Last updated: October 2026
Incorporating makes sense for two kinds of California business: one raising outside investment, and one whose owners are licensed professionals and therefore cannot use an LLC. For everyone else a corporation is more machinery than the business needs — a board, bylaws, annual meetings, minutes, stock records, and an annual filing. Bay Legal, P.C. incorporates California businesses, drafts the governing documents, and advises on whether the structure is the right one before the filing goes in.
Definition: A corporation is a legal entity separate from its shareholders, governed by a board of directors, which can contract, own property, sue, and be sued in its own name.
When is a corporation the right choice?
Three situations, and outside them an LLC is usually simpler and cheaper:
- You are raising institutional capital. Venture investors buy preferred stock. They will generally not invest in an LLC, and a founder who expects a priced round is better off incorporating at the outset than converting under time pressure during a raise.
- You are a licensed professional. California bars professional services from being rendered through an LLC. A professional corporation under Corporations Code section 13400 and following is the only entity available.
- You want an S election for self-employment tax reasons. A profitable owner-operated business can sometimes reduce self-employment tax by taking a reasonable salary and distributions from an S corporation. This is a calculation to run with a CPA, not a default.
What is not a reason on its own is liability protection. An LLC provides the same separation between business and personal assets with considerably less administration.
What does it cost to run a California corporation?
An $800 annual minimum franchise tax under Revenue and Taxation Code section 23153, owed whether or not the corporation is profitable. Above that, a C corporation pays California corporate tax on net income; an S corporation pays a reduced rate on net income at the entity level in addition to the pass-through to shareholders — California, unlike the federal system, does not treat an S corporation as entirely tax-free at the entity level.
Compared with an LLC, a corporation avoids the section 17942 fee on gross income, which is why a high-revenue, low-margin business sometimes finds the corporation cheaper despite the extra formality. That comparison is worth running rather than assuming.
A Statement of Information is due within 90 days of incorporation and annually thereafter under Corporations Code section 1502. Missing it brings penalties and eventually suspension, and a suspended corporation cannot sue, defend a lawsuit, or enforce its contracts.
C corporation or S corporation?
They are the same entity under California law. The difference is a federal tax election, and it carries eligibility limits that rule it out for many companies.
| C corporation | S corporation | |
|---|---|---|
| Taxation | Taxed at the entity level; dividends taxed again to shareholders | Income passes through to shareholders’ returns |
| Shareholder limit | Unlimited | 100, and generally individuals who are U.S. citizens or residents |
| Classes of stock | Multiple, including preferred | One class of stock only |
| Venture capital | What investors expect | Preferred stock is not available, so generally unusable |
| Typical fit | Raising outside investment, retaining earnings | Owner-operated profitable businesses |
The single-class-of-stock rule is what usually decides it. A company that wants to issue preferred shares to investors cannot maintain an S election, which is why growth companies are C corporations even though the double taxation looks worse on paper. Eligibility and the election itself are set out by the Internal Revenue Service, and the election has filing deadlines that are easy to miss in a company’s first year.
How do you incorporate in California?
- File Articles of Incorporation with the California Secretary of State, stating the corporate name, purpose, agent for service of process, and authorised shares.
- Adopt bylaws. The internal rulebook: meetings, voting, officers, transfer restrictions. Required, and not filed publicly.
- Hold the organisational meeting. Elect directors, appoint officers, adopt bylaws, and authorise the issuance of stock. Minute it.
- Issue stock properly. With certificates or book entry and a written record. Founders frequently cannot prove who owns what three years later, and a securities exemption filing may be required.
- File the Statement of Information within 90 days, then annually.
- Obtain an EIN and open a corporate bank account. Commingling personal and corporate funds is the most direct route to losing the liability protection incorporation was meant to provide.
- Consider a shareholders’ agreement. Bylaws govern the corporation; a shareholders’ agreement governs the people. Transfer restrictions, buy-sell terms, and deadlock provisions belong here.
Does incorporating actually protect your personal assets?
Only if the corporation is treated as genuinely separate. Courts can disregard the entity and reach shareholders personally where the formalities were ignored, the company was inadequately capitalised, funds were commingled, or the corporation was used as a mere instrumentality of its owners. The doctrine is applied sparingly, but it is applied, and closely held corporations are where it comes up.
What protects you in practice is unglamorous: a separate bank account, minuted meetings, current filings, adequate capital, and contracts signed in the corporation’s name rather than your own. And no entity protects you from liability for your own negligence — which is why professionals carry malpractice insurance regardless of structure.
Should you incorporate in Delaware instead?
Usually not, unless you are raising institutional capital. A Delaware corporation doing business in California must register here as a foreign corporation and pays the California $800 minimum in addition to Delaware’s franchise tax and registered agent costs — two sets of fees for one company.
The case for Delaware is that investors and their counsel know its corporate law, its Court of Chancery is experienced and quick, and the documents are standard. For a company that will raise a priced round, that familiarity is worth the duplication. For a California business that will not, it is a recurring cost with no return.
Who handles incorporation at Bay Legal?
Managing attorney Jayson R. Elliott leads the firm’s business practice, covering entity selection, incorporation, bylaws, shareholder agreements, and investor structuring. Where a dispute arises between shareholders, it moves to the litigation group under lead litigation attorney Evan Livingstone.
Bay Legal, P.C. advises on the legal design of the structure and prepares the formation and governing documents. The firm does not provide accounting, bookkeeping, or tax filing services, and works alongside the client’s CPA on the S election and related tax questions. It serves businesses statewide from offices in Palo Alto and Los Angeles.
Frequently Asked Questions
What does a California corporation cost each year?
An $800 minimum franchise tax under Revenue and Taxation Code section 23153, owed whether or not the company is profitable, plus California corporate tax on net income above that. Unlike an LLC, a corporation avoids the section 17942 fee on gross income, which can make it cheaper for a high-revenue, low-margin business despite the extra formality.
What is the difference between a C corporation and an S corporation?
The same entity under California law, distinguished by a federal tax election. A C corporation is taxed at the entity level with dividends taxed again to shareholders. An S corporation passes income through, but is limited to 100 shareholders and a single class of stock — which is why companies raising venture capital cannot use it.
Do I have to hold meetings and keep minutes?
Yes. California corporations must hold shareholder and director meetings and record them. It is not a formality to skip: ignoring corporate formalities is one of the factors a court weighs when deciding whether to disregard the entity and reach shareholders personally.
Should I incorporate in Delaware?
Usually only if you are raising institutional capital. A Delaware corporation doing business in California must register here as a foreign corporation and pays the California $800 minimum on top of Delaware’s fees. Investors’ familiarity with Delaware law justifies the duplication for a company raising a priced round, and rarely otherwise.
Can incorporating protect me from personal liability?
Generally yes for business debts and claims against the company, but not absolutely. Courts can disregard the entity where formalities were ignored, the company was undercapitalised, or funds were commingled. And no entity protects you from liability for your own negligent acts.
What is a shareholders’ agreement, and do I need one?
Bylaws govern the corporation; a shareholders’ agreement governs the relationship between the people who own it — transfer restrictions, buy-sell terms, valuation, and deadlock. Any corporation with more than one shareholder should have one, negotiated at the start while everyone still agrees.
Related Questions
How many directors does a California corporation need?
It depends on the number of shareholders. A corporation with one shareholder may have a single director; with two shareholders, at least two; with three or more, at least three. The bylaws should state the number or a permitted range.
What are authorised versus issued shares?
Authorised shares are the maximum the Articles permit the corporation to issue. Issued shares are those actually distributed to shareholders. Authorising more than you issue leaves room for future rounds without amending the Articles.
Can I convert my LLC into a corporation?
Yes, by statutory conversion. It costs more than incorporating at the outset and can carry tax consequences depending on the assets and timing, which is why founders expecting a raise often incorporate from the start.
Does a corporation need a business licence too?
Usually. Entity formation with the Secretary of State is separate from city and county business licensing, seller’s permits, and any industry-specific licence. Forming the corporation does not satisfy those.
Talk to a California corporate attorney
Whether to incorporate, and whether to do it here or in Delaware, is a decision worth twenty minutes before the filing rather than a conversion afterwards. To discuss incorporating a California business, call the office nearest you or email intake.
Bay Legal, P.C. — serving California statewide
Northern California office
667 Lytton Ave Ste 3, Palo Alto, CA 94301
(650) 668-8000
Southern California office
3211 Cahuenga Blvd W Ste 212, Los Angeles, CA 90068
(213) 668-8000
Intake: intake@baylegal.com
Fax: (650) 963-0041
Website: https://baylegal.com
This page is general information about California law and does not constitute legal advice or create an attorney-client relationship. Bay Legal, P.C. does not provide tax advice. For advice on your specific situation, contact a licensed California attorney and a qualified tax professional.