How to Form a Corporation in California Without Pulling Out All of Your Hair

Most people would probably say that forming a corporation sounds like a nearly impossible task, along the lines of assembling the space shuttle or building an exact replica of the Golden Gate bridge out of toothpicks.  But it doesn’t have to be that way.
Forming a corporation can be straightforward. Although it helps to have a good guide, a lot of patience, and an espresso machine nearby.
First you should to ask yourself why are you forming a corporation? Is it absolutely necessary? If you are setting up a small business without much outside investment, then a corporation may be overkill.  Corporations are not easy to maintain, requiring certain formalities and adherence to strict corporate rules.

So why does anyone form a corporation? Budding entrepreneurs set up corporations because they shield its owners from personal liability for business obligations. That is a good thing. Without protection from their personal assets, enterprising individuals might not start businesses, particularly in areas of high risk or high potential for liability. And businesses are good.

(It’s important to note however that you aren’t 100 percent protected from any personal liability. In certain circumstances, such as for breach of fiduciary duty or for negligent or intentional acts, the owners of a corporation could face personal liability, putting their house, cars and other assets at risk. Not good.)

Another advantage to corporations is you can bring on investors who are not involved in active management by selling shares in the corporation.  Owners also may be able to use savvy tax planning to reduce their income tax. It’s best to work closely with your accountant if this is your motivation for forming a corporation.

But you should know that there are other fish in the sea.  One other very popular legal entity is called a Limited Liability Company (LLC) which is much less expensive to set up and maintain, more flexible, and less subject to formalities. Most often, if you consult a small business lawyer, you will be advised to set up a LLC instead of a Corporation for your small business because a LLC is much easier for a small business to maintain.

However, for now let’s assume you still want to move forward with forming your corporation.  Here are the basic steps:

Two Types of Corporations

First, you need to choose which type of corporation you want to form. There are two kinds of corporations – a S Corp, and a C Corp. A C Corp is generally for larger companies like Google or Microsoft.  Shareholders can generally easily buy and sell shares. A C Corp could be subject to double taxation however, which is why you may want to consider a S Corp instead.

An S Corp is usually a smaller, more closely held business, like a family business. The S corporation is a “flow-through” entity for tax purposes, similar to a partnership or a LLC. Unlike the C corporation, an S Corporation will not pay income tax directly on its profit. An S Corporation’s net income or loss is simply transferred to the shareholders who report the gain or loss on their tax returns. Profits from the business must be shared in accordance with ownership interests.

There are similarities between a C Corp and an S Corp: both must have a board of directors who elects the officers in the company. Both must have annual meetings, Board of Directors meetings, corporate minutes, and stockholder meetings.

Choose a Corporate Name

Now let’s get down to the fun stuff – picking a name for your corporation.

The easiest way to pick a name for your corporation is by searching the California Secretary of State’s database of corporation names.

Keep in mind that just because a name is available on the Secretary of State’s website, it doesn’t mean it hasn’t been trademarked. So you still have to check for trademarks, and you may want to register a trademark for whatever corporate name you pick.

There are a few limits on what name you can choose. The name cannot be the same as or too similar to an existing name on the records of the California Secretary of State, and it can’t be misleading.

Choose Directors

The next step is you need to decide who will serve as Directors for the corporation. The Directors make major decisions for the Corporation. Chances are you have already decided who the directors will be, but if you haven’t yet, you should.

File the Articles of Incorporation

Once you have chosen a name and appointed the Directors, the next step is to prepare and file the Articles of incorporation with the Secretary of State’s office. This step is not that difficult. The Articles of Incorporation document is a very filing that needs to be brought to the California Secretary of State, along with the filing fee of $100.

You will need to chose someone to serve as the corporation’s initial registered agent for service of process. Usually one of the directors will serve this role. The agent for service of process is a formality so that a plaintiff would know who to serve the papers on if they want to sue. Hopefully that won’t happen, or at least not until you are a huge success.

Draft Corporate Bylaws

The next step is to draft the corporate bylaws.  Although bylaws are technically not required by law, almost all corporations draft and adopt them.

Corporate bylaws are the “rules of the game” for the corporation. Bylaws typically set forth the “housekeeping” rules and procedures governing the corporation’s affairs and functions, such as officers’ job responsibilities, the dates and location of shareholders’ and directors’ meetings, etc.

You don’t necessarily have to pay a fortune to draft your bylaws. You can search for other corporations’ bylaws which can serve as a template. Although keep in mind that many corporations’ bylaws are far more complex than you will need.

Obey Corporation Rules, Always

Finally, the most important step is left for last. In order to preserve your personal liability protection, you need to act like a corporation. You need to issue stock to shareholders, maintain records of meetings of directors and shareholders’ meetings, and keep records and business transactions separate from your personal affairs.

This step is absolutely crucial. If you don’t obey corporate formalities, and you are subject to a lawsuit, you could lose your liability protection.

Ready to Go Public?

Hold your horses, Steve Jobs. Not so fast. I may have said at the beginning of this article that corporations are not so complicated, however publicly-traded corporations are another animal entirely. Small, privately held corporations that are owned and managed by the same small group of people are far simpler than large, public corporations.

If you think you have the next Google on your hands and you are interested in taking your corporation public, you should dial up an attorney experienced with publicly-traded corporations. Any corporation that sells shares to the general public are heavily regulated by state and federal securities laws, which is why you need a few experienced Corporate transaction attorneys on your team.

Did I miss any key steps in the process?  Or did you form a corporation and have any advice to share? Feel free to let us know in the comments.


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