Are you looking to form a corporation in California, but you’re not familiar with the formation process? There are quite a few important steps you’ll need to take to create your California corporation and maintain it, so this guide will outline the rules and regulations involved with this process.
To get started, please reference our 12-step guide below or hire a professional business incorporation service.
Rocket Tip: To see how some of the top online incorporation services stack up, here are two of our most popular comparisons.
How to Form a California Corporation (in 12 Steps)
Step One) Determine Whether a Corporation is the Right Choice
Before beginning the process of forming a California Corporation, it’s very helpful to review your business’ objectives and become familiar with your options as a business owner.
Should you form a corporation?
This guide explains how to create a California corporation. When starting a new business, forming a corporation is just one of several options. Many businesses instead choose to set up a Limited Liability Company, or to be recognized as a sole proprietorship or partnership. Not sure which option is right for you? Read this guide from the SBA.
Does your business offer professional services?
If your business offers a professional service that requires a license from the state of California (e.g. public accountant, chiropractor, dentist, doctor, attorney), then you cannot form a standard California business corporation. You may instead form a special type of corporation known as a professional corporation.
How will ownership be divided?
A corporation issues “shares” to its owners, who are known as its shareholders. Before forming your corporation, it’s important to decide how shares of ownership will be divided among the owners.
How will the corporation to be managed?
Corporations have two layers of control. The first layer is the Board of Directors. Directors are elected by the shareholders and meet periodically (as a “Board”) to make key decisions and set the strategic direction of the company. The Board of Directors appoints “officers” who are responsible for carrying out the Board’s initiatives and managing the corporation’s day-to-day activities. Directors and officers can be (and often are) the same people. Before forming your corporation you should determine who your initial director(s) will be.
Step Two) Choose a Name
One of the most important aspects of the incorporation process is naming your business. There are three major elements to consider when choosing a name:
When naming a corporation in the state of California, you will need to include one of the following words or abbreviations: incorporated, corporation, limited, company, Inc., Corp., Ltd., or Co. Your corporation’s name also cannot include any words or abbreviations that indicate other business types, like the phrase “limited liability company” or the initials “LLC.” You also are not allowed to include words that refer to certain types of businesses (like “bank” or “law office”) unless your business fits those descriptions.
In addition to the legal considerations, you might want to identify your line of business or your mission in your company name. For example, you can display any closely held values in your name, like using the word “green” for environmentally friendly businesses.
A Name You’re Proud of
Keep in mind that this is your business, so you should choose a name that you’re proud of, and that you enjoy sharing with potential customers. You should also make sure it sounds good when spoken aloud, and also looks good when written down.
Check whether your preferred name is available: Visit the Name Availability Inquiry Letter to check whether it is already in use. If it’s not unique enough, you may need to tweak it or come up with a new name altogether.
Consider Reserving a Name
For a $10 fee, you can instantly reserve a name online for up to 60 days. This will ensure that your name is not taken by another company during the incorporation process.
Step Three) Select a Registered Agent
California corporations must designate a person or business to receive legal notices on behalf of the company. This important point of contact is known as the registered agent. You will be required to list the registered agent’s name and address when filing the Articles of Incorporation in step four.
Who can be my Registered Agent?A registered agent must have a physical address within the state of California where mail and legal notices can be served during regular business hours. You can hire a service to act as your Registered Agent, serve as your own registered agent, or even use an accountant or other business professional’s address – with their consent, of course.
The California Secretary of State says that,
Corporations, limited liability companies and limited partnerships are required by statute to designate an agent for service of process.”
Our Recommendation: We recommend hiring a professional service to act as your registered agent. Doing so will help eliminate junk mail and more importantly, keep your personal and/or business address off the public record.
Rocket Tip: You can get a free registered agent service when hiring a service like ZenBusiness or Incfile to incorporate online. Check out their reviews and how it works below.
Step Four) Complete Your Articles Of Incorporation
This is THE document that formally registers your corporation with the state of California.
You can file by filling out the PDF and sending it in via mail.
Keep in mind that you are acting as the incorporator when you fill out and submit the Articles of Incorporation. You should sign as the incorporator before submitting the document.
|Cost to File||$100|
|Time to Complete Filing||10-20 business days, depending on filing method|
|Agency||California Secretary of State|
Secretary of State
|Agency contact info for filing questions|
Step Five) Establish a Corporate Record
Corporations are required under California law to document and keep a permanent record of all important company decisions.
The official corporate record may be kept at the corporation’s principal place of business, or stored in a safe location elsewhere. You should take the opportunity to set up a secure digital or physical location for storing company records as soon as possible.
Step Six) Designate a Board of Directors
The incorporator is responsible for selecting initial director(s) of the corporation. Unless initial directors were specified in the Articles of Incorporation, the incorporator should record initial director appointments in a signed document and file it to the corporate record. This document is known as the “incorporator’s statement.” A sample incorporators statement can be found here.
The initial directors (every California corporation must have at least three directors, unless the corporation has fewer than three shareholders) will serve until new directors are elected at an annual shareholder meeting, or as otherwise indicated in the bylaws. The incorporator may serve as an initial director.
Step Seven) Create Corporate Bylaws
Corporate bylaws set out the rules and procedures for how the corporation will operate. Some important topics typically covered in the bylaws include:
- How shareholders will conduct votes
- The total number of directors and how each director will be elected
- How often the board of directors will meet
- The types of officer roles that will be appointed
- Procedures for resolving internal disputes
California does not require that corporations write bylaws, but it’s recommended.
Bylaws help your business run smoothly, and are sometimes required by financial institutions for opening business bank accounts or acquiring loans.
Either the incorporator or the initial directors may prepare the company bylaws. The bylaws should be recorded in an internal company document, signed by the incorporator or a director, and filed to the corporate record. The bylaws are not filed with the state of California.
Popular Strategies for Preparing Bylaws
- Use a free online template. Northwest Registered Agent has a great free template you can download.
- Hire a lawyer to draft the bylaws. If your business has investors, is already profitable, or has multiple co-owners, we strongly encourage you to hire a lawyer experienced in California Corporate law to help you draft suitable bylaws. Use Avvo to find a California attorney who can help you draft bylaws.
Step Eight) Hold First Board Meeting
After designating a board of directors and preparing bylaws, the new corporation should call for an initial board meeting. The incorporator often arranges and attends this first meeting. During the first board meeting, the initial directors should plan to cover the following topics:
- Review and approve corporate bylaws
- Designate officers to manage day-to-day business affairs
- Choose a bank
- Approve issuance of stock certificates
- Determine whether the company should elect to be taxed as a C corporation or S corporation (see step Nine for more details)
Recording Meeting Minutes: a detailed record of all key discussions and decisions during the board meeting should be prepared and distributed to all board members for their review and approval. This record is known as the “minutes”. A copy of the minutes should be sent to each director for review and filed in the company record.
Step Nine) Handle Tax Obligations
You’ll need a federal tax ID number (EIN) to operate a corporation in California. You can obtain your EIN from the IRS for free, and it’s a fairly painless and simple process. An EIN enables your corporation to hire employees, file corporate taxes, open business bank accounts, and more.
A major decision for any corporation is determining whether to be taxed as a C corporation or an S corporation. Take a look at how these two formats differ:
- C Corp: The majority of corporations are C corporations, as they are subject to far fewer restrictions than S corps. With a C corp, profits are taxed at the corporate level, and again on the personal tax returns of the shareholders, resulting in what’s commonly referred to as double taxation.
- S Corp: This is only an option if your corporation has fewer than 100 shareholders, only issues one class of stock, is not owned by another business entity, and does not have any foreign shareholders. If your corporation meets these requirements, you can select the S corp’s pass-through taxation which eliminates the double taxation issue of C corps. S corp dividends are not taxable.
On the state level, every California corporation is subject to the corporation income tax. You’ll also be subject to the state’s Franchise Tax. There is a minimum fee of $800 for these taxes, and you may owe more depending on your corporation’s income. You can learn more here. In addition, there are a variety of tax registration requirements that may or may not apply to your company, depending on the nature of your business. These include taxes like tire tax, cannabis taxes, timber yield taxes, etc.
Since you’ll have employees, you’ll also be expected to pay withholding taxes on employee wages. Essentially, you’ll keep back a small portion of wages from each paycheck and forward that money to the state. You can learn more about your withholding obligations with the the State of California Franchise Tax Board.
If you’re a corporation involved in retail sales, you’ll also be responsible for the state’s sales and use taxes. The statewide sales tax rate is 6% (additional fees come on the local level). You can learn more about the sales tax laws and apply for a seller’s permit here.
Keep in mind that your city and/or county may also have taxation requirements as well, so make sure to check with them to make sure you aren’t missing anything. For instance, sales and use taxes vary depending on your location, so if you’re involved in retail sales, you may need to pay additional taxes. You can look up local sales tax rates here. We also recommend that you contact your local government office to ensure that you don’t accidentally overlook any local tax requirements.
Step Ten) Obtain Business Licenses and Permits
While California does not have a general business license that applies to all companies operating in the state, cities do. You’ll need to file for a city business permit. Thankfully, California makes it easy to determine what licenses and permits you’ll need with CalGOLD. In addition to the local permit you’ll need, there are hundreds of industry-specific permits and licenses that you may need to acquire. Take a look at the state’s list of professional permits and licenses to determine if any of them will apply to your corporation.
Much like you should check to see if your local government has tax requirements, there’s also county-level occupational licenses that you may need to acquire. Get started at this link.
Step Eleven) Acquire Insurance
Every business with employees located in the state of California is required by law to obtain three different kinds of insurance policies: workers’ compensation, disability insurance, and unemployment insurance, even if they only have one employee on the payroll.
You can learn more about these insurance types with the California Department of Industrial Relations or the Employment Development Department. No matter what line of business you’re in, you need these policies.
In addition, you should also pursue general liability insurance and other more industry-specific types of insurance, but these are not legally required.
Step Twelve) Open a Business Bank Account
To operate a corporation and receive the limited liability protection that comes with it, you have to keep your personal assets entirely separate from your business assets. Due to this requirement, it’s strongly advised that you acquire a business bank account for your corporation.
Get Help Forming a Corporation
The process of incorporating in any state can be a lengthy one. If you run into any trouble along the way, remember that there are plenty of organizations that can help you navigate the incorporation process.
Online Incorporation Services
If you would like to hire an affordable business incorporation service to create your corporation for you, services like ZenBusiness and Incfile can help you out. These service providers can handle most of the formation process, while still charging much lower rates than a business attorney’s fees.
There isn’t the same level of personalization that a lawyer can provide, but online incorporation services can still be a tremendous help. The only major issue with these service providers is the fact that they can’t provide any actual legal advice, so you need to know what you want ahead of time.
California Business Attorney
There are some situations where hiring a business lawyer is a preferable route to using an online incorporation service. The corporation as a business structure can be highly complicated, and if you want to have the peace of mind that every single step was taken care of by a true expert, hiring a business attorney to form your California corporation is the way to go.
If you would like to pursue this route, there are some convenient services that can help you choose the right lawyer for your business. We like to use Avvo, which has extensive reviews and ratings for hundreds of California business lawyers, which can make it much easier to select an attorney who has your best interests in mind, and also has the expertise to get the job done right.
In this state, the California Small Business Development Center exists solely to (in their own words) provide “small business owners and entrepreneurs with the tools and guidance needed to become successful in today’s challenging economic climate.” With dozens of locations across California, the CSBDC is ready and willing to help if you need assistance.
Another excellent resource is the California chapter of the U.S. Small Business Administration. Their website has information regarding small business events, business resources, press releases, SBA programs, and more.