How to Incorporate a Business Under California Law
A California corporation is a legal entity that stands separate from its owners. Corporations benefit owners by protecting their personal assets from business debts. Creditors and plaintiffs usually cannot reach the personal assets of business owners to satisfy judgments against a corporation. However, corporations are subject to what is sometimes known as “double taxation.” Corporations are taxed when they take in profits, and shareholders pay tax on any dividends or capital gains.
A corporation can be a C corporation or an S corporation. A C corporation is the more traditional of the two, while an S corporation somewhat avoids double taxation by “passing through” its profits to the individual tax returns of its owners. An organization that prioritizes control over “going public” may be structured as a close corporation. A close corporation (or “tightly held” corporation) is usually limited to a small number of shareholders and often restricts how stocks are sold or transferred. Close corporations work well for organizations such as family businesses.
Regardless of how an organization chooses to incorporate, it is important to follow all the steps of incorporation properly. The benefits and protections of the corporate structure, such as protection from liability, may not apply if a business is not properly incorporated.
1. Choosing a Name
An incorporator may name their California corporation almost anything so long as it is distinguishable and does not mislead the public.
In California, a business’ name is distinguishable if it “contains one or more different letters or numerals or [...] a different sequence of the same letters or numerals that is plainly recognizable by means of sight” (not including capitalized or lowercase letters or lettering, typeface, or punctuation). For example, A.P.E.X. Incorporated and Apex Corporation would not be distinguishable.
The corporation’s name also may not include words that may mislead the public, such as “bank” or “trust,” without approval from the Commissioner of Business Oversight, and its name cannot confuse the corporation with a governmental entity like “FBI” or “State Department.”
A corporation name may be reserved with the Secretary of State for a fee. The reservation will last for 60 days and cannot be renewed consecutively. It may be a good idea to also check if the web domain is available for purchase. A corporation operating under a name other than its legal name will need to file a DBA (Doing Business As). Finally, a registered name is not a trademark. Trademarks are registered with the U.S. Patent and Trademark Office or a state trademark office.
2. Choosing a Registered Agent
A business’ registered agent receives service of process, government correspondence, and compliance documents on behalf of the business. A registered agent can be an individual or an entity, but a corporation cannot be its own registered agent for service of process. However, a director or officer may serve as an agent. Some businesses, especially larger ones, prefer to employ a registered agent service. Regardless, California requires that a registered agent meet the following criteria:
- Is at least 18 years old
- Maintains a physical address in California
- Is available in person during normal business hours
3. Choosing a Share Structure
In order to complete the Articles of Incorporation, incorporators and directors must choose a share structure. A share structure will include the number of shares that the corporation is allowed to issue (the authorized shares), the total number of shares actually issued to shareholders (the issued shares), and any share classes with defined rights and privileges.
Unlike some states, California does not dictate a par value, meaning a threshold value under which a stock cannot be sold. Instead, the board of directors may establish a par value if desired.
4. Executing Articles of Incorporation
The Articles of Incorporation is the official document that creates a California corporation. It can be filed online, in person, or by mail with the California Secretary of State for a filing fee. California’s standard form (Form ARTS-GS) only provides for a corporation with one share class. A corporation with multiple share classes must draft its own document. A business lawyer may be helpful in this situation.
The Articles of Incorporation include:
- The corporate name and principal address
- The corporate service of process agent’s name and street address
- The number of authorized shares that the corporation is allowed to issue
- The signature of each incorporator
For more information, see: CA Corp Code § 202; § 204.
5. Holding an Organizational Meeting
The first meeting with the incorporators and potentially the initial corporate directors (appointed by the incorporators) is used to make key decisions. Attendees of the first organizational meeting will usually:
- Set up a corporate records book to maintain all important records
- Create and approve bylaws
- Select initial directors and officers
- Select a corporate bank
- Set the corporation’s fiscal year
- Execute an Incorporator’s Statement
- Adopt Articles of Incorporation
The organizational meeting should be memorialized in meeting minutes by an incorporator or director and stored with the corporate records. California mandates recording of meeting minutes.
For more information on California corporate law, see: CA Corp Code General Corporation Law.
6. Choosing Initial Directors
At least one director must oversee the corporation. In California, a corporation with more than two shareholders must have at least three directors once shares are issued. Until shares are issued, a corporation need only appoint one initial director. A corporate director is responsible for the adoption, amendment, and repeal of operational bylaws and the election, supervision, and removal of officers.
During an organizational meeting, the incorporators should elect the board of directors, or the initial directors should appoint officers.
The initial corporate directors will serve on the board until the first annual shareholders meeting, at which board members are elected by the shareholders.
7. Executing an Incorporator’s Statement
The Incorporator’s Statement includes the complete name and address of each initial director. Initial directors serve until the board of directors is elected during the first shareholders meeting. The Incorporator’s Statement should be preserved with the rest of the corporate records.
8. Preparing Corporate Bylaws
Bylaws are simply a corporation’s rules dictating the actions of its members. Bylaws must be kept up-to-date and are amended by calling a special meeting. Bylaws may provide:
- How the corporation will be governed (the roles of the directors and officers)
- How meetings are held, how voting is done, and how officers and directors are elected
- How a “quorum” is defined for voting purposes
- The date of the annual shareholders meeting
- How notice of meetings will be given (notice is required in California if stockholders will be required or permitted to act at the meeting)
- How records are kept and managed, including meeting minutes (required in California)
- How disputes are resolved
- How contracts are negotiated
- How bylaws are amended and kept up-to-date
- Fiduciary duties to the corporation (e.g., the duties of care and loyalty)
9. Issuing Stock
Stock may be issued to shareholders in exchange for a variety of valuables, including cash, property, services, or all three. A stock transfer ledger should record each shareholder’s name and contact information.
Shares of stock are considered securities. Federal law exempts private offerings (non-advertised sales of stock to a limited number of individuals) from federal securities law, so long as a corporation files Form D within 15 days of the first sale. If a corporation uses Rule 506(b) as its exemption, the stocks issued will be restricted securities.
California similarly exempts the non-advertised sale of shares to 35 or fewer unaccredited investors with preexisting personal or business relationships with the corporation or demonstrated investment sophistication. The investors must represent that they do not intend to resell the shares. The corporation must submit a Limited Offering Exemption Notice (LOEN), along with a filing fee, to the California Department of Financial Protection & Innovation within 15 days of the first sale. A corporation using federal Rule 506 must submit a Form D notice filing and fee within 15 days of the first sale.
Corporations interested in selling stock publicly or to a large number of investors should consult a business lawyer.
10. Filing a Statement of Information
The California Corporate Statement of Information must be filed within 90 days of registering a California corporation. The Statement of Information is filed every year thereafter. It may be filed online, by mail, or in person.
11. Complying with California Tax and Regulatory Requirements
A corporation must apply for an Employer Identification Number (EIN) or Federal Tax Identification Number (FTIN) to open its business bank account, pay federal and state taxes, and hire employees. A corporation may apply for an EIN from the IRS online or by mail.
All California corporations pay California taxes to the California Franchise Tax Board (FTB). California corporations that pay wages must register through the California Employment Development Department. California corporations that sell a physical product may need to register for a seller’s permit to collect and report taxes.
If a California corporation elects to operate as an S corporation, it must submit Form 2553 Election by a Small Business Corporation to the IRS. Form 2553 must be filed within two months and 15 days of the beginning of the tax year when it is to be effective.
Incorporators should check for other necessary business licenses, such as health permits if opening a restaurant. Licenses may be necessary on the federal, state, and local levels.
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