Incorporate in California: Everything You Need to Know
Incorporating in California is one of the best ways to grow your business while securing its future.8 min read
Incorporate in California
Incorporating in California is one of the best ways to grow your business while securing its future. The added perk of doing this is that corporations get to decide where they will form their legal entity. Many business owners are attracted to incorporating in California even if that isn’t physically where their business is headquartered. Every state has different steps you need to take to incorporate a business and if you decide to incorporate in California, you will want to familiarize yourself with the process.
By forming a corporation in California, you can increase your tax benefits and reduce legal liability. And by incorporating your business, you are also able to do a better job of protecting your personal assets in the event of a lawsuit. Lastly, forming a corporation gives your business more credibility and makes it more appealing to potential customers and investors.
An additional benefit of incorporating is California is the flexible management. Only three officer positions are needed to form a corporation in California: the president, the chief financial officer, and the secretary. And although three officer positions are required to form a corporation in California, you can fill all three roles with just one person. Corporate managers and shareholders can also enjoy the benefit of anonymity when they incorporate in California. Only the director and resident agents are required to publicly disclose their names. Finally taxes for corporations in California are at a low 9 percent and these corporations can enjoy other tax advantages as well.
Choose a Corporate Name
When first forming a corporation, you need to make sure that the business name you choose is available in the state of California. This is the first step anyone has to take when incorporating a business.
The only time the ending of the business name has to be included in the corporate name is if the corporation is a professional or close corporation. Another instance in which the ending of the name has to be included is if a person’s name is in the corporation name.
If your corporate shares won’t be traded in public markets, your corporation is a close corporation. Close corporations are required to include the word “limited”, “corporate”, or “incorporated” in the title (or an abbreviation of any of these words).
Professional corporations must comply with name requirements in the state of California. These requirements depend largely on what profession your corporation falls under. Contact the state agency that overlooks the profession your corporation is under to learn more about name requirements. The name you choose cannot be the same as or even similar to the name of any other domestic or foreign corporations that already exists. It also can’t be similar to a name that is already reserved by someone else. Lastly, the corporate name you choose cannot be misleading to the public. If your corporate name will include the word “trust”, “trustee”, “bank”, or “bank”, you need the approval of the Superintendent of Banks.
To find out if the name you wish to use for your corporation is available, complete and submit a Name Availability Inquiry letter. This can be done for free. Once you have submitted this inquiry letter, the state will look up whether or not the name is accessible. With one inquiry, the state will be able to look up three names or less.
When you fill out the Name Availability Inquiry letter, list the three names in order of preference. Don’t forget to keep a copy of this letter in your records. Also provide a stamped envelope that’s self-addressed when mailing the inquiry letter. If the name is available, you can reserve it for a 60 day period. To reserve the name, fill out and mail the Name Reservation Form to the office of the Secretary of State. You may submit three names for reservation when you fill out the letter. The first available name will be the one that is reserved. Don’t forget to include the $10 filing fee with the form, made out to the Secretary of State.
Mail your form along with the $10 fee and self-addressed envelope to the Secretary of State, Name Availability Unit, 1500 11th Street, 3rd Floor, Sacramento, CA 95814.
If you do not want to mail the form, you can deliver it to the Secretary of State’s office in Sacramento in person. There is an additional $10 handling fee to do this.
Consider Obtaining a Trademark
When incorporating your business, you might want to think about getting a trademark. A trademark is defined as a design, symbol, word, or phrase that acts as an identifier of your corporation. Trademarks are an important component of brand identity. When you have a trademark (along with federal protection of that trademark) it prevents others from using it and if they do, you can sue them.
File California Articles of Incorporation
Filing the articles of incorporation is a necessary step when forming a corporation in the state of California.
In your articles of incorporation, you need to provide the following information:
- The corporation’s name
- The purpose of the corporation
- The registered agent for service of process
- The corporation’s street address (this can’t be a post office box)
- The number of authorized shares in the corporation
- The incorporator’s signature
The exact information required in the articles of incorporation is different in every state. When submitting your articles of incorporation, you can choose to either write the document up yourself or fill out a form. You can obtain a form from the Secretary of State. When writing up the articles of incorporation, you must include the number of authorized shares and par value. The number of shares you have does not increase filing fees.
The type of form you need to file depends on the type of corporation you’re forming. A general stock corporation files Form ARTS-GS. A close corporation files FORM ARTS-CL and a professional corporation files form ARTS-PC.
You also have the choice of filing drafted articles rather than a form. Should you choose a drafted article, you will need to provide the following information:
- Article I needs to include the corporate name. Double check the name thoroughly because what you write down is how the name will look in the Secretary of State’s records.
- Article II provides information on the purpose of the company. State the following if you are starting either a general stock or close corporation: "The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code."
- Article III includes information on the agent’s name and California address. If your registered agent is a separate business, you don’t need to include an address.
- Article IV states the address of the corporation. This cannot be a post office box address.
- Article V identifies how many corporate shares will be approved to issue by the corporation. If you plan to issue more than one class, you have to include details about the preferences, restrictions, privileges, and rights of each class.
- Article VI states how many corporate shareholders the company can have. You only have to provide this information if you’re forming a close corporation.
At the end of the document, include the signature of the incorporator. If you have more than one incorporator, you need each person’s signature.
Before mailing this document, create a copy for your personal records. Use certified mail and request return receipt. In the envelope, include a check or money order of $100 made out to the Secretary of State. Mail the articles to the Secretary of State, Business Entities, P.O. Box 944260, Sacramento, CA 94244-2600.
For a $15 processing fee, you can bring the articles in person to the Sacramento Office at 1500 11th Street.
Appoint Your Directors
The directors of your corporation are the people responsible for making big decisions regarding the corporation. They also represent the corporation’s shareholders. For each shareholder, you can only appoint one director.
Appoint directors: directors act as representatives for shareholders and make major decisions for the corporation. For two shareholders, you must have two directors, and so on.
There is no requirements for where the directors must live. There is also no age minimum for directors. When crafting the articles of incorporation, the directors’ name does not need to be listed. In general, corporate directors in California need not meet any special eligibility requirements.
Other Corporate Obligations to Fulfill
â— Make a corporate records book and keep it at the primary corporate office. Use this book to hold all corporate documents. Examples of important documents you should include in the corporate records book are stock certificates, stock certificate stubs, and minutes of director and shareholder meetings.
â— Corporations also need a Federal Employer Identification Number (FEIN) to open a corporate bank account.
â— Make sure you have all of the right business licenses and permits to allow you to do business in certain counties and cities.
â— Within 90 days, you also need to submit an initial report called the Statement of Information.
â— When forming your corporation, you need to meet California’s filing requirements by providing a corporate purpose.
â— Appoint a registered agent for your corporation. The registered agent is responsible for sending and receiving legal documents for the corporation.
â— Draw up corporate bylaws. The bylaws provide information on what procedures and rules your corporation will be governed by. The bylaws do not have to be filed with the state of California. Instead, you should keep them at your company’s primary location.
The bylaws should provide the following information:
- How many directors the corporation has
- The corporate office’s location
- How directors will be elected
- When meetings for shareholder are held and how they will be conducted
- How meetings are called
- How the board of directors operates
When the owners or directors call an organizational meeting, the following tasks should be accomplished:
- Appoint directors
- Appoint corporate officers
- Adopt bylaws
- Pick a bank
- Adopt a stock certificate form
- Issues shares of stock
You will also need to decide if your corporation will be an S corporation. If you become an S corporation, you avoid double taxation. Typically, corporations pay tax as shareholders and tax as a corporation. With an S corporation, any profits and losses go through shareholders.
The following requirements must be met to become an S corporation: fewer than 100 shareholders (and those shareholders cannot be other corporations, partners, or non-resident aliens) and only one class of stock.
Final Thoughts on Incorporating
The general stock corporation is the most commonly formed type of corporation and it allows for unlimited shareholders. If you form a close corporation, you have to limit the number of shareholders you have and list that number in the articles (it cannot be more than 35 shareholders). If you choose to become a professional corporation, you have to make sure you meet the requirements set for by California regarding specific professionals. For certain professionals, a Professional Corporation is actually mandated by law.
If you use the default articles of incorporation, you are limited to one class of shares. If you use a custom document, this number can be changed. You can include the names of initial directors in your articles so long as their signatures are included on that documents. If you want modify your articles of incorporation, you must file an amendment. However, bylaws can be amended simply by voting at a directors and shareholders meeting.
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