A professional corporation is a type of business entity that allows a group of business professionals to provide services in their profession. The benefits of a professional corporation are many, and perhaps you can’t wait to start your corporation. A step-by-step guide to forming a California professional corporation can be a huge help here.
A professional corporation, which constitutes a separate legal entity from its owners, is a great choice if you are a licensed professional in California. Members have voting rights, which allow them to vote on each corporate decision. You also benefit from its biggest advantage – liability protection. Limited liability protection protects shareholders from the corporation’s business errors and business debts.
Sound good? This article covers the basic steps of forming a California professional corporation. By the end of it, you should have a good idea of what you can expect as you start your professional corporation. If you’d like more information about what a California professional corporation is and how it works, check out our article on the subject.
1. Pick a Name
It’s crucial to appropriately name your corporation during its formation. Consider these requirements when naming your corporation:
- Your corporation name must include one of these terms: Incorporated, Corp., Corporation, Professional Service Corporation, or PSC.
- A professional corporation name can’t have any word or abbreviation that suggests other business types.
- Your intended corporation’s name must be unique, meaning no other corporation must have the same name as yours. You can check here to confirm if your corporation name is unique. If it isn’t, you might have to make a few adjustments until it is.
- There are legal requirements specific to every profession. Ensure your professional corporation name meets all of those requirements on top of those stipulated above before moving forward.
2. Appoint a Registered Agent for Service
A California professional corporation must have a representative to stand for them and act as an agent for the service of the process. The representative is called a registered agent.
Anyone can serve as your corporation agent if they have a physical mailing address in California to receive legal notices and mail. They also must be available during business hours.
You can appoint a corporate agent from within the licensed individuals in your corporation or act as your own agent. Alternatively, you can hire a professional service company to stand in your company’s place.
3. File the Article of Incorporation and Initial Statement of Information
Your articles of incorporation also called the initial registration form, register your corporation. It’s the first document-related step in forming a professional corporation.
As a filing requirement, an article of incorporation must have basic information about your corporation. This includes:
- The name of the corporation
- The registered agent’s name and address
- The corporation’s physical address
- The corporation’s purpose, and the number of authorized shares of stock
- A declaration that the corporation you are forming is a professional corporation
Note that alongside an article of incorporation, a corporation must also file an initial statement of information that gives the state your basic business information. You must also pay a filing fee of $ 100 in California to file an article of incorporation with California’s Secretary of State.
4. Designate Corporate Directors
After filing the articles of incorporation, you’ll need to designate the corporate directors and officers. If you’re the incorporator (the person who filled out and filed the article of incorporation), it’s your job to appoint the first set of corporate directors.
All directors/business owners should have the same profession, which should also be the corporation’s profession. For example, if your filing formation documents designate your professional corporation as a professional nursing corporation, all your directors must be nurses.
5. Prepare Corporate Bylaws
Corporate bylaws supplement rules set by the federal government. They determine the procedures and rules of your professional corporation and control how it operates. Before you can have your first organizational meeting, you have to have these bylaws in place.
These are some additional provisions that operational bylaws typically cover:
- The types of officers in the corporation
- How many members of the board of directors the corporation wants to have
- How the board of directors will be elected
- The power granted to each director
- How the vote of directors will be handled, including voting procedures and removal of officers
- Manner, location, and frequency of the annual shareholder meeting
- The issuance of shares
- Company buy-sell provisions
You can also choose to include additional information in your bylaws, including how notice of meetings will be handled, the protocol for business funding, steps for business plan creation, and more.
Operational bylaws are integral parts of a corporation’s internal documents that help to keep the corporation functioning. Your corporation will have to keep a copy and provide it if there is a lawsuit or audit.
The initial directors or incorporators can create bylaws in California. If you need help developing operational bylaws, you can reach out to A People’s Choice.
6. Share Issuance
This step is an integral part of incorporation. The owners of a corporation are the shareholders. Further, when you buy shares, you become a shareholder.
As proof of share ownership, you get a share certificate. A share certificate is a legal document issued by a corporation that serves as proof of ownership of a particular number of shares. This is something you will have to create during this step.
A share certificate includes:
- The professional corporation’s name
- The number of shares authorized
- The number of issued shares
- The shareholder’s name
- The signature of the president and secretary of the professional corporation
When people start buying distributive shares, record keeping becomes very important. Keeping a stock ledger and other business documents is crucial for all business structures. Be sure to note all of the shares-related transactions accordingly.
7. Call for Your First Board Meeting
Next is to call for a meeting scheduled with your initial directors. Keep in mind that if you’re using a registered agent service, your agent may not be a board member. During this initial meeting, discuss these important matters with your board of directors, which will likely comprise of your fellow business owners:
- Pick a bank for the corporation’s financial affairs
- Approve the shares certificate
- Determine if the professional corporation should be taxed as an S or C Corporation (learn more about these business entity structures here)
- Discuss the corporate bylaws
- Decide on annual meetings
You can also discuss other pertinent matters, such as business credit cards, how liability for business debts will be handled, official correspondence protocol, business insurance, and more.
Meeting minutes are part of a professional corporation’s share of formalities that helps in case of an audit or lawsuit. During the annual board meetings, minutes are required according to California’s law. Corporate meetings should be recorded, and a copy shared among the concerned parties for review. This will then be filed into the corporate record, which you’ll prepare once you get a certificate of registration.
8. Tackle All Corporation Tax Obligations
As your business plan starts to become a reality, you’ll need to meet all the legal requirements of the US and California governments when it comes to taxes. Here are some of the additional requirements you’ll need to consider for taxes.
A federal tax ID number, or employer identification number (EIN), is necessary to operate as a professional corporation or a foreign corporation in California. Without an EIN, your corporation can’t employ workers, open business bank accounts, earn business profits, and file corporation taxes like any other regular corporation. That leads to tax liabilities for example the late filing penalty of $18 per shareholder. Obtaining an EIN from the IRS is a free and stress-free process.
C Corp and S Corp Taxation
Deciding your corporation status as an S or C corporation will determine how your corporation would pay its corporate taxes at the federal level. For example, S-type has profits of business pass through to the owners. Here’s how the two differ:
- In California, a C corporation is taxed on both the profit at the corporate level and also at the personal level for personal tax returns. Hence, this results in double taxation.
- S corporations are taxed as pass-through entities, preventing double taxation in C corporations. Profits pass through to the owner’s individual tax returns. However, S corporations come with several other limitations, unlike C corporations.
Other Types of Taxes
In California, corporations are subject to franchise tax and corporate income taxes. Also, if your corporation intends to have employees, you’ll withhold social security from their wages to pay the employer’s share of those federal taxes.
Some business entities have limited tax liabilities. An affirmation of exemption letter or federal determination letter for tax exemption only applies to non-profit corporations. You can read further on the federal income taxes you have to file and pay online on the California Tax Service Center‘s website. Note that you might garner additional tax liabilities from your city or county.
9. Get All Your Licenses and Permits
A professional corporation can’t obtain a general business license in California. That being said, you might need to obtain local licenses and business permits to operate your business. You can confirm from the CalGold website which professional licenses and additional permits are required by your business.
10. Open a Bank Account for the Public Benefit Corporation
Your corporate bank account is meant for the corporation’s business income transactions alone. Mixing your personal assets with that of the corporation can lead to issues, including an audit or a lawsuit.
Having dedicated business banking and business credit score/business credit accounts maintains personal asset protection. Also, getting listed with reliable business credit agencies further builds your business credit score. You can use this to access benefits like business-specific cash or loans if you need them for business activity.
11. Abide with the Corporate Transparency Act
The Corporate Transparency Act requires that new and existing LLCs and corporations reveal benefits of ownerships—the names of those controlling the corporation directly or indirectly—to the Department of Treasury Financial Crimes Enforcement Unit. Violation of the corporate transparency act is a daily charge of $500 and Incarceration.
A People’s Choice Can Help you with Forming a California Professional Corporation Paperwork
As you plan your business matters, consider using A People’s Choice to assist with your paperwork. We are a California platform that helps provide affordable document preparation services. Licensed individuals seeking a corporation can easily get lost in the swiveling storm of paperwork involved. It can be exhausting, but it doesn’t have to be.
Regardless of the corporation or business structures you want to form or any corporation bylaw structure you need to create, A People’s Choice can help. We can help you as you make a sole proprietorship, professional corporation, and much more in lieu of a business attorney. Get help with every tax registration form, annual registration statement, and other annual corporation paperwork so you can focus on more important matters. Start your professional corporation now!
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