There are many reasons why you might want to incorporate your business. Forming a corporation helps to protect your personal assets from liability on account of your business’s debts and transactions. Furthermore, a corporation can protect you as an individual in the event that a business partner or employee is found guilty of a crime. If this is the business organization model you choose, there are several steps you will have to take in order to finish the incorporation process. Firstly, let’s start with naming it.
This part is one of the most important things you can do for your business. A good name is key because it will help with good product promotion and branding. However, the state you file for incorporation must also be okay with your chosen name. This usually means that the name must not already be taken by another corporation that is registered in your state and that the name is distinct enough from other corporations’ names that it would not bring up issues of copyright. Your chosen name can (but does not have to) include the words “Incorporated”, “Corporation”, “Limited” or any abbreviated version of them. Furthermore, your chosen name cannot be misleading to customers, nor can it contain any offensive or controversial words. It is possible to check to see whether your name of choice is already taken by another corporation online by visiting an online entity name checking service, or by sending a name availability inquiry letter to the Secretary of State’s office. Lastly, you can reserve your name by filing a name reservation request form, which just requests that the Secretary of State hold your chosen corporate name for no more than 60 days while you finish the filing process.
Next, California corporation's have to prepare and file your Articles of Incorporation to the Secretary of State’s office. These documents are what the state will use to establish your corporation as a business entity. The articles must contain the name of the corporation, its purpose, the name and address of a registered agent, the street address of the corporation, the amount of shares that the corporation is authorized to issue, and the signatures of the incorporators. As it pertains to outlining the shares of the corporation, your Articles of Incorporation must account for some specifics. If the corporation will have only one class of shares, then the articles of incorporation must list out the total amount of shares that the corporation is authorized to issue. On the other hand, if the corporation is to have more than one class of shares, then the articles must account for the total amount of authorized shares in each class, the designation of each class, and the rights and restrictions that may apply to each class.
In California, every corporation must have an agent for service of process in the state. This agent has to be a person living in California or corporation that has registered within the Secretary of State’s office as a corporation. The registered agent agrees to receive legal papers on the corporation’s behalf, in the event that legal action is taken. A corporation cannot be its own registered agent. Lastly, note that the registered agent, be it person or corporation, must have a physical address, meaning a PO box is not sufficient. Next up, you’ll want to set up your records book. California Corporations Code 1500: It Pays to Keep Receipts Pursuant to California Corporations Code 1500, your corporation must keep track of important internal information. For this reason, you must set up a corporate record book (physical or virtual), in which you document important corporate paperwork, including minutes of director and shareholder meetings, stock certificates and stubs and shareholder information. Once again, this record must be quite extensive and thus the information it contains is also highly sensitive. It is vital to ensure that the physical and cybersecurity of the record book is of a high standard. It may pay dividends to see our in-depth article about your options for corporate bookkeeping here.
After you’ve taken care of the method of record keeping, you’ll then need to specify the people who are applying to form the corporation. California law allows for one or more persons, corporations, partnerships, or associations to form a corporation. The people who apply to form the corporation are called incorporators and they are responsible for filing the articles of incorporation. The incorporators should also elect directors and officers, and agree upon corporate bylaws. Upon selecting directors, the incorporators have no further responsibilities. The requirements for specifying incorporators are that the corporation must have at least one incorporator and that their name(s) be listed on the articles of incorporation.
Once the incorporators have named the directors, your new directors will have the responsibility of setting and carrying out corporate policy. From then on, those directors have fiduciary duty to the corporation and its respective shareholders, which ensures that they must always act in the corporation’s and the shareholders’ best interests. The requirements for specifying directors for your corporation are only that there must always be at least one director and that the maximum amount of directors is proportional to the maximum amount of shareholders.
After your corporation has specified its directors, California law requires that your corporation state its purpose. While a statement of purpose may not sound particularly complicated, it is actually a very nuanced part of the procedure to forming your corporation. The reason for this is that you would ideally want to leave the purpose statement as vague as possible so as to cover as much breadth and scope as possible. This would enable your corporation to operate within all possible boundaries of the law as it pertains to business. Therefore, it’s imperative to use generic language for your corporation’s purpose statement. For this part, having legal counseling is particularly useful because a seasoned business lawyer will know the best way to word and compose such statements.
Lastly, the final thing you will want to do is to draft up and sign off on corporate bylaws with the incorporators and directors of the corporation. The irony is that this crucial document is not actually required to be submitted to the Secretary of State’s office like the rest of the Articles of Incorporation are, but they are nonetheless vital to have for the smooth upkeep and maintenance of your corporation. This is because incorporation bylaws describe how the company will conduct its operations, how directors and officers are to be appointed, their duties and the manner by which executive meetings take place. It is required that you have your corporate bylaws handy at the corporation’s headquarters. They must also specify whether there is a maximum limit to the amount of directors the corporation can have, or whether that maximum will be determined later by a board or shareholders. It’s also worth noting that there can’t be anything illegal written into the bylaws because state and federal law supersede its authority. Bylaws are also extremely useful for showing that your corporation is legitimate to potential investors and to the IRS.
The process of forming a corporation can be daunting and tedious, but you do not have to face it alone. As alluded to earlier, experienced business lawyers can greatly speed up and smoothen the process of formalizing your corporation as a legal entity. Our team of California business lawyers have many years of experience with the process and can help your company achieve corporation status quickly and effectively. We invite you to give us a call at (310) 943-1171 to see how a Glendale corporate formation lawyer can help. Our lawyers in Glendale, Los Angeles, California, are dedicating to providing the highest quality legal services for all of our clients.
Easy nine step guide for Startup or small business owners interested in forming a corporation in California.
Your business name may not be the same as, or deceptively similar to, other corporate names on file with the Secretary of State (limited exceptions apply). Additionally, the name may not contain the words “bank,” “trust”, “trustee,” or related words. Although you are not required to do so, consider registering your business name as a federal and/or state trademark.
Under California law, a corporation must have at least three directors, unless there are less than three shareholders. In that case, the number of directors may be equal to or greater than the number of shareholders. For example, if the corporation has only one shareholder, the number of directors may be one or two. If the corporation has two shareholders, the number of directors may be two (or three, which is the normal minimum). California does not set forth a minimum age or residency requirement for directors. Either the articles of incorporation or the corporation’s bylaws must state the number of directors that will constitute the corporation’s board of directors.
The filing fee is $100. The Secretary of State website has a sample of articles of incorporations with instructions.
California law requires a corporation to create bylaws. There is no set criteria for the content of bylaws, but they typically set forth internal rules and procedures for the corporation, touching on issues like the existence and responsibilities of corporate offices, the size of the board of directors and the manner and term of their election, how and when board and shareholder meetings will be held, who may call meetings, and how the board of directors will function. You are not required to file bylaws with the Secretary of State, but the corporation must keep a copy at its principal place a business.
The filing fee is $25. The Secretary of State’s website has a simple, fill in the blank form for the Statement of Information. Instructions are included. It must be filled within 90 days of filing the articles of incorporation.
Request an Employer Identification Number (EIN) from the IRS. There is no filing fee. If you will be paying at least $100 to an employee or employees in a quarter (this includes corporate officers), you are subject to California employment taxes and must register for a California employer account number within 15 days of paying that $100. You can register for employment taxes and get your account number online using the Employment Development Department’s website. These taxes must be paid quarterly. Whenever you hire an employee in California, you must inform both the IRS and the State of California. The IRS details all of the necessary steps, including verifying work eligibility and withholding allowances certificates, on its page entitled Hiring Employees. You can find information for the state level in the California Employer’s Guide and on the website for California’s New Hire Reporting Program. If you have employees in California, you must carry workers’ compensation insurance. There are other informational returns that you may have to file annually or semi-annually with both the IRS and the state. California imposes an $800 minimum franchise tax on corporation doing business in the state. This minimum tax is separate from any income, self-employment, or payroll tax. For many, this $800 minimum tax could be significant impediment to forming a corporation in California, especially if you have little or no expected income from your online publishing activities. California’s current income tax rate for corporations is 8.84%.
It is a good idea to keep business’s finances separate from your personal accounts. A good way to do this early on is by opening a bank account for your corporation. You will probably need a Tax ID number (EIN), a copy of the articles of incorporation, and a resolution identifying authorized signers if those names are not listed in the articles. Our lawyers in Glendale, Los Angeles, CA can provide you with any sort of legal assistance regarding business startups.