Starting a corporation in California has its benefits. One of them is the limited liability protection regarding obligations and business debts afforded to California Corporation owners.
However, another significant benefit of incorporating in the state of California is management flexibility. This is because the state requires that corporations elect three officers in the filing to fulfill the chief financial officer, president, and secretary roles. In fact, California allows all three of these positions to be filled by the same person.
The following step-by-step guide will show you how to start a corporation in the state of California.
1. Select a name for your corporation
The process of incorporation starts with deciding on a business name. The name must comply with California state naming requirements and should be easy to search and pronounce.
General corporate name guidelines
Keep the following naming guidelines in mind when deciding on a business name:
- Your California corporation name must contain the word company, corporation, Limited, Inc., or an abbreviation of any of these terms.
- You cannot include the words trust, bank, credit union, trustee, or any related words in your business name unless you have approval from the Commissioner of Business Oversight.
- The name should also be distinguishable from other existing business entity names in the state of California.
- Do not include any words in your business name that may confuse your corporation with a government agency such as treasury, FBI, State Department, etc.
Once you’ve decided on a business name for your corporation, you may choose to protect it with a trademark. While applying for a trademark does come with its costs, it will give your corporation’s brand nationwide protection backed by federal law.
To trademark your corporation’s name, you may submit an application online through the California Secretary of State’s business portal.
The entity name is your corporation’s legal name recognized by the state of California. For additional guidance on how to go about choosing business entity names to comply with California’s naming requirements, refer to the Secretary of State Business Entity Names section.
DBA (Doing-business-as) name
If you want to conduct business or sign legal documents under a different name, California state law requires a DBA or (Doing business as) name to be filed with the state. First, you need to search the California Secretary of State business database tool to ensure name availability.
California law dictates that DBAs must be filed within 40 days with the county clerk or at least 40 days prior to the corporation starting any operations.
2. Nominate a registered agent
California law requires all corporations to nominate a registered agent that meets the following requirements:
- The agent must be at least 18 years of age or older
- The agent must remain available during usual business hours
- The agent must have a physical street address in the state of California, where business activities are carried out
- If the agent is not a resident of California, then a Certificate pursuant to Section 1505 of the California Corporate Code must be filed by the corporate agent.
The purpose of nominating a registered agent is to receive service of process on the corporation’s behalf. Therefore, this individual’s primary responsibility will be to receive legal documentation and official paperwork from the state.
3. Appoint initial directors at the organizational meeting
An initial organizational meeting must be held prior to filing the Articles of Incorporation. During this meeting, the board must complete a number of tasks, including selecting initial directors.
At least one director must be nominated to oversee the corporation until the first shareholder meeting is held.
The director will be in charge of the repeal, amendment, and adoption of the bylaws, including officers’ elections. Therefore, this meeting aims to elect and incorporate a board of directors who will then appoint the officers.
As per California law, all three officer positions may be held by one individual.
4. File Articles of Incorporation
The next step in the process of incorporating your California business is filing Articles of Incorporation. This document will officially create your corporation and must include some basic information, including:
- A broad purpose statement
- The number of shares your corporation is allowed to issue
- Corporate service of process agent name and address
- The name of your corporation, including its principal address
Alternatively, you may download the relevant form and submit it by mail to the following address:
California Secretary of State
Business Entities Filings Unit
P.O. Box 944260
Sacramento, CA 94244-2260
5. Create and approve bylaws
Every California corporation must create and approve corporate bylaws. The bylaws are rules determining how the corporation is going to be governed and operated. Ultimately, the purpose of the bylaws is to make the rules clear to everyone involved in the business.
Additionally, the corporate bylaws will supplement all rules laid out by the federal government or the state of California.
The bylaws must include the following information:
- What constitutes a quorum for voting purposes
- Fiduciary duties to the corporation
- How the corporation negotiates contracts
- The date of the annual shareholders’ meeting
- How bylaws will be created and amended in future
- The process of handling disputes
- How corporation records will be filed and managed
- The process of holding meetings
- How officers and directors will be elected
- voting procedures
- How the corporation will be governed
- The role of officers and directors within the corporation
6. Select a share structure
This step involves issuing stock and deciding on the share structure and strategy. Stocks must be issued to shareholders in return for their capital contributions. Shareholders may choose to contribute property, services, cash, or a combination of all three.
California corporations do not need to establish a par value for stock. A par value is basically a set amount below which the stock cannot be sold. Ultimately, it is the board that sets the value as well as the number of the initial shares.
Shares may be structured into classes termed a share class.
The California Secretary of State issues the Articles of Incorporation Form or template, and this can only be used to start a corporation with one share class. If your corporation requires more than one share class structure, you may compose your own articles.
7. Obtain an EIN
An EIN, also known as a Federal Tax Identification Number, is more often referred to as the Employer Identification Number. This nine-digit unique code may be considered a Social Security number for your company.
It’s assigned by the IRS to identify business entities in every state. In order to obtain an EIN from the IRS, you need to complete IRS Form SS-4 and file it online. This is the quickest method, and you’ll receive your EIN immediately.
There is no charge for the EIN, nor do you have to pay for the application.
However, once you obtain your Employer Identification Number, you may use it to open up a corporate bank account for your corporation, submit it for state and federal tax purposes, and hire employees.
8. File California state taxes
The following taxes and fees are applicable to all California corporations:
- Franchise tax: Corporations registered in the State of California must pay a franchise tax as per the California Franchise Tax Board. Additionally, corporations without taxable income need to pay California franchise tax. Alternatively, corporations with a taxable income are subject to state corporate income tax. The corporate income tax rate is 8.84% of any amount over $100 000. The minimum tax amount is $800.
- Sales and use tax: If your corporation is selling services or products in California, you are liable for sales and use tax. Refer to the California Tax Service Center for further information.
- State income tax: Anyone who takes earnings out of your corporation is liable for state income tax. More information on this may be found on the California Tax Service Center website.
- Payroll tax: If paying salaries to employees, then you need to submit payroll taxes to the IRS.
9. California business licenses and permits
Corporations in California require the following licenses and business certificates:
- Certificate of Authority: Companies that transact intrastate business in the state of California are required to obtain a Certificate of Authority. If you have a sales representative or warehouse within California, your corporation will need to obtain a Certificate of Authority in order to conduct business in the state legally.
The instructions and the relevant forms to obtain a Certificate of Authority in California may be found on the California Department of Insurance website.
- General business license: Business owners in the state must obtain a California corporation general business license in the city in which the business is located. In some California cities, the business license is referred to as a Business Tax Certificate.
Not every state in California will require a general business license; however, the ones that do include Los Angeles, San Diego, San Jose, San Francisco, and Sacramento.
The only exception to this rule is if your corporation is operated from an unincorporated section of the state, and in this case, you must obtain a relevant license or tax certificate on a county basis.
- Seller’s permit: If your corporation sells any tangible goods, then you’ll need to apply for the California seller’s permit. Do so by visiting the local California Department of Tax and Fee Administration in person or by applying online.
- Professional license: Prior to offering certain services, a few professions in the state need to be regulated. Some professions requiring licenses to operate legally in the state include cosmetologists, auto repair shops, pest control, and more. For additional information regarding obtaining a professional license, refer to the California Department of Consumer Affairs website.
10. Annual report requirements in California
All California corporations, including foreign corporations registered in the state, should file a Statement of Information with the Secretary of State. The Statement of Information is California’s annual report requirement.
The statement must be filed within 90 days after submitting the California Articles of Incorporation.
Additionally, it must be filed every year during the relevant filing period. The filing period is the first calendar month in which the original articles were submitted, including the prior five calendar months.
In order to submit the Statement of Information, file Form SI-550 online.
11. Costs of starting a corporation in California
The following filing fees apply to California-based corporations:
- DBA Name: Varies based on county, starting at $25 and $5 for each additional name
- Certified copies of DBA: $14 for up to 5 pages
- Articles of Incorporation: $100 or $115 if hand delivered
- Statement of Information/annual report: $25
- California Certificate of Good Standing: $5 by mail and $15 in-person
Next steps after forming a corporation
A few helpful tips go a long way in maintaining your corporation:
Open a business bank account
To obtain liability protection, it’s recommended that you open up a business bank account for your California corporation. The bank account separates the corporation’s funds from the members’ personal income.
To open up a business bank account in the state of California, you will need the following:
- Copies of the original Articles of Incorporation
- Employer Identification Number
- Business license
- Depending on how old your corporation is, you may need a California Certificate of Good Standing to prove the business entity is active and in good standing with the state
Get business insurance
In order to manage risks and help you focus more on your growing California corporation, you should get business insurance. Some of the most common types of business insurance include professional liability insurance, general liability insurance, and workers’ compensation:
- Professional liability insurance: This type of insurance covers claims of malpractice and a few other business errors for professional service providers such as accountants and consultants
- General liability insurance: This type of insurance protects your business from lawsuits. In most cases, small businesses choose general liability insurance.
- Workers’ compensation insurance: This type of insurance provides coverage for employees’ job-related injuries, illnesses, or death.
In order to find out who owns a business in the state of California, you need to do a business search on the Secretary of State website. The website displays information pertaining to corporations, limited partnerships, and limited liability companies.
In order to find out whether your business has a seven-digit corporation number or a 12-digit one, you can contact the office of the Secretary of State. This should be done if you don’t have your original application form. Additionally, the corporation’s ID number and type may be found on the California Secretary of State’s website.
In order to file a California corporate income tax return, you need to complete Form 100 and submit it to the state of California Franchise Tax Board. If your business is incorporated in California, conducting business in California, or receiving California source income, you’ll need to complete this form.
In order to dissolve a California corporation, you need to submit the Article of Dissolution or Form 966 by mail to the Secretary of State. There is no fee for filing the certificate by mail. However, there is a $15 handling fee for documents that are hand-delivered to the Secretary of State’s office in Sacramento.
California corporations are required to submit annual reports and the filing fee for these reports is $25. Additionally, corporations in California are required to pay tax, the minimum amount being $800 paid to the California Franchise Tax Board.