By: Natalie Zweig
The process of incorporation involves legally establishing a company. After formation, the company becomes separate from its owners. The business’s assets and income from owners and investors are separated in the process. The steps to incorporate are fairly similar across the nation, however the cost, taxation and corporate laws vary state to state. Some states are more appealing to business owners due to cost savings and flexibility. Delaware is the most popular state for businesses to incorporate since their laws give business owners flexibility and there is no state corporate income tax during formation.
A benefit of incorporating in California is that California treats corporations as separate legal entities, separating assets from the business. California corporations hold their own debt and income, meaning if things go south, the corporation is liable, not the owners. California also offers certain tax credits to corporations such as new employment hiring tax credits, California competes tax credits, or California research and development tax credits.
California also has corporation taxes of 9%, which is advantageous compared to states such as Iowa that have a 12% rate, but also a disadvantage compared to Delaware. Another con is that California charges a minimum annual tax of $800. Also, corporations in California are monitored by the federal, state, and local government, which results in many regulations and not a lot of flexibility. Corporations in California must file an abundance of paperwork including separate books and records and minutes of shareholder and board meetings. In order to satisfy government requirements, a great deal of time and effort must go into the process of incorporation.
The steps to incorporate in California are as follows:
- Choose a corporate name.
- File Articles of Incorporation.
- Appoint a registered agent.
- Prepare corporate bylaws.
- Appoint directors and hold the first board meeting.
- Issue stock.
- File a Statement of Information.
- Comply with California Tax and Regulatory Requirements.
- When choosing a corporate name, corporations must choose a unique name not listed on the California Secretary of State's records. Names often include "Corporation," "Incorporated," or "Limited", however this is not a requirement.
- The corporation must file their articles of incorporation with the California Secretary of State. The articles of incorporation include: the corporate name and address, name and address of an agent, number of authorized shares to issue, purpose statement, and a cover sheet. There is a $100 filing fee included.
- A registered agent must be appointed for service of process. The agent can be an individual in California or a corporate agent that has filed a Registered Corporate Agent for Service of Process Certificate. Their role includes accepting legal documents on behalf of the corporation in the case of a lawsuit.
- Next, the corporation makes corporate bylaws to set out rules for operation. This is not a requirement, however it’s highly encouraged to establish rules and prove legitimacy to banks, creditors, the IRS, and other investors. This step also includes making a corporate records book to keep legal documents and important papers.
- The incorporator then appoints the board of directors until permanent directors are voted on. The incorporator also makes the “Incorporator’s Statement” to detail information about the board of directors. The first meeting of the board can now occur. The agenda is appointing corporate officers, adopting bylaws, selecting a corporate bank, authorizing issuance of shares of stock, setting the corporation's fiscal year, and adopting an official stock certificate form and corporate seal. All of this information is recorded.
- Stock is then issued to shareholders in exchange for capital, such as cash, property, or services. California corporations don’t need a par value for their stock. If over 35 people are issued stock, the corporation is classified as a security under state and federal securities laws and will be regulated under the law. To get exemption, you can file a Section 25102(f) Notice Filing - Limited Offering Exemption Notice with the California Department of Business Oversight for $25 to $300.
- Every corporation registered in California must file a Statement of Information with the Secretary of State within 90 days after filing the articles of incorporation, and every year after. Corporation must also file Form SI-550 for $25.
- The final step is to comply with tax and regulatory requirements in California. Some of these requirements include: annual minimum tax of $800, additional fees based on income, federal employer identification number, a business license, payroll taxes, and more.
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