Friday, April 3, 2009

How to incorporate startup in CA? (and stay on the budget)

Well, we have a few startup ideas. We want to charge money. So we're about to incorporate.

But let me start from the very beginning. My partners and I have been working together for a pretty long time and we finally reached the point when we're ready to start something together. As far as the most of us based in California, we decided to incorporate here.

Yeah, I know, I know, the startups are about Delaware. But why did we decide to stay within CA? First of all, running the business from CA is a pretty solid nexus with the state, making us pretty liable to state taxes. Doing some consulting over there can add even more reasons for state to be sure about this. Incorporating in DE could be a valid reasons because of DE corporate-friendly status, but is not the best choice for us.

We're hungry people living of the budget. Any more state fees, taxes and extra paperwork (instead of building something that we can sell) is not a good choice. Remember, that running DE company in CA makes you liable to CA taxes, registering a foreign entity in CA and adding the extra amount of headache plus not taking away the minimum $800 CA franchise tax.

What type of company? S-Corp, as for now. Actually, it's a typical C-Corp, with S status election, coming after all, with some benefits on the top. Anyway, we're not about taking outside investment right now (at least, for those projects that we're on), so having limited number of shareholders plus one class of stock doesn't make a difference for us. And S-Corp can be converted to C-Corp pretty easily.

All other types of businesses, as well as LLC doesn't work for us. S-Corp gives more chances to save on taxes, which LLC doesn't. And while LLC is a little bit easier to run, I don't think it worths the money we can save on staying away from unemployment taxes (partially, though).

How to incorporate? A lot of people advise using Internet based services. I've looked at the number of them:, MyCorporation, The Company Corporation (, LegalZoom, INCORP and IncFile. What can I say? That's an expensive thing for a startup. Besides, it's too much information over there that is repeated all over again and again, so it's so easy to miss something you might really need.

After speaking with the most of these companies over the phone, the best choice is none. I'm sorry to say that, but I didn't find one good leader. All of them do the same thing, but they put them into different type of plans and packages and sell for different numbers: some of them try to pretend to be wholesellers, selling some staff, but missing some essential tools; another ones allow you to customize yourself, but give you so many options, so your mind is about to blow out.

So, yeah, you will have to do something yourself anyway. Anyway means you can take the top package, but you still have something to do. Is it something you're willing to pay hundreds of dollars for? I doubt so.

My choice was a little bit odd, but I believe it to be the good one. I had to invest some time for understanding a process, but it's never a waste.

First of all, I need a business address. So I ordered a PO box at the close-by USPS station. Likely, I'm living pretty close to SFO, so I could get a very inexpensive one ($42/12 months) over there. (And I'm getting "luxurious" San Francisco, CA address ;). Don't take it seriously, though, but I know some startup companies think that matters, while it does not.) Anyway, I don't want to mess with my residence address, as it can change or whatever else happens - this is not my bussines suite, so PO box is the better choice for me. USPS gives you a good informative resource online for location USPS station near-by and you can even order it from the Web. But you still need to visit office for the keys and personal verification process.

For the second, I had to get a California registered agent, which is required for every company, and cannot be a PO box. There is a plenty of choice online, and it varies a lot. I chose Patel & Alumit, which provides the service for $50/year. I had several questions and contacted them online and by the phone and I was pretty happy with the care. So they've got my money ;)

Third, I need to incorporate. After considering many options, I decided to choose MyCorporation, an Intuit company. They provide a basic service for CA including 1. preparing and filing articles of incorporation, 2. publication requirement (although I don't know if it's necessary for CA), 3. personalized corporate bylaws, waivers, notices, and minutes of corporate meetings (very often charged extra!), and some other not imporant things with state fees included for $144 (with the MYFREE coupon which discounts $149 from the full price). Keeping in mind that the state fees are $115 (if I'm not wrong), I think that $29 is a fair premium paid. ;)

More things to go. While I'm waiting for actually, being incorporated, I decided to take a deeper breath and learn the process myself. While reviewing a number of books (primarily by NOLO though), I found an ultimate resource for learning about incorporating in California. This is the book How to Form Your Own California Corporation by Anthony Mancuso. $26 bucks is almost free for such amount of information included in the book and on CD.

Of course, nobody is perfect and I don't suggest limiting your understanding of the process by reading only this book. For example, Anthony pays too much attention for choosing LLC over S Corp. It could be very right for some type of ventures, however, not really for ours.

As for me, the incorporation process looks pretty easy and I'd definitely consider incorporating myself next time. At least, I'll have a better understanding of where I am standing at every moment of time. The MyCorporation's process doesn't give you a good idea and requires you to call for the status update.

The incorporation process takes time. However, being too impatient and after waiting for about a week, I called MyCorporation and inquired the status of my order. They told me that it'll take about 2 weeks more and I'll be receiving an email from UPS and the whole package shipped by that time. I'm still wondering about exact list of documents that I'm going to receive from them, and how much will have to do myself.

Meanwhile, I keep reading the Anthony's book, and making myself much more confident about the process. From the other hand, I still have gaps in knowledge of tax related issues, especially, for those cases when the company is just bootstrapping and willing to save every single cent. I own a number of NOLO's book, but I don't have clear answers for some of my questions. (Are there any good self-made accountant & tax attorney book around?)

Another thing we might need to think about is choosing the bank for your small business. Keeping in mind that we're going to run very low during the first days (weeks and months), we need to be very careful about this choice. Originally, I was thinking about either Silicon Valley Bank (SVB) or First Republic. I didn't have personal experience with either one. (Some people might say: try Well Fargo, however, I'm pretty much done with them. That was one of the worsiest experience while keeping my personal banking with them, and I don't want to try it again anytime soon.) From the other side, First Republic was acquired by Bank of America (BofA), and doesn't have a very clear future plans. Besides, their rates are far from free. The SVB is not free either, but it has a pretty impressive reputation and networking, in addition to services that it can provide. You can even negotitate a pretty low (or even free!) introductory rates for a year or so, but you need to be interesting for them. (Keep in mind, that as it's always with good things, they tend to end soon. :) References are good, especially with SVB.

So, in my case, I'm not ready to bank high, and I'm not ready to be interesting for banks either. So what I need is something free. As much free, as it's possible. (Don't forget, that something that you're not paying for, is of the same quality.) So we have just a few banks on the plate right now. They are WaMu (now Chase), which still provides a free business account, with pretty much no limits, and HSBC, which limits you to 300 free transactions per month. There are might be some more, but I didn't find them.

There is also an option of local credit unions. However, more often this is not the most straightforward decision. And seldom free. (It looks Silicon Valley Credit Union has a free business checking though.)

So, as for me, I'm going to try WaMu. I've been a personal customer of WaMu and it's okay to start with. Eventually, I'm more directed towards SVB.

In about 2 weeks after registering the company with MyCorporation, I've received an email from UPS:

Message from MyCorporation:
This email is to notify you that you have been sent documents from MyCorporation. If a return label is provided, please return as soon as possible.

I should say it was rather fast. Hopefully, UPS wouldn't screw up its part now. Meanwhile, I'm going to check the POB for some mail, that I could receive.

The UPS didn't screw up this time and actually delivered the parcel even one day earlier than planned. The package was pretty simple: the yellow letter from Secretary of State that our Articles of Incorporation have been filed with the CA, we're required to file Statement of Information with the Secretary of State with 90 days (this can be done online) and business entities are subject to state and federal tax laws (what a surprise). It also includes SI-200 C form, for those who're willing to do the paper work, and self-addressed envelope with no post stamp (cheapo ;). Plus two stapled certified copies of Articles of Incorporation endorsed and filed by Secretary of State. So basically at this moment I have a C-Corp, which (after a few steps) I'll have to turn into S-Corp and start to use the power of incorporation.

The other envelope includes CORPORATION GUIDE CD, with video and documents (Corporate ByLaws, Minutes of Meetings and Stock Transfer Ledger) and printed business documents. Among this docs, you can find a pretty detailed checklist (but doesn't look to be very complete) of what you've done and what you have to do more.

You can click on the image to see it better. The bylaws included have some things to be filled in. Make sure to go through it and put whatever needed. I wish all docs would be coming stapled, but not just an unnumbered set of pages, which can be messed up pretty easily.

Also, I found instructions on filing Time Sensitive Information, what is basically SS-4 form (EIN) and 2553 (S-Corp) and five or six certificates templates (you normally give one to every shareholder).

Ok, so now it's time for Statement of Information and the fee is $25 (I barely see any reason for charging a fee for that, but California always was sorta greedy). You can do this online at You will need to type the company name and it'll pull up the records for you. They ask for the principal business and executive addresses and don't accept POB there, so I had to put my residence. You can pay with a credit card after completing the form (and it's a pretty straight one). They will issue a receipt and confirmation after all.

Next comes applying for EIN. It's required to apply for EIN before electing S-Corp status (form and instructions). The EIN application is also very simple and basically is a set of questions. You can also do this online and it's free. After you're done with the form, you can receive the number right away in a printable format. Make sure to print it and save. (Actually, I do both - paper copy and PDF.)

Now we should prepare and file Notice of Stock Transaction and this can be done online as well. There is also a fee associated with this and is $25 for Value of Securities of $25,000 or less. The process starts with creating a profile on site, basically, filling the information about the corporation and mailing addresses. After you created profile, you can proceed with actual notice. The most important part is asking you about securities. In my case I have 1,000,000 of common stocks (you can't have different types of stocks in S-Corp) with $0.001 par value and I'm going to issue all of them, that is $1,000 of total transaction cost. However, I'm going to take only half in money and other half in different consideration (actually, some services that have to be done for the company). Make sure to print, manually sign and retain a copy in your records.

Now, it's time for S-Corp status election paperwork. You cannot do this online (and this sucks!). You can grab the form and instructions on the Web though. This one is editable PDF, is a little bit more complex than the previous ones, but very doable with instructions handy. I chose to fax the form, instead of mailing it. For California, the filing address and fax are:

Department of Treasury
Internal Revenue Service Center
Ogden, UT 84201

Fax (801) 620-7116

But make sure to double check it with instructions on-site. This form should include signatures of all shareholders, so it might take some time to prepare. The faxing wasn't easy either.

My next step is opening bank account. WaMu (Chase) wants everyone, but sole proprietorship to apply from the branch, and the minimum deposit is $100. (I think it can be withdrawn right away.) I've got a branch store which pretty close by. I took the whole set of papers and it was smart - they ask for as much information as I can provide. Definitely, they really wanted my FEIN confirmation and copy of Articles of Incorporation. They ask the typical set of questions, take your personal information and just in case if you have partners - make sure to show up all together, otherwise, they can't add anyone but yourself. The minimum deposit was $100 and they want it to reside on your account for 60 days (I don't know what happens if you take them out though ;). The whole process takes about 20 minutes and you're pretty much done. You'll get the temporary set of checks right away, a complimentary box of checks will be mailed in 2 weeks and a debit card should come within a week or so.

So now we're pretty much done with the brand new company, bank account and ready for my new ventures. You are welcome to ask me more questions on this matter, I know that the help is really needed, but sometimes (pretty often) attorney's or CPA's fees are way out of the question. (Keep in mind, that I'm neither CPA nor attorney.)

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Disclaimer: I'm providing information. Use it at your own risk. Information is not a legal advice and isn't directly applicable to individual's specific circumstances. I'm not providing legal services or legal advices. Although I did my best to make my information accurate and useful, you should consult a lawyer to interpret and apply this information to your particular situation. My opinions are my own.

P.S. I was writing this post over some period of time, getting back and forth, so it might have inconsistencies in time references.

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