By Richard Harroch
Creating a California corporation offers several advantages to businesses. A firm, if run appropriately, will protect its shareholders from the company’s debts and obligations. Other investors, such as angels and venture capitalists, may assist the company in securing more funding. Incorporation may provide a company legitimacy and brand recognition and make a future sale of the company easier. Shares in a company may also be easily transferred.
Several critical actions must be completed to properly form and operate a California corporation. Startup lawyers, incorporation service providers (ZenBusiness, CorpNet, or MyCorporation), or entrepreneurs will shape California businesses.
This book contains all of the necessary information for founding a California corporation.
Step #1: Give your California business a name
It’s difficult to get a high-paying position in your California company. When you’re starting a business, choosing the right name for your company may have a big impact on how successful it becomes. The erroneous title might result in overwhelming legal and business obstacles.
The following are some basic naming conventions to be aware of:
- Do a reputation eligibility search on the California Secretary of State’s website to see whether your desired title is available. “The Secretary of State must not submit a document or grant a reputation reservation that includes a proposed business term that is the same as or deceptively similar to an existing company title,” according to California law.
- Check the U.S. Patent and Trademark Office trademark database to see whether your title has been federally trademarked by someone else.
- Make a thorough internet search for the title to guarantee you aren’t using the name of an existing company.
- According to California law, you must include the words “Included,” “Inc.,” “Company,” “Corp.” or “Restricted” as part of the title. This may be accomplished, for example, by calling the company “American Glass & Metals, Inc.”
- Don’t employ names that are likely to mislead the general audience (which implies an affiliation with an authorities company or entity).
- In order to use the phrases “bank,” “insurer,” and “credit union,” you must acquire a particular license.
Consider submitting a trademark application with the United States Patent and Trademark Office (USPTO) or the state in order to safeguard the name.
- Avoid names that are difficult to spell.
- Check whether the domain name that corresponds to the business name is available (the “.com” variant is the most popular).
- Don’t choose a reputation that will restrict what you’re promoting as it expands. For example, Jeff Bezos made a wise decision in picking “Amazon” as a brand name rather than “online books.”
The name of your company may be changed by filing a “doing business as” form.
Step #2: Choose a registered agent in California
When forming a California corporation, you need to choose a “registered agent,” also known as an “agent for service of process.” The registered agent is a human or business organization with a California business license that receives official approval and tax communications on the company’s behalf.
A corporation officer, a shareholder, a director, another California resident, or a dedicated registered agent service business will serve as the registered agent. No P.O. Boxes allowed. The registered agent’s address may be located in government documents on the California Secretary of State’s website. Registered brokers must be available during normal business hours.
For a small yearly fee, most online incorporation services (ZenBusiness.com, CorpNet, MyCorporation, and others) will give registered agent services in conjunction with their incorporation services. Using a registered outside agent protects your privacy since the registered agent’s address, not your physical address, is recorded in public records. Additionally, some people form businesses outside of their home state and utilize a registered agent to provide an address for receiving legal documents in California.
Step #3: Write the Articles of Incorporation and file them
After selecting a business name and a Registered agent, you must file the company formation paperwork with the California Secretary of State. This may be done by yourself, your company’s lawyer, or with the help of an online incorporation provider. The Articles of Incorporation is the name of this document. California Form ART-GS is often utilized when just one class of shares is involved; however, any format might be used as long as it fits the statutory requirements.
The Articles of Incorporation are typically two to three pages long. The following parts are important:
- The company title. The official title of the corporation is indicated in this section of the Articles.
- Handle. The preliminary address of the firm, including its whole road handle, metropolis, state, and zip code. This must be a physical handle, not a P.O. Box.
- The aim of the company. “The goal of the company is to engage in any lawful act or exercise for which a company may be organized beneath California’s Common Company Legislation, aside from the banking enterprise, the belief firm enterprise, or the practice of a profession permitted to be included by the California Companies Code,” says the goal clause.
- The licensed capital. This section should detail the various types of shares that the firm may issue and the various inventory courses. Early on, you could just have one kind of frequent inventory, but as time goes on, you’ll be able to challenge both frequent and most well-liked inventory. This section should permit a sufficient number of shares to cover the founder’s shares and shares that may be offered to future employees or traders. Consider approving a total of 10,000,000 or more shares.
- Title and handle of registered agent. For service of process inside the state, the corporation must specify the title and address of a registered agent. “Selecting a California registered agent” is step #2 (above).
- Different required provisions. To be effective, certain provisions, such as preemptive rights to purchase future shares, need to be included in the Articles.
- Signature. Every incorporator (even if there is just one) must sign the Articles of Incorporation.
The fee for filing California Articles of Incorporation is $100, plus fees for expedited processing.
Step #4: Form a board of directors for the corporation
Every California corporation should have a board of directors, which is in charge of administering and monitoring the company’s operations. The incorporator occasionally appoints preliminary administrators via a simple Assertion of Incorporator as part of the business creation process.
There is no minimum age, expertise/background, or residence requirement to be a director of a California corporation.
A minimum of one director should be present in companies with just one shareholder. At the very least, companies with two shareholders should have two administrators. At least three administrators should be present in companies with three or more shareholders.
The shareholders of the corporation vote on new or alternate administrators.
Step #5: Implement the board of administrators’ organizational decisions
No P.O. Boxes allowed. The registered agent’s address may be located in government documents on the California Secretary of State’s website.
Some or all of the following authorizations may be included in organizational resolutions:
- Officers to be appointed (sometimes the CEO, CFO, and Company Secretary)
- Adopting an inventory possibility strategy while issuing inventory
- If suitable, electing S company status
- approving the creation of financial institution accounts for the firm and signature authorizations (banks will usually have the type of resolutions they wish to see)
- approving any important early contracts
- The fiscal year is chosen.
- Reimbursement of expended incorporation fees
- Indemnification Authorization Officers and administrators have made agreements with each other.
- Bylaws are adopted.
Step #6: Draft and implement California corporate bylaws
A company’s bylaws contain the principles and processes that control shareholders, administrators, and officials’ rights and powers. Most lawyers and incorporation services provide a ready-to-use “common” set of template bylaws that may be customized to meet your organization’s specific needs.
Instead of the organizational assembly, the bylaws are occasionally established by the board of administrators inside the organizational assembly or with written unanimous approval.
The bylaws occasionally cover the following:
- The board of administrators is evaluated.
- When and how board meetings are referred to (together with discover)
- When and how are shareholder meetings referred to? (together with discover)
- Administrators and officials’ responsibilities and liabilities
- The procedures for exercising one’s right to vote
- Regulations governing the transfer of firm inventory
- Officers and administrators have an indemnification responsibility (protection against litigation and claims directed at them).
- The fiscal year of the corporation
- Issues that often arise in businesses
Bylaws may be created, altered, or repealed by the board of administrators or by a vote of the shareholders, and they can limit the board’s authority in this regard.
Step #7: Think about inventory sharing
Homeowners of a firm are called “shareholders,” They are given the stock that proves their ownership interest in the company. The administrators must approve the sale and assign a value to each inventory share. Federal and state securities laws may apply any time inventory is offered for sale. However, a “non-public placement” exemption from the securities legislation’s registration requirements may be available for many small businesses with minor stock issuances to founders. Part 25102(f) of the California Companies Code may require you to submit a notice with the California authorities within 15 days following the issuing of stock in California. This find may be filed online.
If you’re selling stock to investors, the rules get more complicated, and you’ll need to hire a startup/security counsel.
Shareholders may pay for their stock with cash, property, or services.
Ascertain that you have an inventory ledger that records every inventory certificate issued, the date, the number of certificates issued, and the amount of money received by the firm.
Step #8: Consider having your business managed as an S Corporation
S corporations choose to “move by” their federal income, losses, deductions, and credit to shareholders. This may be helpful to an organization’s stockholders in the early years, when the company may experience losses; owners will then be able to deduct these losses on their tax returns. Furthermore, suppose the business earns a profit. In that case, there will only be a tax on the shareholder level, eliminating the double taxation experienced by traditional C corporations that produce profits and then distribute them to their shareholders.
The following major rules must be followed to be eligible for S business status:
- There can be no more than 100 stockholders in the firm.
- Typically, the stockholders should be humans (exceptions are made for sure tax-exempt organizations, trusts, and estates, however firms, and partnerships typically cannot be shareholders).
- There can only be one kind of inventory (most popular inventory and standard inventory are not permitted).
- Shareholders must be citizens or residents of the United States.
The S corporation election is normally made by filing with the IRS by the fifteenth day of the third month in which the election is to take effect, or at any time during the year immediately before the tax year.
S corporations in California pay a franchise tax of 1.5 percent of online income to the state, with a minimum of $800.
IRS Form 2553, found on the IRS website here, is used to elect an S corporation.
Step #9: Determine any permits, licenses, or registrations you’ll need to start your California business
Depending on the nature of your business, you may need the following permissions, licenses, or laws:
- Regulated businesses need permits (aviation, agriculture, bars, and many others.)
- Allowance or license for gross sales tax
- A home-based business is possible.
- Permits or licenses for business in the city and county
- Vendors are permitted under zoning.
- The division of health is possible (corresponding to for a restaurant)
- Tax and employer identification numbers from the federal and state governments
Depending on your business, permits or licenses may be required on the federal level. For information on federal permissions and licenses, go to the SBA site here. Also, try the CalGold website, which helps California businesses obtain appropriate permit information and phone numbers for the many California corporations which manage and issue these licenses.
Step #10: File an Assertion of Data with the Secretary of California
A firm must file an “Assertion of Data” with the California Secretary of State within 90 days after filing the Articles of Incorporation and pay a submitting fee. The Assertion provides basic information about the firm. The form may be found online here.
The Assertion of Data must be submitted annually for home inventories and agricultural businesses.
Step #11: Keep track of the contracts you’re advertising
Enterprise contracts are written agreements that are legally enforceable between two or more parties. They’re an important component of conducting business, and they need to be carefully drafted and/or negotiated.
Smaller businesses may do business based on informal handshake agreements or unspoken understandings, but the more at risk, the more necessary it is to have a written contract. A contract serves as the basis upon which all events must be built. It allows you to do the following on any given occasion:
- Describe all of the responsibilities they are expected to do.
- Describe all of their commitments that they expect the opposing occasion (or events) to fulfill.
- Limit any potential obligations.
- Set parameters that correspond to a period in which the contract’s terms will most likely be fulfilled.
- Set the terms of a sale, lease, or rental agreement.
- Make a fee schedule.
- Set out all of the events’ hazards and duties in detail.
A contract is essentially a written meeting of minds. While it’s occasionally written up by one party and favors that party’s wishes and needs, protecting them from most (if not all) obligations, it should be seen as a work in progress that changes and expands as each party adds to it before signing. A contract’s foundation is “consideration,” whether it’s cash or a commitment to complete work/present a service by a certain date. It becomes an official document if you sign it.
The term “common contract” is more myth than reality, and far too often, people just sign on the dotted line without reading or debating the terms of a contract. A startup must verify that it is comfortable with the contract’s whole terms, and depending on the transaction dynamics, almost any time is negotiable.
Consideration, remuneration, ownership rights, legal obligation, and hazard are all terms that must be carefully phrased. Anyone starting a business should get legal advice from a competent lawyer specializing in contracts to ensure that these topics are covered clearly.
The contract should spell out how it will be enforced and what steps will be taken if one party fails to meet its responsibilities. A private binding arbitration clause is frequently advantageous to smaller businesses to handle any issues.
Among the most important “commonplace contracts” that a company should have are as follows:
- Service settlement or gross sales
- Settlement of a license
- Provide a letter to the personnel, as well as a consulting agreement with any independent contractors (you wish to just be sure you will find personal the mental property rights for something they develop for what you are promoting)
- Workers and independent contractors must sign a Confidentiality and Invention Assignment Agreement
Settlement of non-disclosure
Step #12: When starting a business in California, get a tax id number
In most circumstances, you’ll need to get a tax I.D. from the IRS for your company. It’s also known as an “Employer Identification Number” (EIN), similar to a Social Security number for businesses. Banks will need your EIN when opening a business checking account, and you will need it for filing tax returns.
An EIN online may be obtained via the IRS website. To receive an EIN from the IRS, there are no costs involved.
Step #13: Set up a good accounting and bookkeeping system
You’ll need to set up a bookkeeping/accounting system to keep track of your company’s finances, including revenue, bills, capital expenditures, EBITDA, income and loss, and so on. This is necessary for understanding your company’s cash flow situation as well as for tax-filing purposes.
QuickBooks, Zoho, FreshBooks, and Xero are just a few of the online software program solutions that may be handy in this respect.
Step #14: Adhere to business formalities to avoid private legal liability
Filing Articles of Incorporation for a California company gives many business owners the false sense of security that they are shielded from personal responsibility. This is not the case. The simple act of incorporating does not provide complete protection to business owners. To reduce the likelihood of such private or shareholder legal liability, it’s important to follow certain procedures:
- All the time use the company title. The company’s complete name must be used on any contracts, invoices, or papers used by the firm, along with the words “Inc.” or “Corp.” This denotes the company’s existence as a distinct entity.
- All the time use the correct signature. That is, you will sign on behalf of the firm, using both the company’s and your titles. When signing contracts on behalf of the firm, it’s recommended to adopt the following format:
[Your name—authorized signing officer and corporate title]
- Observe all company formalities. This includes following bylaws, appropriately issuing inventory, having a board of administrators meetings, documenting assembly minutes, and adhering to certain corporate formalities.
- Be sure to maintain funds separate. The money of the company and the funds of individual shareholders should not be kept in the same account or mingled for any reason.
- All transactions made by the company must be clearly separate from any particular person transactions. Firstly, you reduce the risk of any private responsibilities for the company’s debts by not blurring the line between individual owners, executives, or the board of administrators and the corporation (which exists as a distinct entity).
Step #15: Make sure your business is properly insured
If you’re putting up the work and time to create a company, you should safeguard it by purchasing enough insurance coverage.
Your first item of business should be to determine your specific insurance requirements depending on the nature of your business. Consider what risks must be addressed and how much protection is required. Then look for and compare insurance providers or brokers to see which companies specialize in the kind of protection you want.
When looking for insurance, you’ll want to know the answers to the following questions:
- How much do the deductibles cost?
- Are the protection thresholds high enough?
- What doesn’t the insurance cover devices or events?
- Is there any protection that isn’t complete?
Here’s a rundown of the several types of insurance coverage that can be appropriate for your company:
- Insurance coverage for general legal liability
- Coverage for product liability insurance
- Expert legal liability insurance coverage
- Insurance coverage for your home
- Insurance coverage for workers’ compensation (For further information, go to the California Department of Industrial Relations website)
- Insurance for administrators and officers (D&O)
- Workers’ medical health insurance
- Insurance coverage for business disruption
- Coverage for commercial vehicles
- Insurance coverage for data breaches and cyber-attacks
- Important life insurance coverage for individuals
- Unemployment insurance coverage (for additional information, check the California EDD website)
More information about creating a California corporation
Copyright © by Richard D. Harroch. All Rights Reserved.
In regards to the Writer
Richard D. Harroch is the Managing Director and Global Head of M&A at VantagePoint Capital Companions, a San Francisco-based venture capital firm. You can find all of his publications as well as his entire profile.