Incorporation? Not So Complicated After All
You may be wondering, “Is it worth incorporating my business? If so, what is the process?” You may not know a lawyer who can walk you through the process or trust online legal services. Here’s the good news: this article lays out a step-by-step guide on how to incorporate in California.
There are a number of reasons to incorporate instead of remaining a sole proprietorship. The primary reason is to avoid personal liability; to stop any creditors, including lawsuit winners, from taking personal property from the owners of the business to pay off the company’s debt.
For example, if someone owns a store and a customer slips and falls in the store, and the reason they slipped was due to the negligence of the store’s employee, the customer, after winning a lawsuit, can go after the personal assets of the store owner in order to satisfy the money owed to the customer. Nevertheless, if the store was maintained within a corporation, owned by the same store owner, the injured customer could only go after the assets of the corporation, leaving the personal assets of the owner free from the claim by the creditor.
This release of personal liability can be relevant in a variety of different lawsuits and legal matters, i.e. slip-and-fall, contract disputes, employee law claims, tax issues, and business debt responsibilities. Incorporating a business can shield a business owner from personal liability from any of these claims, and more. It is a legal buffer ensuring that a business owner’s personal property is safe from any disputes with the owners’ business and ensures continued ownership.
There are also a number of tax implications that arise from incorporation and running a business as a corporation. It is important to talk with a tax professional when determining whether incorporation is the right step for a particular business. This article is not giving any tax advice.
Step 1 – Name Search
A business owner who is looking to incorporate a new or existing business must determine whether the name they wish to call the corporation is still available for use. The California Secretary of State (“SOS”) has a searchable database on their website (http://www.sos.ca.gov) where a business owner can search names of existing businesses and see if their potential name is still unused.
The SOS will not allow the incorporation of a business using a name that already exists. The SOS will allow the use of the name as long as the name is not held by an already existing, active, corporation.
However, it is important to remember that just because the SOS grants a business owner the name, doesn’t mean that it is protected under trademark law. That’s a separate topic.
Step 2 – Articles of Incorporation
The Articles of Incorporation is the name for the paperwork sent to the SOS, which, after processing, creates the corporation. On the SOS’s website, there is a form, Form ARTS-GS, which is preapproved, that allows business owners to fill in the form and mail it to the SOS. The form asks for the business’s name, address, and registered service of process agent (the person designated to receive legal documents).
Step 3 – EIN
Step 3 is obtaining an Employee Identification Number. It is similar to a Social Security number, but for a business. A business will need this in order to hire employees and pay taxes. A business owner can apply and receive the number straight from the IRS’s website.
Step 4 – Order Corporate Binder
A Corporate Binder, though not strictly necessary, is the traditional place where all the important documents of the business are kept. You can easily order one online (search for “corporate binder” in a search engine or favorite shopping website and a number of options will show up). They come with the corporation’s name already printed inside and generally include stock certificates as well.
Step 5 – Write Bylaws
The bylaws of a corporation are a set of rules that outline how the corporation will be run. Bylaws include sections such as the responsibilities of members of the board of directors and executives, how to remove unwanted directors and executives, how to handle conflicts of interest, and how often meetings will be held. There are templates that can be found online using a search engine that may be helpful.
Step 6 – Hold First Annual Meeting
The meetings start with the first Annual Shareholders Meeting, where any and all shareholders determine who will sit on the board of directors of the corporation. This meeting may be fairly informal in small corporations; however, it is important to memorialize this meeting by keeping meeting minutes and storing a copy of those minutes in the corporate binder.
After the Shareholder’s meeting is the first Board of Director’s meeting. In this meeting, the directors discuss who the executives of the company will be, where to bank, whether to be taxed as an S-Corporation and also adopt bylaws and issue stock certificates. There is nothing preventing for-profit corporations in California from having a single owner who owns all of the shares, is the only member of the board of directors, and performs the role of all the different executive positions.
Step 7 – Statement of Information
A Statement of Information must be filed with the SOS within 90 days of incorporation and then yearly after the initial filing. The SOS has a form that is used, Form SI-550. Just fill it out and send it in. The form is used to notify the state, and the public, who the officers and agent of the process of the company are. Once the initial Statement of Information is filed, new yearly Statements of Information, where no changes have occurred, can be filed online through the SOS’s website.
Step 8 – Specific Business Needs
Each business has its own individual needs. A business may need a business license or a permit to operate their specific business in the location they wish to operate. Every corporation has their own tax responsibilities as well. These are requirements to run a successful business, but are not technically a step of incorporation.
These are the steps required to incorporate in California. This article covers the basic information. If a business owner wishes to form an LLC, the steps are similar but vary slightly. A business owner should definitely consult with a business attorney if they have any questions or concerns regarding what is right for their particular business.
Throughout my career, I have worked towards making affordable legal services accessible to small businesses with all levels of capitol. This path has allowed me to start my own law firm, which specializes in small business counseling.
I hold a B.S. in Business Management from Humboldt State University, in Arcata California, as well as a J.D. from the Thomas Jefferson School of Law, in San Diego, California.