Starting a Corporation in California: The Art to Drafting Articles of Incorporation

It is easy to legally form a corporation in California. You simply file Articles of Incorporation (“Articles”) with the Secretary of State and pay the appropriate filing fee. The filing of the Articles legally creates your corporation at which point you may conduct business in California. However, it is important to file Articles which reflect the structural design of the Company.

Most people, including lawyers, do not put much thought into what goes into the Articles. From a statutory standpoint, if you just include some basic information in the Articles, the Articles are acceptable for filing. Below, we will discuss the “basics” which need to go into the Articles and then provide some detail regarding considerations which are often overlooked.

There are many different types of corporations in California. This article addresses general stock and closely held corporations.

Basic Content Necessary for Articles of Incorporation:

1. Corporate Name:

Do not assume you can use just any name. If the name is already being used or there is another company using a name which is similar to your chosen name, the Articles will be rejected. So, before a final decision is made as to the desired name, you need to clear the name with the Secretary of State. If the name is available, you should reserve the name if you are concerned someone else may secure the name before your Articles are filed.

There are specific rules regarding the names deemed appropriate for California corporations. Failure to comply with these rules will result in your Articles being rejected. The words “bank,” “trust,” “trustee,” or similar terms may only be used if a Certificate of Approval from the Commissioner of Business Oversight is attached to the Articles. Use of the word cooperative, or any abbreviation of that word, may be a part of a corporate name only if the corporation is incorporated as a cooperative.

For the corporation to be a general stock or statutory close corporation, the name of the corporation must contain the word or an abbreviation of the word “corporation,” “incorporated,” “company” or “limited.” A limited liability company must have the words or the acronym for the words “limited liability company” in the name.

2. Corporate Purpose:

The Articles must indicate a corporate purpose. Specifically, the Articles should state either that the corporation “is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code,” or that “the purpose of the corporation is to engage in the profession of ____ (with the insertion of a profession permitted to be incorporated by the California Corporations Code) and any other lawful activities (other than the banking or trust company business) not prohibited to a corporation engaging in such profession by applicable laws and regulations”. If the corporation is intended to be a professional corporation, additional requirements apply.

3. Service of Process:

Every California corporation must appoint a California registered agent. The registered agent is responsible for accepting legal documents such as a summons and complaints. A registered agent must have a physical street address, which is listed in the Articles. The agent can be an individual who resides in California or a business which has an address in California. Often, businesses will designate a lawyer or a company which acts as a registered agent. The address for the registered agent must be a physical address.

4. Corporate Address:

You are required to list a business address, even if you’re a web-based business. The address must be a physical address. You are also required to provide a mailing address, if different from the street address, which may be a P.O. Box.

5. Authorized Shares:

The Secretary of State requires a list of the number of shares of stock authorized to be issued at the time of incorporation. You can amend the Articles to change the number of authorized shares at a later date if necessary or desirable.

Additional Considerations for the Articles Content:

1. Statutory Close Corporation Status:

In California, it is possible to waive certain formalities required of corporations under the California Corporations Code. For instance, you can waive the requirement to hold formal annual meetings of the shareholders. There may be significant benefits to doing this for some corporations. The first step in being able to waive certain corporate formalities is to specifically designate in the Articles that all of the corporation’s issued shares of all classes shall be held of record by not more than a specified number of persons, not exceeding 35, and a statement, “This corporation is a close corporation.” Other steps must be followed, but the designation in the Articles is required.

2. Preferred Stock:

If the idea is to raise capital through the issuance of stock, the Articles will need to provide the necessary information. As an example, Companies are commonly authorized to issue two classes of stock designated, “Common Stock” and “Preferred Stock.” In this instance, the Articles will need to identify the total number of shares which the Company is authorized to issue of each class of stock.

You typically have different rights, preferences and restrictions for the Preferred Stock, and you may have different series of Preferred stock. The Articles will need to identify the existence of one or more series of Preferred Stock and the number of shares authorized for each series. Multiple classes of Preferred Stock are often referred to as the “Series Preferred.” The Articles will identify such things as dividend rights, voting rights, liquidation rights, conversion rights, and redemption rights.

3. Liability of Directors:

Articles may contain a section identifying the fact the liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

4. Indemnification of Directors, Officers and Agents:

The Articles may identify whether the corporation is authorized to indemnify the directors and officers “to the fullest extent permissible under California law.” The Articles can also identify whether the corporation is authorized to provide indemnification of agents as defined in California Corporations Code Section 317 through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by California law and subject to any limitations.

The content of the initial Articles to be filed with the Secretary of State should not be taken for granted. Although you can always amend the Articles, there is no reason to file Articles which are inconsistent with the nature of the structural design of the Company.

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