Everything You Need To Know About Starting a Corporation - Your Free 10 Point Checklist
10 Step Corporate Formation Checklist
Let’s be real, starting and maintaining a corporation can be complicated. There’s various forms, documents, and formalities that must be done correctly for you to form a valid Corporation.
However, these complexities come with some great benefits: protection from personal liability, more opportunity to raise funds, and more versatility.
Is a Corporation the right form of entity for your business? Potentially. If you have many investors or shareholders, a Corporation may be your only choice. Further, many licensed professionals like attorneys, doctors, psychologists, architects and others cannot form an LLC in California. Therefore, a corporation may be their only choice if they seek liability protection and other benefits for their business.
It is advisable to speak with a business attorney to determine which type of legal structure is best for your business.
However, if you have decided a Corporation is right for your business, here is the 10 point checklist to guide you along the process of forming your Corporation in California:
- Pick A Name. Time to choose a snazzy name for your new business. This can be almost anything, so long as it is not taken already, substantially similar to a name already in use, or that is misleading to the public.
You can search to see if your proposed name is currently in use here. You may also want to search the Fictitious Business Name (FBN) database for the County that you are in to make sure your name is not being used as an FBN by another business.
Finally, the name of a close corporation subject to the provisions of California Corporations Code section 158 must contain the word corporation, incorporated or limited or an abbreviation of one of those words. (California Corporations Code § 202.)
- Register Your Name. You may be able to reserve your name for up to 60 days for a fee through the California Secretary of State (S.O.S.). In my opinion, this is generally not worthwhile unless you really need that name or fear it may be taken before you can file your Articles of Incorporation.
If you plan to incorporate under one name but operate under another, you will need to register your operating name as an FBN. For example if your corporation was “Jane Smith, Inc.” but you ran your business as Jane Smith Coffee Co., the latter name would need registration as an FBN.
In San Diego, you can go here to check your name and register. You can find other Counties FBN pages through a simple Google search (“_____” County FBN) should work.
- Where You At? Even if your operations are only in California, you may incorporate elsewhere if it provides advantages. For instance, Delaware, Nevada, and recently Alaska are popular states to incorporate in for their friendly treatment of business and other potential benefits.
For most small to midsize businesses (SMB’s) this does not make much sense, as there are increased potential costs. Plus maintaining a corporate address and bank account out of State can be a chore. However, it may make sense for you, and if it does, contact an attorney to help you get sorted and started legally.
- Register Your Articles of Incorporation. The articles of incorporation are the first documents you will file with the S.O.S.’s office. You can now complete this form and submit the $100 application fee online.
This document will contain various important information about your proposed Corporation, such as the name, principle address, Agent for service of process and more.
- Choose Your Board of Directors. The board of directors is the governing body of the Corporation. It will generally protect the interests of the investors and shareholders.
Who should be on the board and how many directors must there be? This is a complicated question, that varies case by case.
In general, there must be not less than three directors, unless there are only one or two shareholders of record, in which case the number of directors may be less than three but not less than the number of shareholders.
- Draft Your Bylaws. The bylaws outline the duties of the corporation’s officers, directors, and shareholders; who has which powers, and how the Corporation is to be run.
This document is extremely important, it dictates the rules for how the Corporation is run. Perhaps, if you are the sole shareholder and wearing all the hats, you may be able to draft these yourself, but it is not advisable.
This document should be tailored to your Corporate goals, plans, and operation. If it is drafted incorrectly, or you fail to create one at all, your business will be subject to the default rules of California.
These rules may not be applicable or advantageous to your Corporation. Proceed with caution.
- Create A Shareholder’s Agreement. This one is technically optional. However, this document sets forth all of the Shareholders rights with concern towards their stock in the company.
This agreement will dictate the terms on transferability of shares, corporate buy back of stock, and much more. It is a good idea to have a detailed agreement written to protect the best interest of the shareholders.
- File Your Statement of Information. You must file your statement of information with the S.O.S. within 90 days of receiving your filed copy of your Articles of Incorporation.
You can find this form here. Additionally, once your Articles of Incorporation are filed, you can complete this task online as well.
Have a Meeting. You will need to hold your first meeting and take Corporate minutes (i.e. detailed notes) of this meeting and any subsequent meetings.
Since it will be the first meeting, you will lay out the initial officers, vision, and goals of the corporation and establish the format for future meetings.
You can typically hire an Attorney or CPA, to help you take compliant meeting minutes. Even if you are the sole shareholder, meetings and meeting minutes must be kept for all major decisions of the Corporation.
At this point you may also Issue Certificates of stock to the initial shareholders of the Corporation, as applicable.
- The Last Details. You are almost there! For all intents and purposes you now have a valid California Corporation.
All that’s left is to open a business bank account, to keep your business funds separate from personal expenditures. This will prevent commingling of funds which could cause a loss of liability protection.
You will also need to obtain an employee identification number (EIN) from the IRS. You can do this online or have an attorney or CPA do this for you.
You may also want to speak to your tax professional as to whether or not you qualify for and should choose to be an S-Corp by making an S-Corp election. This election will affect your taxes as well as other aspects of your Corporate structure and should be discussed with legal counsel and your tax professional.
Finally, you will need to ensure you get and maintain any business licenses and/or permits that may be required for your business by local City, County, and State level authorities. Different businesses may require different licensing or permitting, so be sure to review your local ordinances.
Bonus: Schedule a Consultation With a Business Attorney. The process detailed above is not rocket science, but it can be complicated.
To ensure that your new business complies with California’s legal requirements you should at a minimum discuss your business plan and goals with legal counsel.
Even a consultation for the cost of an hour of an Attorneys time, at a rough estimate of a couple of hundred dollars, can save you thousands if not much more should your Corporation get sued or there be shareholder litigation.
I have seen countless business litigation disputes, even between family members, which have cost hundreds of thousands of dollars, over insufficient or poorly drafted bylaws and shareholder agreements.
These issues could have been avoided had they done things right from the beginning and worked with a qualified business attorney.
Dennaoui Law is able to help you form your Corporation and walk you through the entire process – or even just the parts you aren’t comfortable with. We are agile and tech friendly meaning these documents can be accomplished 100% electronically to give you instant peace of mind.
Feel free to call Dennaoui Law Firm with any questions or contact us via email: [email protected].
Frank Dennaoui, Esq.
**TAX ADVICE NOTICE: Neither Dennaoui Law, the author, or the information in this article, provides tax advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax advice.**
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