As you are aware, making the dream of a California corporation or limited liability company (LLC) a reality takes a lot of effort and dedication. As you embark on your journey to incorporate your business in California, consider important criteria, such as selecting your business name and obtaining the necessary business licenses and permits. Ultimately, the decision to incorporate in California should be grounded in your business goals for your company, where you intend to do business, and where you intend to bank and establish credit/financial footprints.
Select your business name
Naming a business is most definitely a stressful undertaking. You want people to find you, understand your product or service and remember your company. You don't want a name you're stuck with if you ever plan on expanding outside of your area, you don't want a name that's too "punny," and most importantly, you don't want to bump into someone else's name. A state name check can prevent this from occurring. It reveals if the desired name is already in use in the preferred state of incorporation, like California. Other common searches conducted include a domain name search and a trademark search.
Select your incorporation type
C corporation or S corporation? Limited liability company (LLC) or limited liability partnership (LLP)? When reviewing and comparing business structure types, it is helpful to weigh the following factors:
- Filings and fees — Is there a state filing and applicable filing fee required for creation?
- Ongoing filings and fees — Are there ongoing state filings, such as annual reports and fees?
- Corporate formalities — Does the incorporation type you choose impose strict ongoing formalities and requirements?
- Management — Does the incorporation type you choose offer flexibility in who manages the business?
- Personal asset protection — Incorporating your business provides limited liability protection to the owners, where operating your business as a sole proprietorship or general partnership does not.
In addition to the points above, there are many other factors that may be important to you to consider when selecting your incorporation type.
- Businesses providing professional services — You may also want to note that in California, professional LLCs are not recognized. If providing a licensed, professional service, a professional corporation or a limited liability partnership would need to be formed. You will have to contact your licensing board to determine your requirements.
- Filing of a Statement of Information — California requires corporations and LLCs to file a Statement of Information shortly after the incorporation is complete. The Statement of Information provides the state with additional information on the new business, such as names/addresses of the members/managers for LLCs or directors for corporations. There is a fee to file the Statement of Information with the state. See our incorporation guide for the State of California for additional information.
- Management requirements — California law requires corporations to have at least three directors with the exception that there are less than three shareholders. If this is the case, the number of directors must be equal to or greater than the number of shareholders. For example, if the corporation has only one shareholder, the number of directors may be one or two. If there are two shareholders, the number of directors may be two or three. It should also be noted that California does not have a minimum age or residency requirement for directors.
- Corporate bylaws — California law also states that a corporation needs to create bylaws. Bylaws are the internal governing document for the California corporation. No specific criteria define the content of the bylaws. Typically, the bylaws establish internal rules and procedures for the corporation, addressing issues such as the existence and responsibilities of corporate offices, the size of the board of directors and the manner and term of their election, how and when board and shareholder meetings will be held, who may call meetings and how the board of directors will function in its role. You are not required to file bylaws with the California Secretary of State, but you must keep a copy at your principal place of business.
File your incorporation paperwork
The following organizational documents are necessary to incorporate specific types of businesses in California. These documents are required to satisfy the requirements of the California Secretary of State:
- Articles of Incorporation — California Corporation, California Professional Corporation, and California Close Corporation.
- Statement of Authority — California General Partnership.
- Articles of Organization — California Limited Liability Company.
- Articles of Registration — California Limited Liability Partnership.
- Articles of Certification — California Limited Partnership.
Taxation is a primary consideration when choosing a business structure. The state of California imposes an $800 minimum franchise tax on corporations and LLCs. This tax is treated separately from any income, self-employment, or payroll tax. For many business owners weighing the option of incorporating their business in California, this $800 minimum tax is viewed as a hindrance.
Keep in mind if you choose to incorporate outside the State of California, but are still doing business in California, you will be required to register your company to transact business there (called foreign qualification), and will be required to pay ongoing fees both in your state of incorporation and in California. So, incorporating in another state to "escape" the franchise tax may end up costing your company more in the long run.
Other notable items
Business licenses and/or permits are required for most types of businesses, and a Federal Tax Identification Number (EIN) is required for corporations that have employees. Additionally, an EIN may be required to open a business bank account.
Undoubtedly, incorporating your small business in California holds substantial advantages; however, no matter which state you are dreamin' of for your company's home state, make sure to consult with an attorney or accountant to make an educated decision.