-date record detailing how many shares have been issued, who owns the shares, and how many shares are outstanding.
9. Obtain the California Business License and Permits Required for Your Industry
Your corporation will need to obtain all necessary business licenses and permits before it can legally operate as a California business.
Required licenses and permits may differ depending on which industry your business is in, your local government, and the state in which you decided to incorporate. You can also check with your California government offices to find out all that is needed for your particular business.
10. File Necessary Forms with the IRS, California and Local Tax Agencies, and Obtain an EIN (Employer Identification Number)
Two types of tax classifications that corporations use are C corporations and S corporations. Each has its advantages.
An S corporation doesn't pay the tax directly; instead shareholders report the corporation's revenue on their personal income taxes. C corporations pay tax on the income of the corporation, and owners and employees pay tax on income received from the corporation.
C corporations are the most common corporate tax status, and they are advantageous because there is no restriction as to who can own shares. This grants for much more freedom in how the C corporation operates. S corporations are popular for their "pass-through" tax structure, however, they have much more stringent regulations in regards to how many shareholders they can have, who can be a shareholder, etc. Please visit the IRS website for more in-depth information regarding how C corporations and S corporations are taxed and regulated. Source
Corporations are required to have an employer identification number (EIN) which functions as your corporation's tax ID. Your corporation will need to obtain tax IDs on the federal level through the IRS and California and local levels through state and local agencies. Your corporation's EIN will also be used when setting up your corporate bank account and filing your corporate taxes.
InCorp can either prepare the requisite forms to the IRS or actually obtain your EIN number for you.
11. Open a Separate Corporate Bank Account
Corporations in California need their own separate corporate bank account.
It's important to create this separate account and not have any of the corporation's shareholders' accounts serve as the business' account. Depending on which bank you choose to use, you may have to provide certain documents in order to open a corporate account. The documents needed will generally vary from bank to bank. Some banks may require copies of your corporate bylaws, and others may only need your Articles of Incorporation. Most banks will also require your corporation's Employer Identification Number in order to open a corporate account.
Conclusion
Once you have completed these steps, most of the basic requirements needed to start a corporation in California will be fulfilled, and you will be well on your way to successfully operating your corporation. It is important that you complete these basic requirements in order to have a better likelihood of smoothly running your corporation and avoiding any potential conflicts amongst the shareholders, board of directors, and corporate officers. Doing so will increase the corporation's chances of short and long-term success.
