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The California corporation has long been the gold-standard for business entities in the state. A California corporation immediately brings to mind the prestige of the corporate boardroom, but added prestige is only the tip of the iceberg. When you form a California corporation, the benefits are numerous: asset protection, fewer formation regulations, easier access to capital, and, in most cases, a significant tax savings.
California Corporation Advantages
The California corporation enjoys a great deal of prestige as a business entity. While many people view corporate formalities as a bureaucratic annoyance, there is a built-in reverance for shareholders, boards of directors, CEOs and other elements that make-up the classic corporation. It isn’t by mistake that so many of the most succesful businesses headquartered in California—Facebook, Apple, Disney—are corporations.
California imposes certain restrictions on the types of business an LLC can conduct. Most practices that require state licenses, certifications or registrations cannot organize as an LLC. They must be formed as a California professional corporation.
LLCs cannot be formed to practice as, for example: attorneys, architects, barbers, dentists, doctors, nurses, pest control, psychologists, veterinarians, automative repair, artist management, bail bondsmen, child care, contractors, cosmetologists, and many, many more.
If your business falls into one of the licensed or regulated industries, you must form a California corporation.
Save on Taxes
At first glance, it would seem as if you might save money by forming a California LLC. But in many cases, this simply isn’t true. This is because of how LLCs and corporations are taxed in California.
A California corporation will pay 8.84% on its Net Revenues. Shareholders will pay an additional capital gains tax on any dividends they receive (ranging from 0% to 20%). LLCs, however, must pay a fee each year based on Gross Revenues, and LLC members must pay the full self-employment tax (up to 25%) on their earnings and the state income tax (up to 13.3%).
Because California imposes multiple layers of taxation on LLCs—and because it taxes an LLC’s gross revenues instead of net revenues—there are numerous situations in which it will make more sense for you to form a California corporation and take advantage of the corporate tax structure. Remember, a corporation is subject to “double-taxation”, but it is the rate of taxation that matters most. Lower corporate rates (as well as tax deductions) can significantly lower your corporate tax burden.
Access to Capital
When it comes to raising capital, the California corporation is easily the most dependable business entity. First, a corporation has a built-in mechanism for raising capital: selling stock. Shares of stock can be authorized and sold at any time. Second, investors are far more comfortable with putting their money into corporations. The corporate formalities that are missing from an LLC are precisely the measures that give investors confidence. It is less nerve-racking to invest in a company that must release financial records and answer to a board of directors.
How to Form a California Corporation
Complete Your Articles of Incorporation
To form a California corporation you must file Articles of Incorporation with the Secretary of State. The following information must be listed on the form: the name of the corporation, the corporate purpose, the name and address of your California registered agent, the corporation’s street and mailing addresses, the number of authorized shares of stock.
File Your Articles of Incorporation
You cannot file the Articles of Incorporation online. You must submit a paper copy. The Secretary of State charges a $100 filing fee. Incorporation processing can take up to two months. There are two expedite options: 2-3 weeks ($75) and 1-2 day ($575).
File Initial Statement of Information
Within 90 days of incorporation, you must file your initial Statement of Information. This is filed with the Secretary of State and can be processed online. There is a $20 filing fee and a $5 disclosure charge.
Understanding the Articles of Incorporation
Your must select a name for your California corporation that meets the legal standard set out in state law. For example, you cannot file a name that is already in use by another entity within the state.
You also cannot select a name that is “deceptively similar” to that of another company. The Secretary of State does not consider a corporate designation to be enough to distinguish a name. For example, Anderson Incorporated is considered deceptively similar to Anderson Corporation. The different designator (Incorporated, Corporation, Limited, etc.) does not distinguish them.
This section of the Articles is already pre-filled, stating that your corporation is formed to pursue legal business activities.
California Registered Agent
Every corporation must designate California registered agent to accept service of process on behalf of the company. An agent for service of process must have a physical address within the state.
You must list both your physical and mailing addresses. This is the main address of your corporation, the place where you keep your corporate books and financial records.
The Secretary of State requires you to list the number of shares of stock you are authorizing at incorporation. You can authorize more shares later, but for now you must list an initial number. Once your corporation is formed, you will hold a first shareholders meeting, at which you will issue shares of stock to your shareholders. You are not required to issue all the shares that you authorize. You may keep shares for later use.
Corporations are required to file a Statement of Information each year. Publicly traded corporations (both domestic and foreign) must also file a Corporate Disclosure Statement annually.
Does My California Corporation Need Bylaws?
California does not legally require a corporation to adopt corporate bylaws, but few corporations operate without a governing document. Your bylaws outline the ownership of your corporation (your shareholders, their number of shares, the rights that come with those shares) as well as the broad management structure of your company.
Well-written and thorough bylaws are not easy to write, but taking your time getting them right now will save you a good deal of time and heartache later. Think of corporate bylaws as a blueprint for how your California corporation will operate. Would you build a house without a blueprint? Of course not. Your business is no different.
Every corporation will need to craft unique bylaws that address the specific needs of the particular company. The following elements, however, should be addressed by all corporate bylaws:
- Names and addresses of initial shareholders
- Classes of stock and the rights of each class
- Number of shares allocated to each shareholder
- What capital each shareholder offered in exchange for stock
- Appointment of board of directors
- Rights and responsibilities of directors
- Rules for buying and selling shares of stock
- Rules for appointing new directors and officers
- Rules for conflicts of interest
- Dates and locations of annual meetings
- Shareholder meeting procedures
- Procedure for making amendments to bylaws
- Voting requirements for California corporation dissolution
By carefully writing bylaws for your California corporation, you can avoid numerous problems later in the life of your business. Simple questions that seem unimportant now can become major headaches down the road, especially if there is no clear path forward because your corporation lacks a governing document.
It should be noted that a California close corporation must have a shareholder agreement, which is similar to bylaws, although closer in nature to a partnership agreement.