California is a leader in great companies and household names. From Silicon Valley to Los Angeles, the state houses some of the biggest technological and entertainment businesses on the planet.
For entrepreneurs with big dreams, starting a corporation is a powerful way to show your commitment and bring those ideas to life. In this guide we’ll talk you through everything you need to know on how to start a corporation in the state of California.
What Type of California Corporation Should You Choose?
Most entrepreneurs will have a choice of starting an LLC, an S Corporation or a C Corporation in California. We’ll help you select the right type of business entity, as each one is treated differently by the CA Secretary of State, the law, the IRS and other official bodies.
Here’s a quick overview of each type of business entity.
California Sole Proprietorships and Partnerships
These are the simplest type of business and will be the “default” type of CA business you have if you do not choose to form a separate business entity. These types of businesses do not provide you with any special protections or benefits and can leave your personal assets vulnerable. We do not recommend them.
California Limited Liability Companies (LLCs)
LLCs are a great option for smaller CA businesses. LLCs are quick and easy to create, inexpensive to administer, light on regulations and have simple taxation and rules.Learn how to create an LLC in California
California S Corporations
You might choose to form a California S Corporation because it’s a good compromise between the simplicity of the LLC and the complexity of the C Corporation. Note that CA S Corporations are subject to more rules and regulations than a CA LLC, but they can mean that you pay less tax.Learn about forming an S Corporation.
California C Corporations
If you plan to start a large business or want to trade your shares on the public stock market, a CA C Corporation is your only choice. Be aware that California C Corporations are subject to many rules and regulations, and they have a substantial amount of administrative overhead. Additionally, the tax rules for a California C Corporation are not as advantageous as for a CA S Corporation or LLC.Learn about forming a C Corporation
There are some other business entity structures like nonprofits, Limited Liability Partnerships (LLPs) and B Corporations, but they will not be relevant for the majority of entrepreneurs.
Advantages of Forming a Corporation in California
California corporations have several benefits for business owners.
- California corporations provide the strongest form of liability protection possible. They insulate your personal assets and finances from those of your business.
- This means that any liabilities created by your corporation (debts, obligations, damages, bankruptcy or other liabilities) should not impact your personal money, property or assets — they are considered completely separate from a legal perspective.
The Advantages of a California Corporation Over an LLC
Why might you want to choose to incorporate as a CA S Corp or C Corp instead of an LLC? Here are a few reasons.
Taxation Benefits of a California S Corporation Over an LLC
A California S Corporation will often pay less self-employment tax on owner earnings than an LLC. Note that a CA LLC can choose to be treated as an S Corporation for tax purposes by filing Form 2553 with the IRS, which removes this restriction. California C Corporations do not have this advantage over an LLC.Learn about the tax benefits of S Corporations.File From 2553 with the IRS via Incfile
California S Corporations and C Corporations Make It Much Easier to Transfer Stock and Ownership
California S Corporations and C Corporations make it much easier to buy, sell and transfer stock. C Corporations also allow you to file an IPO and list stock on the public stock market.
If You Want Maximum Flexibility for Buying and Selling Stock, Choose a California C Corporation
C Corporations provide certain benefits when it comes to buying, selling and transferring stock. Here are the rules for both S Corps and C Corps:
- If you want up to 100 shareholders who are U.S. citizens or residents and want to issue one type of stock, you can be an S Corporation or a C Corporation.
- If you want more than 100 shareholders, want to issue more than one type of stock or have international shareholders, you will need a C Corporation.
- If you want to allow the public to buy and sell shares in your company after an Initial Public Offering (IPO), you will need a C Corporation.
Advantages of Starting a California S Corporation
In addition to the general benefits above, CA S Corporations provide several other advantages:
- California S Corporations can have up to 100 shareholders.
- Running an S Corporation in California is simpler than running a C Corporation.
- It is easy to transfer ownership in an S Corporation by selling your stock.
- In some cases, part of the income from an S Corporation can be paid as a “distribution” rather than “salary,” so it would not be subject to self-employment tax. Find out how this can save you money using our S Corporation Tax Calculator.
- LLCs can choose to be taxed as S Corporations to take advantage of this.
Advantages of Setting up a California C Corporation
In addition to the general benefits above, California C Corporations provide several other advantages.
- Ownership in a California C Corporation is very fluid and determined by who owns stock in the business.
- California C Corporations can list their shares on a public stock exchange. This stock can be bought and sold by anyone.
- California C Corporations can sell stock to investors inside and outside the U.S.
- California C Corporations can issue more than one type of stock.
- California C Corporations can raise more funds by issuing more stock.
What You Need to Know About Forming a California Corporation
Here are some areas to be aware of when you’re creating a corporation in California.
First, CA corporations are formed on the state level by filing Articles of Incorporation with the Secretary of State. Incfile specializes in helping entrepreneurs form California S Corporations and C Corporations and can collect the information and file this form on your behalf.
When you incorporate a business as a corporation, the California Secretary of State will treat your business as a C Corporation by default. A C Corporation will become an S Corporation when all shareholders wish to change the corporation’s status to an S Corporation with the IRS. You can make this choice when you first form your California corporation or at any time after you incorporate.
There are some similarities and some differences between S Corps and C Corps:
- Similarities: California S Corporations and C Corporations have similar rules and regulations for liability, governance, management and ownership
- Differences: Key differences are taxation and the ease of buying, selling and transferring stock
Your California Corporation Must Follow Certain Rules and Regulations
All CA corporations must issue stock to shareholders
All CA corporations must hold Annual General Meetings (AGMs)
All CA corporations must have an elected Board of Directors
All CA corporations must appoint officers
All California corporations must follow stringent compliance rules and regulations. These include financial reports, bylaws, corporate formalities, taxes, fees, business licenses and the like. You can find links to these below.Learn about California corporation requirements.Learn about California Corporation Taxes and Fees
Are you ready to start your California corporation? If so, we can help. We provide comprehensive corporation formation services for both S Corporations and C Corporations in California.
Detailed Information for Your California Corporation
You’ll find plenty more insight and guidance on the other pages of this guide, including:
Forming Your California Corporation
The six steps you need to take to start a California S Corporation or C Corporation.Learn more
Naming Your California Corporation
How to search the California business registry of the CA Secretary of State and find the right name. Includes information on naming rules, fictitious names, reserving a California corporation name and more.Learn more
California Registered Agents for Your Corporation
How to appoint a California Registered Agent to your new corporation or change to a different Registered Agent. Includes information on Registered Agent rules and searching for California Registered Agents.Learn more
Fees and Requirements for Your California Corporation
How to understand the various fees you’ll need to pay and the requirements you’ll need to meet for both federal and California rules. Includes details of Employee Identification Numbers (EINs), California and federal business licenses, California Statement of Information reports and more.Learn more
Federal, State, Sales and Other Taxes for Your California Corporation
How to understand the various taxes you will need to pay to the federal and California government. Includes details of federal taxes like income and self-employment, and California taxes like sales tax and income tax.Learn more