How to Open a Company in California: new 2022 Guide

California is well-known as a global business hub, and it's easy to see why. The state is the largest and wealthiest in the USA and has a diverse economy with a wide range of industries; it's home to some of the world's biggest companies.

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How to Open a Company in California

California is well-known as a global business hub, and it’s easy to see why. The state is the largest and wealthiest in the USA and has a diverse economy with a wide range of industries; it’s home to some of the world’s biggest companies. California also has a well-educated workforce and a favorable tax climate. These factors make it an attractive place to start or grow a business.

There are a few things to keep in mind if you’re thinking about starting a business in California. First, it’s important to choose the right business structure. There are several different options available, and each has its own advantages and disadvantages. You’ll need to consider factors like the size of your business, the nature of your products or services, and your tax situation. Once you’ve selected the right business structure, you’ll need to obtain the necessary licenses and permits. Depending on your business activities, you may need to obtain a license from the state, county, or city. Finally, you’ll need to make sure you have adequate insurance coverage. This will protect you and your business in case of any accidents or damages. By keeping these things in mind, you can increase your chances of success when starting a business in California.

Choose a Business Structure

When it comes to choosing the right business structure for your company, there are a number of factors to consider.  In California, there are 5 main businesses structures to choose from: Corporation (C-Corp), Limited Liability Company (LLC), General Partnership (GP), Limited Partnership (LP), Limited Liability Partnership (LLP).

Corporation (C-Corp)

Incorporating a business automatically makes it a regular, or “C” corporation. A C-corporation (or C-Corp) is a separate taxpayer, with income and expenses taxed to the corporation and not the owners. Corporate profits are then distributed to owners as dividends. Owners must pay personal income tax on the distribution, creating a “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). C-corps offer limited liability protection for shareholders. This means that shareholders are not personally liable for the debts and obligations of the corporation. C-corps can also raise capital through the sale of shares. This makes them an attractive option for businesses that need to raise money quickly. Once you’ve incorporated (C-Corp), you can elect S corporation status by filing a form with the IRS and with the state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax). This S-Corp status is available only to US citizens.

Limited Liability Company (LLC)

A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required. The LLC does not file the operating agreement with the Secretary of State but maintains it at the office where the LLC’s records are kept.

How to Open a C-Corp in California

Starting a C-Corp in California is a relatively simple process. First, you will need to choose a name for your corporation and make sure that it is available. Next, you will need to file Articles of Incorporation with the Secretary of State. Once your Articles of Incorporation have been approved, you will need to elect a board of directors and adopt bylaws. Finally, you will need to obtain the necessary licenses and permits. While the process may seem daunting, following these steps will help ensure that your corporation is up and running in no time.

Step 1: Choose a name, check the name availability and reserve it

The corporation’s name will need to include one of the following words or abbreviations: “Incorporated”, “Corporation”, “Limited”, “Company”, “Inc.”, “Corp.”, “Ltd.”, or “Co.”
The corporation’s name also cannot include any words or abbreviations that indicate other business types, like the phrase “limited liability company” or the initials “LLC” or words that refer to certain types of businesses like “bank” or “law office” unless the business fits those descriptions.
When determining name availability, names are checked only against names of similar entities registered with the California Secretary of State (e.g., a proposed corporation name is checked for availability only against other corporation names). Names are not checked against trademark or service mark registrations or against fictitious business names. A preliminary search can be made online through https://bizfileonline.sos.ca.gov.
Prior to adopting a proposed name, the name may be reserved for a period of sixty (60) days. The reservation can be renewed to the same applicant or for the benefit of the same party, but not for consecutive sixty (60)-day periods. There must be at least one (1) day between reservation periods.
The reservation of a name does not guarantee the name meets all federal and state requirements related to a specific entity type. Names are reviewed for compliance at the time documents are submitted to the California Secretary of State’s office for filing.

Step 2: Select and Appoint a Registered Agent

California corporations must designate a person or business to receive legal notices on behalf of the company. This important point of contact is known as the registered agent. The investors will be required to list the registered agent’s name and address when filing the Articles of Incorporation.

Who can be a registered agent?

A registered agent must have a physical address within the state of California where mail and legal notices can be served during regular business hours. Investors can hire a professional service company to act as the Registered Agent, serve as their own registered agent, or even use an accountant or other business professional’s address – with their consent.

Step 3: Complete the Articles of Incorporation

To register the Articles of Incorporation for the corporation, usually the form “CA Corporation-General Stock” is the one to go https://bpd.cdn.sos.ca.gov/corp/pdf/articles/arts-gs.pdf. The other options for Articles of Incorporation which are available on CA Secretary of State website are:

  • CA Corporation-Benefit
  • CA Corporation-Insurer
  • CA Corporation-Social Purpose
  • CA Corporation-Close
  • CA Corporation-Professional

When filling out and submitting the Articles of Incorporation, the investors are signing and submitting it as the incorporator. If the Articles of Incorporation will be submitted online, investors should be ready to answer the following questions:

  • Submitter information: Name, Email address, Phone Number, Extension (This information is optional. If entered, the information may be used for contact related to this submission)
  • Corporation Name: A previously reserved name will be used for this filing? Yes/no. If you answer No, name the Corporation.
  • Initial Street Address of Principal Office of Corporation: Must be a physical address; a P.O. Box cannot be used
  • Initial Mailing Address of Corporation: This address will be used for mailing purposes and may be a P.O. Box
  • Directors: Directors are optional. All Directors named must sign the Articles of Incorporation. Most corporations do not name Directors in the Articles of Incorporation.
  • Agent for Service of Process: An agent for Service of Process is responsible for accepting legal documents (e.g. service of process, lawsuits, other types of legal notices, etc.) on behalf of the entity. Select either an individual or California Registered Corporate Agent.
  • Shares: Enter the total number of shares the corporation is authorized to issue. Do not leave blank or enter zero. Most corporations do not have more than one class or series of shares.
  • File Date: The File Date will be the date the submission received by the Secretary of State in fileable order and will become the effective date. However, a Future File Date not exceeding ninety (90) calendar days can be specified. All submissions and file dates are subject to review and approval by the Secretary of State.
  • Attachments: Attachments are optional. All attachments should be one-sided, legible, and clearly marked as an attachment, noting which section the attached information relates to for this filing.
  • Review and Signature: Review all the answers, Electronic Signature. Only one incorporator is required. If there are multiple incorporators, use the Send for Signatures function, available at the end of the online form. If directors are named, each director must sign in place of the incorporator.)

After registering the Articles of Incorporation, apply for the SSN (Social Security Number) as it is required to obtain the EIN (Employer Identification Number), whether or not the company will hire employees, for tax purposes. If you are a foreign investor and do not wish to apply for a SSN and in hurry to obtain the EIN, you may file Form SS-4 for obtaining the EIN via mail or fax using your overseas address.

Step 4: Establish a Corporate record

Corporations are required under California law to document and keep a permanent record of all important company decisions. Some things that are required to be kept in the corporate record include:

  • Bylaws;
  • Minutes of director and shareholder meetings.

The official corporate record may be kept at the corporation’s principal place of business or stored in a safe location elsewhere. Investors should take the opportunity to set up a secure digital or physical location for storing company records as soon as possible.

Step 5: Designate a Board of Directors

The incorporator is responsible for selecting the initial director(s) of the corporation. Unless initial directors were specified in the Articles of Incorporation, the incorporator should record initial director appointments in a signed document and file it to the corporate record. This document is known as the “incorporator’s statement.” The initial directors (every California corporation must have at least three directors, unless the corporation has fewer than three shareholders) will serve until new directors are elected at an annual shareholder meeting, or as otherwise indicated in the bylaws. The incorporator may serve as an initial director.

Step 6: Corporate Bylaws

Corporate bylaws set out the rules and procedures for how the corporation will operate. Some important topics typically covered in the bylaws include:

  • How shareholders will conduct votes;
  • The total number of directors and how each director will be elected;
  • How often the board of directors will meet;
  • The types of officer roles that will be appointed;
  • Procedures for resolving internal disputes.

(California does not require corporations to write bylaws, but it’s recommended).

Bylaws help businesses run smoothly and are sometimes required by financial institutions for opening business bank accounts or acquiring loans. Either the incorporator or the initial directors may prepare the company bylaws. The bylaws should be recorded in an internal company document, signed by the incorporator or a director, and filed to the corporate record. The bylaws are not filed with the state of California.

Step 7: First Board Meeting

After designating a board of directors and preparing bylaws, every corporation is legally required to call for an initial board meeting and to have an annual board meeting going forward. The incorporator often arranges and attends this first meeting. During the first board meeting, the initial directors should plan to cover the following topics:

  • Review and approve corporate bylaws;
  • Designate officers to manage day-to-day business affairs;
  • Choose a bank;
  • Approve issuance of stock certificates;
  • Determine whether the company should elect to be taxed as a C corporation or S corporation (see Step 9 for more details).

Recording Meeting Minutes: a detailed record of all key discussions and decisions during the board meeting should be prepared and distributed to all board members for their review and approval. This record is known as the “minutes”. A copy of the minutes should be sent to each director for review and filed in the company record.

Step 8: Tax Obligations

The investors will need a federal tax ID number (EIN) to operate a corporation in California. It can be obtained from the IRS for free. An EIN is required for any corporation to hire employees, file corporate taxes, open business bank accounts, and more.

Federal

The majority of corporations are C corporations, as they are subject to far fewer restrictions than S-Corps. With a C-Corp, profits are taxed at the corporate level, and again on the personal tax returns of the shareholders, resulting in what’s commonly referred to as double taxation.

State

On the state level, every California corporation is subject to the corporation income tax. There is a minimum fee of USD 800 for these taxes, and investors may owe more depending on the corporation’s income. In addition, there are a variety of tax registration requirements that may or may not apply to the company, depending on the nature of the business. These include taxes like tire tax, cannabis taxes, timber yield taxes, etc.

Since the company will have employees, it will also be expected to pay withholding taxes on employee wages. Essentially, keeping back a small portion of wages from each paycheck and forward that money to the state. If the corporation is involved in retail sales, it will also be responsible for the state’s sales and use taxes. The statewide sales tax rate is 6% (additional fees come on the local level).

Local

The city and/or county may also have taxation requirements. So, it is important to make sure to check with local offices to make sure not to miss anything. For instance, sales and use taxes vary depending on the location. Basically, if the company is involved in retail sales, it may need to pay additional taxes.

Step 9: Obtain Business License and Permits

While California does not have a general business license that applies to all companies operating in the state or cities do. Investors will need to file for a city business permit and check if the local government has tax requirements (there’s also county-level occupational licenses that you may need to acquire).

Step 10: Insurance

Every business with employees, located in the state of California, is required by law to obtain three (3) different kinds of insurance policies: workers’ compensation insurance, disability insurance, and unemployment insurance, even if they only have one employee on the payroll. In addition, investors should also pursue general liability insurance and other more industry-specific types of insurance, but these are not legally required.

Step 11: Open a Business Bank Account

To operate a corporation and receive the limited liability protection that comes with it, investors have to keep their personal assets entirely separate from the business assets. Due to this requirement, it’s strongly advised to acquire a business bank account for the corporation. Failure to successfully keep personal and business affairs separate could result in a court piercing the corporate veil and ending up with the investor being personally responsible for the corporation’s liabilities.

how to open a company in california

How to Open an LLC in California

LLCs offer liability protection for their owners. This means that if the company is sued, the owners’ personal assets will not be at risk. LLCs also have flexible tax options. They are relatively simple and inexpensive to set up and maintain, as well. In California, all is needed is to file some paperwork and pay a small annual fee.

Of course, there are also some drawbacks to LLCs to keep in mind. Unlike corporations, LLCs do not have an unlimited lifespan – they must dissolve when one of the owners dies or leaves the business. If you are a one member LLC that chooses to be taxed as an individual, you are required to pay self-employment tax. In 2022, this rate is 15.3% in California.

Step 1: Choose a name, check the name availability and reserve it

In the state of California, companies are required by law to meet several requirements for their business name. Here’s a quick glimpse at the rules for LLCs:

  • The name must include the words “limited liability company,” the abbreviations “LLC” or “L.L.C.,” or a similar variation of these;
  • The name cannot mislead the public regarding the business purpose;
  • The name cannot include words like “trust” or “bank” or “insurer,” implying that the company is a bank or insurance branch;
  • The name cannot include tags like “Co.” or “Inc.” since they belong to other entity types;
  • The name must be “distinguishable on the record,” or distinct from the names of other state businesses.

Prior to adopting a proposed name, the name may be reserved for a period of sixty (60) days. For faster service, name reservations can be submitted online through our enhanced online services at bizfileOnline.sos.ca.gov. The reservation can be renewed to the same applicant or for the benefit of the same party, but not for consecutive sixty (60)-day periods. There must be at least one (1) day between reservation periods.

The reservation of a name does not guarantee the name meets all federal and state requirements related to a specific entity type. Names are reviewed for compliance at the time documents are submitted to the California Secretary of State’s office for filing.

Step 2: Appoint a Registered Agent

Every LLC in California is required to designate a registered agent, which is the individual or registered agent service provider that receives government correspondence on behalf of the business, then forwards those documents to the owner. When investors appoint a California registered agent, here are the state requirements to be mindful of:

  • Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent;
  • The agent must be a resident of California or a corporation that has not terminated its capacity to act as a registered agent;
  • An agent must be continuously maintained.

Without a registered agent, the LLC could lose the good standing with the state of California, and the state also has the right to dissolve the LLC. In a worst-case scenario, investors could miss the alert regarding a lawsuit against the company, which could even lead to a judgment against the business.

Step 3: File the Articles of Organization

Investors may submit the Articles of Organization online. To register the Articles of Incorporation of the company, go for the Form LLC-1 (pdf file https://bpd.cdn.sos.ca.gov/llc/forms/llc-1.pdf). If the Articles of Incorporation will be submitted online, investors should be ready to answer the following questions:

  • Submitter information: Name, Email address, Phone Number, Extension (This information is optional. If entered, the information may be used for contact related to this submission)
  • Professional Services Notice: An LLC may not provide professional services in California. If the business is required to be licensed, certified or registered, before submitting this filing to the California Secretary of State’s office, it is recommended to contact the appropriate licensing authority in order to determine whether the services are considered professional. For licensing requirements in California, please refer to the CalGold website at http://www.calgold.ca.gov or the California Department of Consumer Affairs website at http://www.dca.ca.gov.
  • LLC Name: A previously reserved name will be used for this filing? Yes/no. If you answer No, name the LLC.
  • Initial Street Address of Principal Office of Corporation: Must be a physical address; a P.O. Box cannot be used
  • Initial Mailing Address of Corporation: This address will be used for mailing purposes and may be a P.O. Box
  • Agent for Service of Process: An agent for Service of Process is responsible for accepting legal documents (e.g. service of process, lawsuits, other types of legal notices, etc.) on behalf of the entity.
  • Purpose Statement: The purpose of the limited liability company is to engage in any lawful act or activity for which a limited liability company may be organized under the California Revised Uniform Limited Liability Company Act.
  • Management Structure: The LLC will be managed by: One Manager or More than One Manager or All LLC Member(s)
  • File Date: The File Date will be the date the submission received by the Secretary of State in fileable order and will become the effective date. However, a Future File Date not exceeding 90 calendar days can be specified. All submissions and file dates are subject to review and approval by the Secretary of State.
  • Attachments: Attachments are optional. All attachments should be one-sided, legible, and clearly marked as an attachment, noting which section the attached information relates to for this filing.
  • Review and Signature: Review all the answers, Electronic Signature. Only one incorporator is required.

Step 4: Draft an Operating Agreement

After the LLC is registered in California, investors need to create a detailed outline that explains how the new business be managed. Even though it doesn’t need to be filed with the state, it is recommended to put one together and keep it for the records. When opening a bank account, investors may be asked for this document. Also keep in mind that any future business partners or managing members may also be interested in seeing the Operating Agreement before joining the company. After all, this document essentially serves as the overall plan for success.

Some of the basic information that could be included are:

  • Individual members’ ownership percentages;
  • Rights and responsibilities;
  • Voting powers and meeting guidelines;
  • Allocation of profits and losses;
  • Management rules for the LLC;
  • Provisions for buying a member owner out, or transferring their shares in the case of illness or death.

Step 5: Tax Obligations

Any business with employees must obtain an EIN, or an Employer Identification Number. This is a free registration with the IRS, and the number acts a lot like a social security number for a business. Obtaining the number also lays the groundwork for other taxes, such as social security and withholding taxes. For example, companies are required to withhold income taxes from employee paychecks, make social security and Medicare tax payments, and pay unemployment fund taxes.

There are similar taxes on the state level. For example, California requires businesses to make withholding taxes from their employees’ income and make contributions to the unemployment insurance tax fund. It is recommended consulting with the Franchise Tax Board (https://www.ftb.ca.gov/pay/withholding/index.html) and the Employment Development Department (https://edd.ca.gov/Payroll_Taxes/).

Step 6: Obtain Business License and Permits

California law requires an LLC to obtain all necessary licenses and permits before starting operations. State law also decrees that an LLC can only provide one specific type of service. All owners of the LLC must be licensed or registered to provide the specific service under which the LLC was assembled. The type and cost of the permits that the business may require varies depending on the nature of the services the LLC offers. In California, there is no state general business license. And for the most part, California does not allow individuals that perform “professional services” to form an LLC.

Step 7: Insurance

Every California business with employees is strictly required to get workers’ compensation insurance, even if they only have one employee. The big advantage to the LLC is that it offers personal asset protection for the owner. Yet, it is recommended to obtain a general liability policy with the right coverage for the business.

Step 8: Open a Business Bank Account

One of the most important aspects of running an LLC is ensuring that the business funds remain separate from the owner’s personal finances. And to do that, the owner would have to open a separate bank account for the company.

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