California Corporations: What You Need to Know

Guide to California Corporations: Setting Up, Taxation, Maintenance, and Costs

Each state has different rules for corporations, and this guide will focus on how California corporations work. This guide is part of our more general Guide to the Law for Entrepreneurs and Business Owners in California.

1. What is a California corporation?

A California corporation is a corporation that is registered with the California Secretary of State. A corporation is a legally recognized business entity that is considered separate from its owner(s). There are many benefits to having a separate legal entity, which you can read about at our Guide to Business Structures in California.

What are the different types of corporations in California?

There are quite a few types of corporations in California. The most common ones are as follows:

  1. General Stock corporation
  2. Close corporation
  3. Professional corporation
  4. Benefit corporation
  5. Social purpose corporation
  6. Nonprofit mutual benefit corporation
  7. Nonprofit public benefit corporation

The general stock corporation is the standard and most common corporation. Stock refers to the fact that the corporation issues shares to the owners, as opposed to a nonprofit corporation which does not issue shares.

A close corporation may be used for small businesses.

Certain licensed professionals, including architects, lawyers, or medical professionals, are limited to forming a professional corporation (or an LLP).

For info on Benefit Corporations and Social Purpose Corporations, see our Guide to Social Enterprise in California.

Tax treatments: S corporation vs C corporation

A corporation may choose one of two tax treatments: S corporation, or C corporation. Note that these are not really different types of corporations, and are not alternatives to the above types of corporations. These simply describe how the corporation is taxed, and can generally be applied to any of the above (aside from the nonprofit corporations).

By default, a corporation is considered a C Corporation; but the corporation can also choose to be taxed as an S corporation. As a C Corporation, the corporation itself is taxed on its earnings, and then when the income of the corporation is passed to the owners of the corporation, the owners are taxed as individuals. This situation is known as “double taxation.”

What is an “S corporation”?

An S corp or S corporation is simply a corporation that has filed paperwork to be taxed only through the owners, and not the entity itself. This avoids the “double taxation” of C corporations. This is often a way to save on taxes, but discuss with a tax professional for your particular situation. See more at our full Guide to S Corporations.

What is a “foreign corporation”?

Foreign corporation (or foreign stock corporation) means a corporation based outside of California. It does NOT necessarily mean international corporations, but generally refers to corporations established in other states, commonly Delaware or Nevada.

This is in contrast to a domestic corporation (or domestic stock corporation) which is simply a corporation incorporated in California.

2. Creating a corporation in California – “Formation”

Creating or registering a corporation is known as formationforming the corporation, or incorporating. Note that registering a business may also refer to a few different things. See our Guide to Registering a Business in California.

How do I create a corporation in California?

A corporation is created in California by filing Articles of Incorporation with the California Secretary of State. The Articles of Incorporation can be as simple as a one-page document that includes the following at a minimum:

  1. Name of the corporation
  2. Address of the corporation
  3. Agent for service of process
  4. Number of shares the corporation is authorized to issue
  5. Incorporator name and signature

You can find the standard form for Articles of Incorporation, the ARTS-GS form, at the Secretary of State’s website. You can file online through BizFile Online, by mail, or in person.

Once the Secretary of State receives the Articles of Incorporation, along with the filing fee of $100, they will review it for completeness and compliance with the law. If it complies with the law, they will file it, and your corporation will be ready to go! Keep in mind there are further steps to take to ensure it is fully set up, discussed below.

Before you file, you need to know some general information about business names.

How do I set up a corporation in California?

After the Articles of Incorporation are filed with the Secretary of State, you will need to take the following steps:

  1. Initial documents: Prepare other initial documents, including resolutions, stock certificates, etc.
  2. EIN: Obtain an EIN from the IRS.
  3. Tax treatment: If applicable, file paperwork with IRS to select your tax treatment. The corporation is automatically a C corporation unless it elects to be an S corporation. For S corporation tax treatment, file Form 2553.
  4. Bylaws: Prepare and have directors sign corporate bylaws.
  5. Licenses and permits: Properly file for any required licenses or permits.
  6. Bank account: Open a bank account in the full name of the corporation and keep the finances separate from your personal finances.
  7. Contracts: Make sure contracts are in the full name of the corporation.
  8. Marketing: Use the full corporate name on your website, business cards, etc.
  9. Taxes: Properly file and pay taxes and fees.
  10. Statement of Information: Properly file initial Statement of Information, and subsequent Statements of Information every year.

How much does it cost to start a corporation in California?

A minimum of $150, depending on how the shares are distributed. This includes just the initial filing fees for the Articles of Incorporation ($100), initial Statement of Information ($25), and, assuming it is a small group of shareholders, the notice of exemption filing with the Department of Financial Protection and Innovation ($25). For more complex shareholder arrangements, the filing with the DFPI may be more complicated and more costly.

Now, aside from government fees, you may also consider fees for an attorney, if you hire one to help set up the corporation, which can range from $500-2500+.

Do I need to have officers and directors?

You must have, at a minimum, the following officers: a Chief Executive Officer (CEO), a Secretary, and a Chief Financial Officer (CFO). The same person can hold multiple officer positions, and even all three.

As for directors:

  • If you have one shareholder, you must have at least one director for the Board of Directors.
  • If you have two shareholders, you must have at least two directors for the Board of Directors.
  • If you have three or more shareholders, you must have at least three directors for the Board of Directors.

3. California corporation costs

What are all the costs associated with a California corporation?

Considering just the government fees, here are the costs of an corporation in California:

Initial filing fee: $100
Filing with the Department of Financial Protection and Innovation: $25+
Statement of information: $25 (every year)
Annual franchise tax: minimum $800 or more depending on earnings (every year – either March 15 or April 15, depending on your tax treatment)

Again, aside from government fees, you may also consider fees for an attorney, if you hire one to help set up the corporation, which can range from $500-2500+. And consider fees for a tax professional (such as a CPA), which may be $250-$1000+ per year.

4. Corporate Taxation in California

How is a corporation taxed in California?

By default, a corporation is taxed as a C corporation. However, a corporation can also choose to be taxed as an “S corporation.” See more about Business Taxes.

5. Maintaining a Corporation in California

What are the ongoing or annual tasks to do for a California corporation?

There are generally a few tasks to do every year to make sure your corporation is in good standing:

  1. File and pay all taxes
  2. File a Statement of Information with the California Secretary of State
  3. Draft minutes of shareholders meetings and board of directors meetings

Further Resources

How Do I Make Changes to My Corporation?

If you have additional questions or need help with your California corporation, discuss with a lawyer and tax professional.

Photo credit: Image by diana.grytsku on Freepik

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