Incorporating Your Business in California

When should you incorporate?
How do you incorporate?
S-Corp or C-Corp?

Schedule a Business Strategy Session

Use the form below or contact us at (951) 594-9456.

Incorporating in California:
Maximizing Your Business Potential

Are you a California business owner looking to take your enterprise to the next level? Incorporating your business can provide numerous benefits, enhance your credibility, and protect your personal assets. Our attorneys are here to guide you through the process and help you understand the various options available.

What are the Benefits of Incorporating in California?

  • Personal Asset Protection: Incorporating separates your personal assets from your business liabilities, ensuring that your personal finances remain secure, even in the event of business debts or legal issues.
  • Enhanced Credibility: A registered corporation carries a level of credibility and professionalism that can help attract investors, partners, and clients. It signals your commitment to long-term success and stability.
  • Tax Advantages: California corporations enjoy various tax benefits, including deductible business expenses, access to tax credits, and potential savings through strategic tax planning.
  • Access to Capital: Incorporation can make it easier to secure funding, as corporations have more options to raise capital through the issuance of stocks or bonds.
  • Perpetual Existence: A corporation’s existence is not dependent on the owners or shareholders, meaning it can continue to operate even if there are changes in ownership or management.
  • Transfer of Ownership: A corporation offers more flexibility when it comes to transferring ownership interests, allowing for easier buyouts, mergers, or acquisitions.

8 Signs That It’s Time to Incorporate Your Business

1. You are ready to hire an employee.
As a sole proprietor, you may overlook the personal liability risks of not incorporating since you are solely responsible. However, when you hire employees or establish long-term contractor agreements, the landscape changes. It becomes crucial to consider the liability not just for yourself but also for your future employees. It is highly recommended to complete the articles of incorporation before drafting employment contracts or confidentiality agreements to ensure comprehensive protection. By incorporating early on, you create a separate legal entity, safeguarding both yourself and your employees from potential financial risks.

2. You want to make your business more official.
Corporations are perceived as more professional and credible by both investors and clients compared to sole proprietorships or 1099 contractors.

3. You need access to loans or credit - or might in the future.
Establishing a business bank account and cultivating your credit are essential for maintaining financial organization and securing loan approvals and credit when necessary.

4. You are becoming more profitable.
Once your income surpasses $60K, you are now poised to benefit from the tax advantages that come with filing as a corporation.

5. You are starting to conduct business with other entities.
Legally forming a company around your idea and team serves as a crucial step in safeguarding against personal liability. Founders seek to protect their assets from potential business losses. A strong indication that the time is right for this step is when the company begins engaging in activities with other businesses, such as signing contracts, selling products, and hiring contractors. By establishing a formal business structure, founders can mitigate personal risks and ensure the protection of their assets.

6. You want/need liability protection.
Personal liability protection is only established once you incorporate your business. In practical terms, if you anticipate signing a contract for commercial purposes in the near future, it is crucial to incorporate beforehand. Otherwise, you would be assuming liability on a personal level. It’s important to note that personal liability protection is typically not necessary until you have an actual contract to sign with another party, as it is at that point when potential liabilities arise. Prior to that, when there are no existing liabilities, there is usually no immediate need for personal liability protection.

7. You need to protect the intellectual property of your company
Incorporating also provides the advantage of safeguarding the company’s intellectual property. Startups and their teams often experience fluidity, with frequent changes in directions and responsibilities. It is not uncommon for past partners to resurface years later, making claims or lawsuits related to their perceived contributions during the early stages. By incorporating, you establish legal protections that can help shield the company’s intellectual property from such claims, providing a solid defense against potential disputes or challenges in the future.

8. You need to raise funds.
To achieve the desired scale, many startups must secure multiple rounds of investment. However, the majority of investors will insist on the legal formation of the company before considering funding. Additionally, there are significant tax implications associated with formalizing ownership before fundraising or receiving a term sheet. If you anticipate engaging in fundraising discussions soon, it is advisable to proactively incorporate the company beforehand. By doing so, you position yourself ahead of the curve and ensure a smoother path when initiating these crucial conversations. Taking this proactive step demonstrates professionalism and preparedness, which can positively impact investor perception.

FAQs about Forming a California Corporation

Understanding the difference between an S-Corp and a C-Corp is crucial when considering incorporation in California.

S-Corp:

An S-Corp is a pass-through entity, meaning the corporation itself is not taxed. Instead, the profits and losses flow through to the shareholders’ individual tax returns. S-Corps are subject to certain restrictions, including a maximum of 100 shareholders and only one class of stock.

C-Corp:

A C-Corp is a separate tax-paying entity. It is subject to corporate taxation on its profits, and shareholders are also taxed on any dividends or distributions they receive. C-Corps have no restrictions on the number of shareholders or classes of stock, making them ideal for larger companies seeking outside investments.

California corporations must comply with various requirements, such as holding annual shareholder meetings, maintaining proper records, and filing annual statements with the Secretary of State.

Yes, you can be the sole owner and shareholder of your California corporation. However, having multiple shareholders can offer advantages, such as shared responsibilities and access to additional capital.

No, you don’t need a physical office in California to incorporate here. You can use a registered agent or a virtual office address to satisfy the legal requirement of having a registered office.

Yes, it is possible to convert from one type of corporation to another. However, it involves specific legal procedures and tax implications. Consulting with an attorney is essential to navigate the conversion process effectively.

Yes, California allows the formation of nonprofit corporations. Nonprofits have different requirements and obligations than for-profit corporations, such as obtaining tax-exempt status and fulfilling charitable purposes.

Sign up for our Newsletter

Monthly business tips and educational content!

(We do not share your data with anybody, and only use it for its intended purpose)