Here is an outline of the steps you need to follow in order to form a corporation (specifically, a "C corporation") in California. You should also read the general section on forming a corporation for information applicable in any state. Additionally, you should familiarize yourself with the California Secretary of State's website, which has useful information and resources.
1. Choose a business name for the corporation and check for availability.
- Please see our section on choosing and checking the availability of a name for your small business, as well as our section on the trademark law aspects of choosing a name.
- Your business name may not be the same as, or deceptively similar to, other corporate names on file with the Secretary of State (limited exceptions apply). Additionally, the name may not contain the words "bank," " trust," "trustee," or related words.
- Although you are not required to do so, consider registering your business name as a federal and/or state trademark.
2. Recruit and/or appoint a director or directors for the corporation.
- Under California law, a corporation must have at least three directors, unless there are less than three shareholders. In that case, the number of directors may 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 the corporation has two shareholders, the number of directors may be two (or three, which is the normal minimum).
- California does not set forth a minimum age or residency requirement for directors.
- Either the articles of incorporation or the corporation's bylaws must state the number of directors that will constitute the corporation's board of directors.
3. Prepare and file articles of incorporation with the Secretary of State.
- The filing fee is $100. The Secretary of State's website has a sample articles of incorporation for a California corporation, with instructions. For general information on corporate articles of incorporation, please see the Articles of Incorporation page.
4. Create the corporation's bylaws.
- California law requires a corporation to create bylaws. There is no set criteria for the content of bylaws, but they typically set forth internal rules and procedures for the corporation, touching on issues like 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. You are not required to file bylaws with the Secretary of State, but the corporation must keep a copy at its principal place a business. For general information on corporate bylaws, please see the Bylaws page.
5. File a Statement of Information with the Secretary of State.
- The filing fee is $25. The Secretary of State's website has a simple, fill-in-the-blank form for the Statement of Information. Instructions are included. It must be filed within 90 days of filing the articles of incorporation.
6. Hold an organizational meeting.
- See the general section on Forming a Corporation for details.
7. Issue stock certificates to the initial owners of the corporation.
- See the general section on Forming a Corporation for details. You can find the California statute relating to issuance of stock certificates at Cal. Corp. Code § 416. Unless the articles of incorporation state otherwise, the board of directors has the authority to set the "consideration" (i.e., the amount to be received) for each share of stock.
8. Determine what tax and other regulatory obligations the corporation has, and take care of any necessary registrations.
- Request an Employer Identification Number (EIN) from the IRS. This can be done via its online application. There is no filing fee.
- If you will be paying at least $100 to an employee or employees in a quarter (this includes corporate officers), you are subject to California employment taxes and must register for a California employer account number within 15 days of paying that $100. You can register for employment taxes and get your account number online using the Employment Development Department's website. These taxes must be paid quarterly. For more information on being an employer, including tax information, see the California Employer's Guide.
- Whenever you hire an employee in California, you must inform both the IRS and the State of California. The IRS details all of the necessary steps, including verifying work eligibility and withholding allowances certificates, on its page entitled Hiring Employees. You can find information for the state level in the California Employer's Guide and on the website for California's New Hire Reporting Program.
- If you have any employees in California, you must carry workers' compensation insurance. The Division of Workers' Compensation administers this program.
- There are other informational returns that you may have to file annually or semi-annually with both the IRS and the state. For more information, check out the IRS Guide To Information Returns and California Franchise Tax Board's Information Returns page.
- California imposes an $800 minimum franchise tax on corporations doing business in the state. This minimum tax is separate from any income, self-employment, or payroll tax. For many, this $800 minimum tax could be a significant impediment to forming a corporation in California, especially if you have little or no expected income from your online publishing activities.
- California's current income tax rate for corporations is 8.84%.
9. Open a bank account for your business.
- It is a good idea to keep your business's finances separate from your personal accounts. A good way to do this early on is by opening a bank account for your corporation. You will probably need a Tax ID number (EIN), a copy of the articles of incorporation, and a resolution identifying authorized signers if those names are not listed in the articles. Here is one example of the documentation that banks ask for.
Other Notable Requirements for Maintaining a Corporation in California
- California corporations must file a Statement of Information with the Secretary of State every year after the original Statement of Information is filed (see above). The filing fee is $25.
- California requires certain documents to be kept at a corporation's principal place of business. The required documents are described in Cal. Corp. Code § 1500 and Cal. Corp. Code § 1600-01.
- Cal. Corp. Code § 1501 (scroll down) states that a corporation must send an annual report to shareholders within 120 days of the end of its fiscal year. This requirement does not apply, however, if the corporation has less than 100 shareholders and its bylaws expressly waive this requirement.
Additional Steps and Information about Forming an S Corporation
- An S corporation has the same basic organizational structure as a regular corporation, but some of the tax advantages of a partnership or LLC. An S corporation pays no federal income tax, except for tax on certain capital gains and passive income. Instead, the corporation's profits and losses "pass through" to shareholders, and profits are taxed at individual rates on each shareholder's Form 1040. Certain requirements and additional obligations apply -- please see the S Corporation page for details.
- To form an S corporation, designate "S" status with IRS via Form 2553 within 2 months and 15 days of filing your articles of incorporation with California. There is no additional paperwork that you need to file with California.
- California does not recognize "S" status in the same way the IRS does. California taxes the corporate profits of an S corporation before distribution to shareholders at a rate of 1.5% (as opposed to 8.84% for C corporations).
- While the corporate tax rate for S corporations is lower than that for C corporations, the $800 minimum franchise tax still applies.
Additional Steps and Information about Forming a Close Corporation
- California law has provisions relating to what is known as a "close corporation" -- a classification for a corporation with a small number of shareholders (thirty-five maximum) that does not issue stock to the general public. In general, running a close corporation permits a less formal management style under the auspices of a shareholders' agreement. Please see the Close Corporation page for details.
- The articles of incorporation of a close corporation are different from ordinary articles of incorporation. The Secretary of State's website has a sample articles of incorporation for a close corporation. Among other things, close corporation articles must contain:
- a statement that all the corporation's issued shares of all classes shall be held by not more than a specified number of persons, not exceeding thirty-five; and
- this statement: "This corporation is a close corporation."
- Running a close corporation generally requires a shareholders' agreement. This is an agreement among all the corporation's shareholders, in which they agree to the relaxation of various corporate formalities, such as holding frequent shareholder and board meetings. If you are interested in forming a close corporation, you should contact a lawyer.
Additional Steps and Information about Forming a Special/Public Purpose Corporation
- California law allows for the creation of two special corporate forms for organizations intending to serve some public benefit, beyond purely seeking profits. The two forms are known as the "flexible purpose corporation" and the "benefit corporation." Under either form, the corporation pursues some additional goal—such as environmental responsibility, or general social benefit—beyond the traditional profit-seeking of a corporation. The directors of the corporations are then immune from liability based on their pursuit of these other goals. This .pdf document explains the basics of these two forms.
- The "flexible purpose" corporation, created by the Corporate Flexibility Act of 2011 and governed by the California Corporations Code, Division 1.5 (Chapters 1-11, Sections 2500-3503), allows a corporation to specify certain special purposes. The director(s) of a flexible corporation then pursue these special purposes in addition to the traditional profit motive, and are immunized from liability for pursuing the special purposes. See Section 2700(c)-(d). Section 2602 specifies the available special purposes, but in summary:
- the articles of incorporation must state either that the corporation is committed to a specific purpose, or to engaging in a specific profession (Section 2602(b)(1)); and,
- the articles must also specify at least one from a list of additional goals, which include environmental responsibility, community/societal benefit, or any purpose that a nonprofit corporation may pursue.
- The Corporate Flexibility Act also contains specific requirements for reporting to shareholders (Sections 3500-3503), and specifies methods through which corporations may convert to and from a flexible purpose corporation (Sections 3300-3305).
- The "benefit" corporation, governed by California Corporations Code, Division 3, Part 13 (Chapters 1-4, Sections 14600-14631), has "the purpose of creating a general public benefit." Section 14601(c) of the law defines "general public benefit" as having "a material positive impact on society and the environment," and specifies the method by which this standard should be judged.
- In addition to the traditional profit goal of a corporation, the directors of a benefit corporation must also take into account "community and societal considerations," environmental effects, and other particular factors. Section 14620(b)(1-7).
- Directors are immunized from liability if they properly take into account all of these factors. Section 14620(g). Directors are further immune from claims that the benefit corporation has failed to actually create a public benefit. Section 14620(f).
- If you wish, you may specify additional public benefits that your benefit corporation will pursue. The list of permissible specific benefits, enumerated at Section 14601(e), includes "any other particular benefit for society or the environment." These specific benefits then become binding on the directors as well. Section 14620(b)(7).
- Benefit corporations also must follow specific reporting requirements (Section 14630). Existing corporations may convert to a benefit corporation (Section 14603(a)).