15 Steps on How to Form a Corporation in California

Follow 15 steps to form a California corporation, from choosing a name and registered agent to filing Articles of Incorporation. Review stock issuance, taxes, licenses, corporate records, accounting, insurance, and ongoing California filing requirements for your business.

By Brad Nakase, Attorney

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Table of Contents

Introduction

Step 1: Give your California Corporation a name

Step 2: Select a registered agent in California

Step 3: Articles of Incorporation

Step 4: Select the board of directors for the company

Step 5: Accept the board of directors’ organizational resolutions

Step 6: Draft and approve corporate bylaws for California

Step 7: Issue stock shares

Step 8: Think about treating your company as an S Corporation

Step 9: Ascertain whatever licenses, permissions, or registrations are required to establish your California corporation

Step 10: Send the California Secretary of State a Statement of Information

Step 11: Take note of your business agreements

Step 12: When forming a California corporation, get a tax ID

Step 13: Establish a reliable bookkeeping and accounting system

Step 14: To avoid personal liability, adhere to company procedures

Step 15: Make sure your business is adequately insured

Introduction

There are several advantages for business owners who establish a California corporation. A corporation that is run correctly will shield its stockholders from the liabilities and obligations of the company. Venture capital firms, angel investors, and other investors are potential sources of funding for the company. A company’s reputation and brand recognition can be enhanced by incorporation, which can also make a potential sale of the business easier. Easily transferable shares are another option available to corporations.

To properly incorporate and run a California business, a number of important requirements must be followed. California corporations can be established directly by entrepreneurs, through incorporation services, or through startup attorneys.

This guide explains how to form a corporation from start to finish. A thorough approach to creating a California corporation can be found in this article.

Step 1: Give your California Corporation a name

It could be tricky to establish a name for your company. The success of your business can be greatly impacted by the name you choose for your startup. An improper name could lead to unsolvable legal and commercial obstacles.

There are some fundamental naming guidelines:

Do a name eligibility check on the Secretary of State’s website. It is to find out if your suggested name is available. According to California law, the Secretary of State cannot issue a name reservation or file a document that contains the suggested corporate name that’s identical to or confusingly similar to a current corporate name.
Use the U.S. Patent & Trademark Office trademark registry to ensure that no one else has registered your name as a federal trademark.
You are not allowed to employ the name of an already-existing company. Conduct a comprehensive search on the internet to confirm.
Inc., Incorporated, Corp, Corporation, or Limited has to be there in the name. For instance, this is usually accomplished by naming the business “Smith Metals & Glass, Inc.”
Names that could mislead the public are prohibited (e.g., suggesting association with a government organization).
Certain terms in the name are prohibited without a specific license. For example, banks, insurance companies, & credit unions.
Submit a trademark application to the state or the USPTO to safeguard the name.
Names that are difficult to spell must not be used.
Check to see if the domain linked to the company name is available (the “.com” version is preferred).
Avoid choosing a name that can be restrictive. That name may not be relevant if your company expands.

Step 2: Select a registered agent in California

A “registered agent” is required when a California corporation is founded. A person or organization that is permitted to conduct business in California and receive official legal & tax communications on behalf of the company is known as the registered agent.

The registered agent may be a director, an officer of the corporation, a shareholder, another California resident, or a specialized registered agent service provider. The registered agent’s address is posted in the public records through the California Secretary of State’s website, and they must have an actual street address in the state (a post office box will not work). During regular business hours, registered agents have to be accessible.

For a small yearly cost, several online incorporation firms (ZenBusiness.com, CorpNet, etc.) will offer registered agent services in addition to their incorporation services. Because the registered agent’s address—rather than your physical address—is listed in public records, using an external registered agent may safeguard your privacy. Additionally, some individuals create businesses outside of their home state and employ a registered agent to supply an address for obtaining legal documents in California.

Step 3: Articles of Incorporation

The law outlines how to form a corporation & the documents required. The formal document establishing the corporation must be filed with the Secretary of State. It is done once you have chosen the business name and a registered agent. You, your corporate attorney, or an internet incorporation provider can file this. The Articles of Incorporation is the name of this document. When a single class of shares has been involved, Form ART-GS is usually utilized for filing; however, any format may be utilized as long as it satisfies the legal requirements.

Usually, the Articles of Incorporation consist of between two & three pages. Important sections include:

The company name. The corporation’s official name is listed in this part of the articles.
Address. The full street address, state, city, and zip code of the company’s original address. This cannot be a P.O. Box; it has to be a physical address.
The corporation’s objective. The standard purpose clause looks like this. “The corporation’s goal is to carry out any legitimate activity or act for which a corporation could be established under California’s General Corporation Law, with the exception of banking, trust companies, and the practice of a profession that the California Corporations Code permits incorporation.”
The capital that has been authorized. The aggregate number of stocks that the company may issue, as well as the various stock classes, must be specified in this section. In the beginning, you usually just have one class of regular stock, but occasionally you can issue preferred stock in addition to common stock. A reasonable number of shares should be authorized in this section to include the founder’s shares as well as any shares that might be given to future investors or employees. Consider approving at least 10,000,000 shares.
The registered agent’s name and address. For the purpose of serving the standard procedure in the state, the corporation must specify the name and physical address of a registered agent. Refer to the previous step #2.
Further necessary provisions. For certain clauses to be effective, they must also be included in the Articles, such as the preemptive right to buy future shares.
A signature. Although there is usually only one incorporator, each incorporator must sign the articles.

Articles of incorporation (California) require a $100 filing fee, with additional costs for faster service.

Step 4: Select the board of directors for the company

A board of directors is in charge of controlling and supervising the corporation’s overall operations. It is required for every California corporation. Initial directors are usually chosen by the incorporator using a straightforward Statement of Incorporator as a component of the corporate creation process.

To become a director of a California corporation, there are no minimum requirements for age, experience, background, or domicile.

A minimum of one director is required for corporations with a single shareholder. A minimum of two directors is required for corporations with two shareholders. A minimum of three directors is required for corporations having a minimum of three shareholders.

The corporation’s shareholders elect new or substitute directors.

Step 5: Accept the board of directors’ organizational resolutions

Organizational board resolutions are usually adopted by the directors in a meeting in compliance with the organizational bylaws or by majority written assent during the course of the corporate establishment process.

Any or all of the subsequent authorizations may be included in the organizational resolutions:

Officer appointments (usually the CEO, CFO, & Corporate Secretary)
Putting out stock
Using a stock option strategy
Approving the establishment of corporate bank accounts and signing authorizations (banks frequently have the kind of resolutions they wish to see)
Electing S Corp status, if applicable
Approving any important early agreements
Fiscal year election
Reimbursement of incurred incorporation costs
Approval of Indemnity Contracts with Directors and Officers
Bylaw adoption

Step 6: Draft and approve corporate bylaws for California

A corporation’s bylaws contain the guidelines that control the authority and rights of its executives, directors, and shareholders. The majority of attorneys and incorporation firms offer a prepared “standard” set of model bylaws that can be altered to suit the unique needs of your business. Legal professionals can help determine how to form a corporation in your state.

Usually, the board of directors adopts the bylaws during an organizational meeting or, in lieu of an organizational meeting, with written unanimous agreement.

Usually, the bylaws address the following:

The board of directors’ size
When and how (including notice) board meetings get organized
When and how (including notification) shareholder meetings get called
Officers’ and directors’ obligations
How to exercise your right to vote
Control of corporate stock transfers
Officers and directors have an indemnity requirement, which shields them from litigation and claims.
The fiscal year of the business
General business issues

In general, the board of directors or a vote of the shareholders may create, alter, or repeal bylaws, which may restrict the board’s authority in this regard.

Step 7: Issue stock shares

A corporation’s owners are referred to as “shareholders” and get stock as proof of their ownership stake in the business. The sale must be approved by the board of directors, who must also determine the price per share of stock. Federal & state securities regulations may be relevant whenever shares are sold.

However, a “private placement” exception from the securities laws’ registration requirements will probably be available for several small businesses with small stock offerings to founders. Section 25102(f) of the Corporations Code may compel you to submit an announcement to the California authorities within fifteen days of the stock’s issuance. This notification may be filed online.

A securities/startup lawyer ought to be consulted if you are offering stock to investors because the laws get more complex. It is quite common to search for how to form a corporation before registering a company.

In exchange for their stock, shareholders may offer money, assets, or services.

Verify that you have a stock register that documents every stock certificate that is issued, along with the date, certificate number, and amount of money the company has received.

Step 8: Think about treating your company as an S Corporation

Businesses that choose to “pass through” their federal losses, income, credits, and deductions to their shareholders are known as S corporations. In the initial stages of a corporation, when there may be losses, this might be beneficial to the shareholders because they can utilize those losses on the personal tax returns they file. Additionally, in contrast to ordinary C corporations that produce profits and subsequently distribute them to their shareholders, the firm will only pay taxes at the level of its shareholders if it turns a profit.

A few essential guidelines must be followed to select S corporation status:

There can be no more than one hundred stockholders in the corporation.
Generally speaking, corporations and partnerships cannot be shareholders; however, there are some exclusions for certain tax-exempt entities, trusts, and estates.
The corporation may only have one type of equity (common stock and preferred shares are not permitted).
Only US citizens or residents are allowed to be shareholders.

Generally, the S corporation election should be filed with the IRS by the fifteenth day of the third month in which it is planned to take effect, or at any point in the year that comes before the tax year.

S corporations in California are required to pay the state a franchise fee of 1.5% of their net income, with a minimum payment of $800.

Step 9: Ascertain whatever licenses, permissions, or registrations are required to establish your California corporation

You will require a few licenses, permits, or rules. It depends on the type of business.

Permits are required for enterprises that are subject to regulations, such as bars, agriculture, & aviation.
Permit or license for sales tax
Permits for home-based businesses
County and city business licenses or permits
Permit for zoning
Seller’s permit
Permits from the health department (for a restaurant, for example)
State and federal tax and employer IDs

Additionally, visit the CalGold portal, which helps enterprises in California get relevant permit data and contact details for the different California authorities that manage and provide these permits. Federal licenses or permissions may also be required, depending on your business. For information on federal licenses and permissions, visit the SBA website.

Step 10: Send the California Secretary of State a Statement of Information

A corporation must submit a “Statement of Information” and deposit a filing fee to the California Secretary of State within ninety days following submitting the articles of incorporation. The online version of the form is also available. The Statement gives a general overview of the company.

The Statement of Information is required to be submitted annually for domestic stock & agricultural corporations.

Step 11: Take note of your business agreements

Written deals between multiple parties that are legally binding are known as business contracts. These agreements are vital for conducting business, and they must be carefully drafted and/or negotiated.

The greater value that is at risk, the more important it is to have a documented contract, even if smaller enterprises sometimes conduct business according to unofficial handshake agreements or tacit understandings. A contract acts as a set of guidelines that both parties must abide by. It gives each side the chance to:

Explain all of the responsibilities that are expected of them.
List all the responsibilities they want the other side (or entities) to fulfill.
Minimize any liabilities.
Establish guidelines, such as a deadline, for fulfilling the contract’s requirements.
Specify conditions for a lease, rental, or sale.
Decide on terms for payment.
Clearly define all of the parties’ obligations and risks.

Essentially, a contract is a written agreement. Before signing, it should be viewed as a work in development that evolves as each party adds to it, even if it is usually drafted by one party and favors their needs and requirements, insulating them from the majority of (if not all) obligations. It becomes a formal document after it is signed. The foundation of an agreement is “consideration,” which might take the form of money or a commitment to complete tasks or render services by a given deadline.

The idea of a “standard contract” is more fantasy than fact, and far too frequently, people just sign contracts without reading or discussing their provisions. A startup must ensure that all of the conditions of the contract are acceptable to it. Depending on the specifics of the business, practically any condition can be negotiated.

Careful wording is required in the areas of consideration, remuneration, rights to ownership, liability, and risk. To ensure that each of these topics is covered in an understandable way, anyone launching a business should consult a knowledgeable lawyer with experience in contracts.

The terms of the agreement itself should specify how it will be implemented and what happens if one party doesn’t fulfill their end of the bargain. Smaller companies often benefit from having a confidential, legally enforceable arbitration provision to settle any issues.

The following are essential contracts that a new business ought to have as its own type of “standard contract” (written in the startup’s best interests):

Service or sales agreement
Offer letter to new hires
License agreement
Consulting contract with any freelancers (you want to confirm that you will be the owner of the rights to intellectual property for everything they create for your company).
Agreement on Confidentiality & Invention Assignment for Workers and Independent Contractors
Non-disclosure agreement

Step 12: When forming a California corporation, get a tax ID

The IRS will typically need you to obtain a tax ID for your business. This is often referred to as an EIN (Employer Identification Number). It functions similarly to a Social Security number for businesses. Your EIN is required when filing tax returns, & banks will request it when you open a business bank account.

The IRS website allows you to obtain an EIN online. Getting an EIN through the IRS is free of charge.

Step 13: Establish a reliable bookkeeping and accounting system

To monitor your business’s finances, including income, spending, expenditure on capital, EBITDA, profits and losses, etc., you will have to set up a ledger or accounting system. This is essential for both tax filing and understanding the cash flow position of your company.

Several online software programs (Xero, Zoho, FreshBooks, & QuickBooks) can be useful in this context.

Step 14: To avoid personal liability, adhere to company procedures

Many business owners mistakenly believe that by submitting Articles of Incorporation for a corporation, they are fully shielded from personal liability. This is untrue. Business owners are not fully protected by the incorporation process alone. You should follow these steps to reduce the possibility of such individual or shareholder liability:

Use the company name at all times. All contracts, invoices, and other papers used by the corporation should have the complete name of the company, including “Corp.” or “Inc.” This amply demonstrates the corporation’s existence as a distinct legal entity.
Make sure your signature is correct at all times. This implies that you are going to sign using the corporation’s name and your title on its behalf.
Observe all business procedures. This entails adhering to corporate procedures, having board of directors meetings, recording meeting minutes, issuing shares appropriately, and following bylaws.
Ensure that money is kept separate. Individual shareholder funds and corporate funds shouldn’t be pooled or kept in the same accounts for any reason.
The corporation’s transactions ought to be distinct from any private transactions. You effectively run less risk of being held personally liable for the company’s obligations if you never blur the distinction between individual owners, officers, or the board of directors and the company (which is a distinct entity).

Step 15: Make sure your business is adequately insured

You must get the right insurance coverage if you plan to invest the time and energy necessary to launch a business.

Determining your unique insurance requirements based on the type of business you run should be your first priority. Consider what risks need to be covered and to what extent coverage will be enough. Next, locate and assess insurance brokers or suppliers to ascertain whether businesses offer the kinds of coverage that meet your requirements.

When looking for insurance, you’ll want to know the answers to these kinds of important questions:

What constitutes the deductibles?
Are the insurance limits sufficiently high?
What things or situations are not covered?
Does the coverage have any gaps?

The following is a selection of insurance options that might be suitable for your company:

Product liability insurance
General liability insurance
Property insurance
Professional liability insurance
Worker’s compensation insurance
Directors & officers (D&O) insurance
Business interruption insurance
Health insurance for workers
Cybersecurity/data breach insurance
Commercial automobile insurance
Unemployment insurance
Key individual life insurance

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15 Steps on How to Form a Corporation in California

Introduction

Step 1: Give your California Corporation a name

Step 2: Select a registered agent in California

Step 3: Articles of Incorporation

Step 4: Select the board of directors for the company

Step 5: Accept the board of directors’ organizational resolutions

Step 6: Draft and approve corporate bylaws for California

Step 7: Issue stock shares

Step 8: Think about treating your company as an S Corporation

Step 9: Ascertain whatever licenses, permissions, or registrations are required to establish your California corporation

Step 10: Send the California Secretary of State a Statement of Information

Step 11: Take note of your business agreements

Step 12: When forming a California corporation, get a tax ID

Step 13: Establish a reliable bookkeeping and accounting system

Step 14: To avoid personal liability, adhere to company procedures

Step 15: Make sure your business is adequately insured

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