California corporations can help you achieve your goals more quickly and efficiently. They are a great option for small businesses and start-ups, as they allow you to limit the cost of purchasing additional shares from investors or getting involved in other complicated arrangements.
Read on to learn how California corporations work, as well as the advantages and disadvantages of this type of business entity.
Starting a Corporation in California
These three are the most common types of California corporations:
- Single-Director Corporation: One director is elected to serve as the corporation’s director.
- Multiple-Director Corporation: Two or more directors are elected to supervise the running of the organization.
- General Partner Corporation: A limited partnership with one or more general partners who form a general partnership for a specified term or duration. There is an election of only one partner and his/her title must be stated in your articles of incorporation.
- Managing Director Corporation: Managers are elected and manage the corporation on a day-to-day basis, in contrast to a board of directors.
When you create a California corporation, you select a name, designate the number and type of shares to be issued, select one or more directors to hold these offices and nominate officers like a president, secretary, and treasurer. Shareholders ultimately control the corporation through voting rights.
The information needed to start a California corporation includes:
Step 1: Create a Name For Your California Corporation
In California, all business entities must follow the same rules for naming. To create a name, you must select a name that’s unique from all other registered businesses in the state.
A good way to make sure you’re not duplicating someone else’s company name is to start with the California Secretary of State Corporation Information Number (SOS CIN) and append your business category after it. For example, if you’re starting an LLC, the SOS CIN will be “SOS CIN 101019328,” and so you’d check to make sure that number isn’t already in use.
Example: SOS CIN 101019328 Limited Liability Company would become “The Dog Lounge LLC” or “The Dog Lounge, LLC.”
How can I check California business name availability?
The easiest way to find out if your business name is available in California is to check the Secretary of State’s online business name database. This resource allows you to search for your desired company name in both “English Only” and “Name Match” modes.
If you prefer having a real person help you, contact the Business Filings Division at (916) 653-3713 or toll-free at (800) 897-7252, or if outside California phone (916) 653-3686. You can also visit the office at 1620 C Street, Sacramento, CA 95814.
Tips: Reserve your corporate name in California ahead of time.
Reserve your name in California ahead of time, just in case it’s already taken. For an additional fee, you can also purchase a limited-duration reservation of the business name so that it cannot be used by anyone else.
The last date for reserving your name is four and a half months before the date you plan to form your corporation in California.
Step 2: Choose a California Registered Agent
If you’re starting a corporation in California, you’ll need to designate an agent to receive legal documents and mail on your behalf. A registered agent is a person or business that is authorized to receive legal papers on behalf of a corporation. You can serve as the registered agent for your company, but you’ll need to formally appoint yourself using corporate minutes.
If you operate your business out of the same location as your residence, it’s considered a domestic corporation. Domestic corporations don’t need a registered agent and can receive mail at their principal office.
Can I be my own California registered agent?
You can be your own California registered agent for most domestic corporations.
However, in order to do this, you must register the business name with the California Secretary of State and represent that you will receive mail at the corporation’s principal office.
Why do I need a California-registered agent?
There are the following reasons to have a registered agent:
- To be served with a lawsuit
- To receive legal and tax documents
- To be served with a subpoena
- To be served with a notice of tax assessments or collection actions
- To receive tax forms
- To receive annual reports (California)
How can I get a registered agent?
You can use any person or company to act as your registered agent, including yourself. When you file the formation documents to create your corporation, you’ll need to notify the Secretary of State that you’ve appointed someone as your California registered agent. You can do this online, by mail, or by fax.
Step 3: Choose Your Corporation’s Initial Directors
Directors are elected by shareholders and oversee the business’s daily activities. The number of directors is determined by the number of shareholders or members. Corporations can have one director or as many as 50.
You can also appoint a managing director to handle day-to-day management and operations.
Step 4: File Your California Articles of Incorporation
Your California articles of incorporation form, which will be automatically generated by the Secretary of State, contains the following:
- A proposed name for your corporation
- The number of shares you’ll issue
- The names and residences of directors
- Terms for new directors to hold office and adopt bylaws
Tips for Filling out the California Articles of Incorporation
- You can edit the California articles of incorporation to make changes to the original version. However, you must file an amendment with the Secretary of State before you can amend your articles.
- The California Articles of Incorporation form requires all new members to sign and submit their completed copies.
- You must have at least two individuals who either operate a business or reside in California as your corporation’s initial directors.
- There is a fee for filing a corporation’s articles of incorporation with the Secretary of State.
- Your articles of incorporation will be available for public viewing 60 days after filing.
How much do the California Articles of Incorporation cost?
The fee for corporations with two officers, directors, and shareholders is $70. If your corporation will have more than two officers, directors, and shareholders, the fee increases to $90 per person.
There is also a minimum filing fee of $30 for all filings made by mail.
Tip: File your Initial Statement of Information early.
After you file your articles in California, you’ll need to file an Initial Statement of Information within 90 days.
The statement of information is a form filed with the Secretary of State to alert the state that your corporation has been formed. It contains basic information, including the registered agent’s name and address and directors’ names and addresses. You will need to file this form before you can begin transacting business.
Step 5: Obtain an EIN for Your California Corporation
An Employer Identification Number (EIN) is a federal tax identification number assigned to all corporations, partnerships, and sole proprietorships.
Every business that has employees or makes more than $1,000 per year in income must have an EIN so they can report their finances to the IRS.
If you operate as a corporation, your EIN is used in the same way as if you were a sole proprietorship or a partnership, including reporting your business income to the IRS.
Where do I get my EIN?
You can use the Internal Revenue Service’s online tool to apply for an EIN. You can also apply for one at your local IRS office. You can find the address of your nearest IRS office using the agency’s locator tool.
If you have a foreign address, you can apply for an EIN by phone. However, your EIN will arrive in the mail.
Prepare Bylaws for Your California Corporation
Bylaws are corporate rules and regulations created in document bylaws. They describe how the corporation will operate, including details about annual meetings and directors’ responsibilities. Any corporation with more than one director needs to have bylaws.
The Secretary of State provides a sample bylaws form. You can find it by clicking the link at the bottom of the page on your articles of incorporation.
Creating your corporation’s bylaws is relatively simple. You can either fill out the entire form before you file your articles of incorporation or create a bylaws document as part of your articles filing.
You can also include an amendment to the bylaws with your articles of amendment filing.
How long do my Bylaws last?
Your bylaws must be adopted in a meeting open to all directors and shareholders. After adoption, these rules are effective until amended or revoked. Directors can be removed from office by a special meeting.
Bylaws are effective for one year after they are adopted and must be renewed in a future board meeting.
Set Up a Corporate Records Book
In order to keep organized records of your corporation, you should create a corporate records book. This can be a simple binder or folder stored on your company’s bookcase or home office shelf.
Make sure to store corporate records in a safe location. Keep the book or folder in an office that is accessible only to your company officers.
Pros and cons of incorporating in California
There can be advantages and disadvantages to incorporating your business in California. Here are some of the main benefits and disadvantages of a California corporation, based on the choices above.
- It is easy to form a corporation in California.
- California has a low annual fee for corporations on the surface.
- The state registration fee is lower than the corporate tax if your business earns less than $300,000 per year.
- Registration of your business in California does not require a public filing with the Secretary of State, as many states do.
- California has a small population, so it may be difficult to find potential members for your corporation.
- California is one of the most competitive business states in the country, so it may not be easy to find customers.
- Though you don’t need a state charter to do business in California, many corporations incorporate in California only because they have no other options.
How much does it cost to start a corporation in California?
The costs of incorporating a California corporation are relatively low, which can be a good thing if you’ll only be in business for one year.
The annual fees are:
- $45 for corporations with two shareholders or officers
- $65 for corporations with three or more shareholders
If you pay the fee online through the Secretary of State’s website, there will be no additional fees to file your articles of incorporation.
You can also file your articles of incorporation by mail. If you file by mail, you will need to pay a minimum filing fee of $30.
There are no state fees for individuals who form a California corporation.
Open a Bank Account For Your California Corporation
You are required to have a bank account for each business you own. Banks are usually willing to open an account for you if you can show that you have a good reason to keep funds in an account separate from your personal affairs.
If you plan to keep funds in your corporation, make sure to set up an account at a bank where the All Business Checking Account option is offered.
This option allows corporate funds to stay on-site and available for immediate use. The alternative is an off-site account, which makes it harder for your company to access the funds.
If you plan to earn money in another way, consider opening a separate personal account for your business. This will allow you to deposit funds in your personal account and then transfer them to the corporate accounts at any time.
Establish and Build Your Business Credit Score
You will need to establish a credit score in order to obtain a business loan or credit card. Banks use credit scores to make informed decisions about the risks they take on when lending money.
If you have no previous credit history, consider applying for an installment loan with your bank. Installment loans are personal loans that you pay back in monthly installments over time.
You can also open a separate bank account in your corporation’s name. This account should be used for business purposes only, such as purchasing inventory or paying suppliers and vendors.
If you’ve established a corporate credit score, consider applying for an account with a bank that offers business cards. These cards are secured with business deposits to cover the cost difference between the credit card’s interest rate and the standard credit card’s.
How do I raise capital from investors?
Raising capital can be a tough prospect in California. Because of this, many new businesses seek out investors from outside of California.
Some investors with money to spend may be looking for a special business opportunity. You can search online for potential investors.
Once you’ve found an investor willing to support your company, you will have to consider how much of your company you’re willing to give in exchange for the money. You should research the cost of capital from different types of investors before accepting any offer.
How do I get a loan from a bank?
Obtaining a business loan can be difficult when dealing with banks in California. The more money you borrow from a bank, the higher the risk of your business failing.
It can be challenging to find a bank that will give you the money you want without making you pay an arm and a leg for it.
Because of this, many companies look for private loans first and then attempt to find a bank that will back them in case the business fails.
Accounting For Your Corporation
The first step to accounting for your corporation is to create a system to track company expenses and revenue.
When tracking expenses and revenue, you must use the cash method of accounting. This means that you only account for money that has already changed hands. It does not matter what your contract with a client says, only what you have received or spent as of the end of the month or quarter.
QuickBooks is a popular accounting software in California because it allows users to enter transactions immediately after they occur. This stand-alone system offers the ability to generate basic reports of company income and expenses, but it lacks the flexibility and back-end features that make larger accounting systems popular.
If you are not comfortable using QuickBooks, the best option is to purchase a complete accounting system that includes templates for reports and expense tracking. If your business will continue to grow, it’s worth investing in a larger system that handles more complex transactions.
What type of insurance do I need?
Insurance is vital for all types of businesses.
- Business owners often purchase personal insurance to protect their assets and provide peace of mind. Workers compensation covers employees who are injured while at work.
- Commercial automobile insurance provides coverage for cars, trucks, and other vehicles that are used for business purposes.
- Property insurance helps to cover damage to your buildings or equipment caused by accidents, theft, or disasters.
- If a customer sues you for any reason relating to your business operations, you should also consider purchasing liability insurance. This insurance covers any cost you may need to pay because of a lawsuit.
- Business owners should also consider property insurance that covers environmental cleanup in case protestors or activists perform acts of vandalism.
Research Business License Requirements
Every city in California has its own rules. You might have to do everything from special permits to zoning changes. As more cities adopt the concept of “one-stop” business registration, things may get simpler for businesses entering new markets.
You will need to complete a business license application, which is available on your local city or county’s website.
Your local city or county may require that you provide them with information about your business, such as the name and address of your office and a list of employees and their job titles.
You will also need to determine which licenses and permits you need to obtain. You may need to request information from the following organizations:
- The California Secretary of State is a good source for information about the business licenses you’ll need.
- Your city or county will have its own requirements for businesses in your area.
- You may want to hire an attorney who can help you navigate the complexities of local government bureaucracies.
What permits you may need?
If your business is a temporary or seasonal venue, you may need to apply for a Temporary Event Permit. When you obtain the permit, you have up to 30 days to stage the event.
Certain counties in California also require businesses to obtain a large capacity exception license from the county government. A large capacity exception allows for up to 100 people on site at once.
City and county governments may also ask for permits or licenses related to business operations, such as issuing liquor licenses or building permits.
What kind of taxes do I need to pay in California?
A variety of taxes are due on business earnings in the state of California.
- Sales tax can be collected by the state for most types of transactions, including those made by businesses.
- Corporate income tax is a tax on net operating income. It is also an additional tax on California businesses.
- Employer’s social security and Medicare taxes must be paid by every employer who pays any social security or Medicare taxes to the federal government for any individual employee.
- Many cities in California also have sales tax due when a business carries out sales.
- If your business is involved in hiring or firing employees, you’ll need to withhold Federal Insurance Contributions Act (FICA) taxes, which includes Social Security and Medicare taxes.
- If your business sells goods or services, you may need to report and pay California use tax. You may need to collect California sales or use tax on any good purchased for use in the state of California.
- Payroll taxes are also associated with business income. Payroll taxes include wage withholding and employment taxes.
- Other cities in California may require payroll tax for businesses to have a certain number of employees.
The rules for calculating your tax liability can be complex and confusing, which is why it is important to consider the services of a local tax advisor if you have any questions about business taxes.
California State Sales and Use Tax is imposed on sales of tangible personal property sold or otherwise transferred by any retailer in California, unless the purchaser is exempt from this tax under one of the provisions listed below.
California State Sales and Use Tax is not imposed on sales of the following:
- Food and food ingredients for human consumption
- Drugs and medicines intended to be sold only by a pharmacist and used (bought) by the purchaser
- Newspapers, magazines, books, pamphlets, and other educational materials sold to or used by schools, universities, libraries, or other institutions engaging in education or research
If your business is based in California and you sell tangible personal property to purchasers who are located outside of California, you may have to charge. You can determine if you need to charge state sales and use tax based on the sales you make to out-of-state customers. To find out, look at the chart below.
Average tax fees:
- Businesses in California will pay an average of $3,282 per year in state sales and use tax. This amount is based on the number of businesses with a value of over $1,000,000. Keep in mind that localities may charge additional taxes that increase the amount you’ll be required to pay.
- The average amount paid by small businesses is approximately $515 per year, and the average amount paid by large businesses is approximately $2,714 per year.
- If you are a retailer, range from state to state and determine what sales tax will be charged for the sale. If you have any questions about this tax, consider hiring a local attorney who can answer your questions and provide you with legal guidance on these matters.
Have a Professional Service Form Your California Corporation For You
Formation of a California Corporation: A corporation is formed when a filing agent files articles of incorporation with the Secretary of State’s office within the state. Paperwork filings are filed with the Secretary of State’s office and a $200 filing fee is required.
When formally establishing your business in the state, there are many steps that must be completed. An experienced California Corporation lawyer can walk you through the steps and guide you in making informed decisions.
To form your business, contact the secretary of state’s office in California to obtain a small entity or Micro entity corporation identification number (CA – 990), and file articles of incorporation with that office.
California is a state filled with opportunities to start or buy a business. If you are thinking about starting your own business, you can look for the local laws which may require certain licenses, permits, or certifications from city governments.
There are also many taxes that you will have to pay on business income. If you work with an experienced attorney who knows the local requirements and state laws in California, he/she can guide and help you through all of the licensing and other requirements so that you can succeed in this venture.