The top 10 leading Tech, Entertainment, and Food companies have seen their inception in this great state of California. It wouldn’t be wrong to say that the business initiation and incorporation processes are extremely streamlined in this state and nation. Businesses in the United States require more than just an idea, you need to File for a Federal Employee Identification Number (FEIN), there is Incorporation Paperwork, Name Trademark, Banking details, and the mandatory Income Tax Filing.
Let’s not get ahead of ourselves and rush into a process right away. There are many layers that we must slowly peel in order to understand the entire structure of setting up a business from an idea to its launch.
What is a Business Entity?
A business entity is the type of legal skeleton you would want your business to have. Whether you are a sole proprietor or you wish to have shareholders. The choice of the entity type depends on the structure of the business and its future plans.
Let’s review the types of entities, and the documents needed for each of them.
1. DBA – ‘Doing Business As’ also known as a ‘Sole Proprietorship’ is the type of business structure you would opt for if the following applies:
a. You are a single person in your business and
b. You want to start from scratch and do not have much investment.
In this case, the owner is solely responsible for all the profits and loss, while being held accountable for all the debt and payments that are incurred by the business. DBA can also be called a ‘General Partnership’ if there are 2 people who opt for this legal structure.
However, DBA recognition is at the City and County level only, not at the state level. This can be replaced by more optimized legal structures that have added benefits, business brand prestige, and choice of maximum budding entrepreneurs.
2. C-Corporation – This is one of the most commonly opted for processes. C-corporations separate the owners from the company protecting them from any losses, debt, and legal prosecutions. The company can enter contracts, sue, or be sued completely separate from its management and incorporated shareholders.
To begin with, the owner would have 100% of the stocks, then can add shareholders or business partners to the picture. They can then appoint the Board of Directors to run the show for any future listing of the company. Considered as a prestigious entity, C-Corporations have more paperwork than the DBA/sole proprietor. This legal embodiment needs to have a set of Corporate Bylaws for its process operations and works best for attracting investment opportunities. While the tax filing can get tricky, corporation taxes on profits are a tad bit lower than the rest of the entities.
3. S-Corporation – Purely focusing on the Taxing segment, S-Corporations are the bypass solution to the ‘Double Taxation’ process. Unlike C-Corporations where profits are taxed once and again when the profits (as dividends) are shared with the shareholders, S-corporation profits are taxed at a lesser rate only once when they are directly shared with the shareholders’ as personal tax returns.
More than 85% of the newly formed corporations opt for the S-Corporation structure to pay taxes like a sole proprietorship or a normal partnership. However, this formation needs more paperwork, is more tricky, and ends up being more expensive.
4. Limited Liability Company (LLC) – This is the perfect merger of the Corporation and the Partnership structure. While it enjoys liability protection, it is also a separate entity that is less complicated. When fewer than 5-people venture the benefits of a corporation it consists of ease in taxation, ousting of double taxation, and easy management. Similar to that observed under a Sole Proprietorship.
LLC swears by a legal document called ‘Operating Agreement.’ This is not as comprehensive and demanding as the Corporate Bylaws of the C-Corporation, but rather a brief one for major operational decisions taken by the company shareholders and management.
This, by far is the most preferred by choice for small businesses.
How to form a Business Corporation? (Specific to California)
Post understanding the major entities of Business legal management, we slowly shift focus towards the business incorporation process. While a few are optional, there are 5 mandatory steps that are drafted down (in this case) by the Secretary of State, California.
1. Articles of Incorporation: Incorporation of a business begins with filing the Articles of Incorporation with the Secretary of State. These contain the following documents:
a/ Name b/ Corporate Purpose c/Registered Agent d/Address e/Number of Shares authorized f/Signatures g/Details of the classes of shares (if any)
2. Business Corporation Name: Writing to the Secretary of State to check the availability of names is essential. The same can be done online using the Entity Name Reservation service: https://www.legalzoom.com/business/business-formation/entity-name-reservation-overview.html. Note: A 60-day reservation period is allotted if you pay a small fee and book the name.
3. Incorporators and Directors: The details of all the Incorporators and Directors are essential to make a note of as mandated by the California Secretary of State. Incorporators are deemed important until the Directors are appointed, who in turn are to work upon the corporation policy, operational rules, and shareholders’ interests.
Remember, the number of directors should be equal or more than the number of shareholders but never vice versa
4. Registered Agent: This is the one who will receive all the communications and bear the onus to receive the legal documents and lawsuit details. It is essential that this agent is of the same state in which the incorporation is to be done.
5. Incorporation Bylaws: These are of absolute mandate as far as the C-Corporation is filed. Though they are not filed with the Secretary of State, they need to be present at the primary address at all times and followed in times of daily operational decision making.
This is the main and most important section. California corporation forms that must be filed include The Articles of Incorporations, Certificate of Amendments, Statement of Information, Corporate Mergers, Name Reservations, and Information Requests.
The type of corporation chosen will determine the forms that must be filed.
Choosing the best set up for your business can be daunting, but eTax can help guide you every step of the way.
Business Incorporation is a tricky process that has more than a few variables to consider, beginning with the business plan, tax slabs, profits, dividends, and shares to lawsuits, legal communications, agreements, and foreign businesses.
eTax Services Inc has helped some of the leading companies with their business incorporation processes and guides with audit assistance, payroll, and tax return benefits. Tax changes shift base in terms of the business incorporation process, taxes on profits, and double taxations. Before Incorporating and filing your taxes, it is essential to run through the finances with eTax.
We will help you sort everything, figure out the agreements, bylaws, and more. Not to forget, eTax offers free tax estimates so that you make the most of the profits and investment.
Sounds interesting? Book your appointment slot with us. Our main office in the City of Anaheim was established in 2004 and team members have 15+ years of experience. Sit back, Relax and eTax will guide you through!
Link to our website: www.etaxservices.net