Future services seem like a great no-cost way to buy equity in a startup. In California, however, whether you legally can buy equity with future services depends on whether the startup is a corporation or a limited liability company (LLC).
Corporations Code Section 409(a)(1) specifies the types of “consideration” that can be paid for corporate shares. These include, for example, “money paid; labor done; [and] services actually rendered to the corporation or for its benefit or in its formation or reorganization”.
However, “neither promissory notes of the purchaser [subject to certain exceptions] nor future services shall constitute payment or part payment for shares of the corporation“. So a California corporation cannot grant shares in exchange for future services.
I recently have received several inquiries about whether a foreign company or its owners need an ITIN (Individual Taxpayer Identification Number) when they bring their business to the US. The answer is, “No.” The rest of this post explains why that is the case.
When a company wants to do business in the US, it needs an EIN (Employer Identification Number).
For a foreign or foreign-owned company, obtaining an EIN can be intimidating. This is especially true if the principal officer lacks a US social security number. (The EIN cannot be obtained quickly and easily online.)
When I form a corporation for a client, I purchase a customized corporate records book, which comes with share certificates and a corporate seal. This post explains what a corporate seal is and when it might be used.
A corporate seal is a hand-operated metal device that can emboss the corporation’s name and state and date of incorporation on a piece of paper. It, thus, can serve as evidence that the corporation acknowledges an agreement or other document as binding the corporation.
As an analogy, think of an English king, centuries ago, sealing a letter with molten wax and making an impression of his ring in the wax before it hardens. Whoever received the letter would know that it came from the king.
This post is based on a question I have seen online many times. Q. Can I have a corporation with multiple businesses?
A. Yes, you can have a corporation with multiple businesses. Furthermore, those businesses need not be similar or related. So, for example, your corporation might do both software development and per sitting.
However, there is a more important question. Should you have a corporation with multiple businesses?
In Directors’ Inspection Rights Include (Almost) Anything in California, I discussed corporate directors’ inspection rights. Quoting California Corporations Code Section 1602, I noted that directors have an “absolute right” to inspect corporate records and physical properties. This post explains that in enforcing inspection rights, “absolute” is not really “absolute”.
The fundamental limitation, established in case law, is that a director may not use inspection rights to harm the corporation.
Recently, I have seen several limited liability company (LLC) members ask, online, how they can add a new LLC member. This post provides the answer, which is pretty simple.
Short answer: One must amend the Operating Agreement to add a new LLC member.
Slightly longer answer: An Operating Agreement (OA) can be oral or written. A written OA is better because it clearly documents the members’ agreement concerning the LLC.
I recently answered an Avvo question about whether one can sell a partnership interest. The question and answer are paraphrased below (with emphasis added).
Q. In California, is a general partnership terminated upon the sale of one partner’s interest to a third party? How would the remaining partner and new partner continue business? Would a new entity need to be formed? There is no written partnership agreement.
A. Corporations Code Section 16201 states that “A partnership is an entity distinct from its partners.” Therefore, a membership change does not, by itself, create a new partnership.
Officers conduct a corporation’s day-to-day business. Among the states, California law is unique in its set of required officers.
California Corporations Code Section 312(a) states the each California corporation must have:
- A chairman of the board or a president or both;
- A secretary; and
- A chief financial officer.
Additional officers are optional.
Other states typically take an approach similar to that specified in Delaware General Corporation Law Section 142 (emphasis added):
When startups incorporate, they typically want to avoid the expense, delay and effort associated with registering the sale of their shares. In California, the most common exemption from registration is found in Corporations Code Section 25102 (f).
Section 25102 (f) says that a corporation need not register the sale of its shares if all of the following requirements are met:
- The shares are sold to no more than 35 shareholders.
- All purchasers have a preexisting relationship with the corporation or its officers, directors or controlling persons.
- Each purchaser is buying shares for the purchaser’s own account and not for resale.
- The offer and sale of the shares is not accompanied by the publication of any advertisement.
I recently introduced a client to the document called a Stock Assignment Separate from Certificate. While well-known to business lawyers, this document is not known to most business owners.
The client was implementing employee and management stock plans. To provide stock for the plans, the corporation was going to repurchase shares from the founders.
The CFO asked whether and how the founders should complete and sign the assignment provision on the back of their share certificates.