The Corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the assets of the business. A corporation is liable for the actions and finances of the business, while the owners (known as shareholders) are not.
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLC)
- At a minimum, corporations are required to hold an annual board of directors meeting, shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over a Limited Liability Company when a significant amount of funding is being raised from investors. However, due to the cost and complexity of the Corporation, most small businesses are better off forming an LLC.
Related: How to Form an LLC in California
The following steps are to create a domestic Corporation, which is the most common type for businesses. There are other types of Corporations in California include a foreign Corporation (an out-of-state Corporation wanting approval to physically operate in the state), a professional Corporation (designated for Corporations offering professional services), or a non-profit Corporation.
Steps to Forming a Corporation in California
Step 1: Choose a Name
The first step in forming a Corporation in California is selecting a name.
The name of the Corporation has to be different from other entity names in the state of California. Check name availability in California.
The name of the Corporation must include one of the following designators at the end of the business name:
- Or an abbreviation of one of those words – Corp., Co., Inc., or Ltd.
A comma may be used after the business name and before the designator. “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are both acceptable.
If there is a name you want but are not ready to register the Corporation, you can file the Name Reservation Request Form with the California Secretary of State. The name reservation will hold a name for up to 60 days, at the cost of $10.
Before selecting a name, you may also want to see if the domain name is also available.
While a Corporation has to select a unique name that another California Corporation isn’t using, that doesn’t guarantee the name isn’t being used by someone else. Before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in California, a California Registered Agent must be identified to act as a central point of contact to receive legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation. The Registered Agent is either a California resident (Individual) or a registered agent service (California Registered Corporate Agent).
You can act as your own registered agent in California, and you are not required to pay for a registered agent. The requirements to be a Registered Agent are generally available during normal business hours and have a physical street address in the state. A PO Box is not allowed.
Any individual meeting the requirements can be the agent; however, the agent’s name and address will become public record, and with that comes a loss of privacy. This is more important for some entrepreneurs, especially when doing business from home or are still employed. Hiring a company like Northwest Registered Agent to be the Registered Agent will help protect their privacy.
Step 3: File the California Articles of Incorporation
Next, you can start filing the Articles of Incorporation with the California Secretary of State. The Articles of Incorporation can be filed online at California Secretary of State’s website or by mail with Form ARTS-GS.
The information requested includes:
- The name of the Corporation, which must contain the word “Corporation,” “Incorporated,” “Limited,” or an abbreviation.
- Business address (P.O. Boxes isn’t allowed) and mailing address of the business.
- Service of Process – Enter the Registered Agent’s name and physical address
- Information regarding the number of shares authorized for the Corporation.
- The corporate purpose of why the entity is being organized. Learn more about the purpose statement. In most cases, a Corporation will use the general business purpose statement, “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.”
- Name and signature of the incorporator. This can be one of the owners of the Corporation or someone helping with the formation of the entity.
The California Articles of Incorporation can be filed online or submitted by mail. The mailing address is:
California Secretary of State
Business Programs Division -Business Entities
1500 11th Street
Sacramento, CA 95814
Step 4: Create Corporate Bylaws
Bylaws are basically the overall guiding principles and procedures of the operations of the business. The bylaws include the name of the officers of the corporation, responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors at a minimum will elect the officers of the corporation (the President, Vice President, Treasurer, and Secretary), review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state, however, they need to be stored with other Corporate documents.
Step 6: Issue Shares of Stock
In exchange for money or services, the Corporation can exchange shares of stock. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Articles of Incorporation.
If you are using an attorney to create the bylaws, they can also create the shares of stock. Alternatively, an inexpensive Corporate Kit can be purchased from Amazon, which has a corporate records book, blank stock certificates, initial meeting minutes template, corporate seal, and more.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies the Corporation for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Related: How to Apply for an EIN
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” which means the Corporation itself does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed, however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Articles of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a California Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Related: How to Open a Business Bank Account
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and where it is located, there will likely be various business licenses and permits needed before starting your business. Some common registrations include:
- Business License – Some states and several cities require businesses to obtain licensing before they can start.
- Professional License – Certain services such as barbershops, salons, and others must be licensed with the state.
- Sales Tax Permit – To sell products and certain services, registration with the California Department of Tax and Fee Administration will be necessary.
Step 11: File the Initial Statement of Information
Within 90 days of filing the Articles of Organization, the Initial Statement of Information (Form SI-550) will need to be submitted to the California Secretary of State. The filing fee is $25.
Step 12: Pay the Annual Franchise Tax
Every year Corporations will have to pay the state’s Franchise Tax to the California Franchise Tax Board. The minimum Franchise Tax is $800 and is based on a percentage of gross receipts (total income) of the Corporation.
Step 13: File Annual Reports
Corporations are required to submit an annual report with the California Secretary of State by filing Form SI-550. The annual report is due every year before the anniversary of the Corporations registration date.
The minimum annual fee for the annual report and franchise tax in California is $25.