California Corporation: Everything You Need to Know
The first thing an entrepreneur must do to start a California corporation is to choose a name. 6 min read
Starting a California corporation involves several steps. The first thing an entrepreneur must do to start a California corporation is to choose a name.
The corporation's name cannot be the same or substantially similar to an existing corporation in California that is registered by the Secretary of State and cannot mislead the public. While the name can include “corporation” or “incorporated,” it is not required. If you’d like to check the availability of the name, you can mail a completed Name Availability Inquiry Letter to the Secretary of State’s office in Sacramento.
Preparing to File Articles of Incorporation
In order for your corporation to become its own legal entity, you must file Articles of Incorporation with the California Secretary of State.
These must include:
- Corporation name and purpose
- Corporation’s address (street and mailing)
- Address of the corporation’s agent for service of process (cannot be a P.O. Box)
- Amount of shares the corporation will be issuing
The filing fee is one hundred dollars and must be either physically sent to the Secretary of State or filed in person.
Appointing a Corporation’s Agent
Each corporations must register an agent for service of process in California. By registering an agent, he is agreeing to accept any legal correspondence on behalf of the corporation. The corporation itself cannot act as its own agent.
The registered agent must consent before being designated by the corporation. He or she may be a resident of California. The agent is required to have a street address, as opposed to a P.O. Box. If they are not a California resident, a corporate agent must file a Certificate pursuant to Section 1505 of the California Corporate Code with the Secretary of State.
Smaller corporations tend to name either a director or other officer to initially serve as the agent, but another agent can always be named afterward. In addition, private service companies can also act as a corporation’s agent, which the Secretary of State will provide an interested corporation.
Keeping a Corporate Records Book
It is imperative that the corporate keep a records book where all of the formal papers of the business will be filed. This records book must typically be kept at the corporation’s headquarters or principal office.
How to Prepare Your Corporate Bylaws
A corporation’s bylaws are a set of rules the corporation agrees to follow. Bylaws are internal and help get the corporation operating. While not legally required to have bylaws, doing so helps the corporations credibility and can help when trying to take out a loan, obtain credit, or other similar matters.
Whoever signed the Articles of Incorporation—known as the “incorporator”—will need to appoint the initial set of directors who will serve on the board. At the first yearly meeting with shareholders, the shareholders will then elect new directors to serve for the next term.
The incorporator is required to file a statement with all of the names and addresses of the directors and then keep it in the records book. This is an internal document and does not need to be filed with the Secretary of State.
Initial Board of Directors Meeting
At the first Board of Directors meeting, the directors should elect corporate officers, who basically act as agents of the corporation. They should also adopt the corporation’s bylaws, select a bank, and authorize the amount of shares they will issue. The corporations fiscal year should also be set at this initial meeting, as well as the adoption of an official logo or seal. If the corporation is an S-corporation, the board members will need to adopt the election of S corporation status.
What happens at the meeting must be recorded as meeting minutes. Putting together a meeting’s minutes can sometimes take up to two weeks, but afterward must be sent around to all of the board members for their approval and signature.
Authorizing the Number of Stocks to Issue
The board of directors must issue stock to each and every shareholder. Most smaller corporations will usually issue physical stock certificates, although this is not required in most states. The corporation must keep a stock transfer ledger which includes the name and contact information for every shareholder.
Each stock of the corporation is categorized as a security under law that regulates the sale and offer of corporate stock. Small corporations are exempt from these laws, and most states have passed their own types of SEC exemptions into law.
If you have any questions about California security law, you can visit the state’s securities office website.
California Tax Requirements
Every corporation conducting business in California is required to pay taxes to the state Franchise Tax Board. During each accounting period in the first quarter, the corporation is required to pay eight hundred dollars. This requirement applies regardless of the corporation is active, had a net loss, or no longer does business.
For new businesses, the franchise tax is calculated depending on their first year’s income and is subject to estimation. Income amounts of a certain level or higher will require the corporation to pay an additional fee based on their total yearly income. To find out about other details, you can visit California’s Franchise Tax Board website.
Complying with Additional Tax and Regulation Requirements
Your corporation will need to comply with other tax and regulation requirements, such as obtaining a federal employer identification number (EIN). To file an EIN, you can simply apply online with the IRS for no charge. The California Employment Development Department will issue state EINs.
Your corporation may also have to acquire other municipal or state licenses, depending on what type of business it is and where it’s located.
Payroll taxes are also required if a corporation pays over $100 wages during any three months of a calendar year. This rule will still apply even if the president is the only employee.
Filing a Statement of Information
Each corporation doing business in California needs to file a Statement of Information within 90 days after filing its Articles of Incorporation with the Secretary of State. The Statement of Information must be filed every year during the same month the Articles of Incorporation were filed or the prior five months.
Foreign Corporations Doing Business in California
Any incorporation registered with a different state must also register with California if it wants to do business in the state. Foreign corporations are also required to appoint an agent that will be physically present in California. Foreign corporations can register by filling out the Statement and Designation by Foreign Corporation form. This form can either be sent in by mail or filed in person.
If your foreign corporation’s name is not available to use in California, it will be required to file under an assumed name different from the corporate name. This assumed name is required to be in the Statement. The completed form must also include a certificate of good standing from the state the foreign corporation is incorporated in and must be fairly recent (no more than six months prior to filing the Statement).
In California, if an LLC wants to convert to a corporation, it can use the state’s streamlined process that allows the corporation to file a single document with the Secretary of State. This process, also known as a “statutory conversion,” automatically converts the LLC into a corporation and transfers its assets and liabilities as well. This streamlined process allows the LLC to avoid having to form a distinct corporation before the conversion occurs. There is also no need to dissolve the LLC by a separate process.
Converting an LLC into a Corporation by Conversion Statute
If an LLC wants to convert to a corporation by using California’s conversion statute, it must adopt a plan and file Articles of Incorporation which states the conversion. The plan can be as simple as one statement listing the key elements of conversion.
It must include:
- Terms and conditions
- The new corporation’s name and address
- The LLC’s old address
- How you will be converting the membership interest of the LLC into shares of the new corporation
- Article of Incorporation provisions by which the corporation’s shareholders will be bound
It is advised that you reach out to an attorney to prepare this conversion document. The conversion plan must also be approved by a majority of the LLC members, but California also allows for alternative voting measures for approving the plan.
Once approved, the corporation then needs to draft its Articles of Incorporation, which will include the statement of conversion and the signatures of all LLC members. The Secretary of State can help with this if needed, or you can also hire an attorney for assistance.
If you need help filing a corporation in California, you can post your legal need on UpCounsel’s marketplace.