Deciding whether to incorporate your company is one of the most crucial decisions you can make when starting a business in California. A corporation is a legal business entity that provides personal liability protection, easier access to raising capital, security and continuity.
Disadvantages include rigid protocols and formalities, double taxation for C corporations (the most common type) and the incorporation process being time-consuming and typically expensive. It’s vital to do your homework, but advisable to work with an experienced business attorney who can help you make an informed decision.
Steps for forming a corporation
When a corporation is a good fit for your company, an experienced attorney can also help you make sure you comply with California rules. Here are the steps:
- Choose name: You must check with the Secretary of State’s office to ensure that your company’s name isn’t identical or too similar to an existing business. The name cannot be misleading to the public.
- Articles of Incorporation: You must file this document with the Secretary of State, including the name, address of the “agent for service or process” and the volume of shares the corporation can issue.
- Registered agent: You must appoint a person or corporation authorized to receive legal papers on the company’s behalf in case of a lawsuit. The agent must live in California and be registered with the Secretary of State.
- Draft bylaws: While not required by the state, it’s highly advisable to adopt corporate bylaws as they establish your operating rules and show the IRS, creditors and banks that your company is legitimate.
- Choose directors: The person who signs the Articles of Incorporation must complete an “Incorporator’s Statement” naming the initial board of directors. The first meeting should be scheduled to elect directors and officers, issue stock, pass bylaws, select a bank, set the fiscal year and adopt an official corporate seal and stock certificate form.
- Issue stock: You can raise capital by issuing shares to shareholders who can pay with services, cash, property or any combination of those assets.
- File statement: Every corporation doing business in the Golden State must file a Statement of Information within 90 days of submitting the Articles of Incorporation and every year after.
- Pay taxes: All corporations must pay taxes to the California Franchise Tax Board during the first quarter of each accounting period. A minimum tax of $800 is due regardless of whether the company makes money. Additional fees must also be paid for certain income levels, based on annual revenues.
As you can see, several steps are necessary, and many are complex and cumbersome. That’s why it’s crucial to have experienced legal guidance at all stages of the incorporation process.