Understanding the Basics of California Incorporation

California Incorporation: Understanding The Basics

For many startups, forming a corporation is the best option. Corporations are separate legal entities. That means they are not tied to the company owners, who are known as shareholders. Consequently, this structure provides personal asset protection. The owners will not be liable for any of the actions and debts of the company.

The process of starting a corporation will depend on the state where the company wants to register. That is because each state has specific laws governing business entities.

Here are the steps for California incorporation:

Step 1: Choose a company name.

The first thing a company has to do is to come up with an appropriate name for the business. While creativity is an important consideration, it is also necessary to make sure the company complies with the naming guidelines of the state of California.

According to state laws, a company needs to have a proper designator. For a corporation, that means the inclusion of the word “corporation,” “incorporated,” or “limited.” Any of the abbreviations of those words are also acceptable.

It is prohibited to use any term that could mistake the company for a government agency. The use of certain words, such as “credit union,” “bank,” “trust,” and “trustee,” has to be approved by the Commissioner of Business Oversight.

California also requires the distinguishability of a company name. That means a corporation cannot have a specific company name if another corporation in the state has claimed it. To check the availability of the desired name, do a business search on the database of the Secretary of State or send a Name Availability Inquiry Letter to the said agency by mail.

If a company has already thought of a company name but is not yet ready to register, it has the option to reserve the name for 60 days. To do this, file a completed Name Reservation Request form with the Secretary of State by mail or in person. This comes with a $10 filing fee.

Step 2: Nominate an agent for services of process.

All California corporations need to appoint and maintain an agent, or more commonly known as a registered agent, for services of process. This can be an individual or entity that agrees to receive business mail, compliance documents, and government correspondence on behalf of the corporation. Read this article for a complete list of the qualifications.

Step 3: Appoint the initial directors. 

The company needs to have at least one director to oversee the company until the first official meeting is conducted. The directors will be in charge of adopting, amending, and repealing operation bylaws.

Step 4: File the appropriate formal paperwork.

The filing of the Articles of Incorporation will formalize the registration of a business and legally create a California corporation. Submit a completed form to the Secretary of State, along with the $100 filing fee and Mail Submission Cover Sheet.

The readily available Articles of Incorporation is only applicable for corporations with one share of class. If the company has multiple share class structures, then it has to draft its own Articles of Incorporation. 

Step 4: Hold the initial organizational meeting.

Once the corporation has been successfully formed, the initial directors or incorporators will call for an organizational meeting to elect the board of directors. The board will appoint officers, adopt bylaws, set the fiscal year, and authorize the issuance of shares of stock. The company has to record the minutes of the meeting and keep them in the corporate records book. 

The bylaws refer to the rules on how to run the business operations, including the following:

  • Roles of the directors and officers
  • How the corporation holds meetings
  • The voting procedures
  • Election of officers and directors
  • Handling of disputes
  • Amendment and addition of bylaws in the future
  • The date of the annual shareholders’ meeting
  • Procedures for negotiating contracts
  • Fiduciary duties to the company

Step 5: Issue stock.

The company has to issue stocks to the shareholders. These will be in return for capital contributions, which are usually cash, property, or services.

The shares of stock in a corporation have value. For instance, a share could be worth $10 or $100. Since California does not require corporations to establish a par value for the stock, a company can decide how to set the legal value as it sees fit.

Par value refers to a set amount below which a stock cannot be sold. For example, if an investor purchases 5,000 shares with a set par value of $1, they will have to pay at least $5,000 for the purchase.

Those steps are only the first tasks to complete the California incorporation process. The company will have additional obligations. To learn more about the requirements in the state, contact DoMyLLC today. Our team can also help you streamline the process.