This post discusses why – especially now that Assembly Bill No. 5 (AB-5) has taken effect – in California corporate officers are considered employees rather than independent contractors.
California Corporate Officers Employees by Statute
The starting point is California Unemployment Insurance Code Section 621. This Section states, in relevant part:
“Employee” means all of the following:
(a) Any officer of a corporation.
This post discusses my surprise at finding that there apparently is no requirement that corporate officers be human beings.
My answer to a Quora question is the basis for this post. Please see Could an A.I. create a company and do all the functions typical of another company?
I was about to write an answer stating that corporate officers be natural persons (human beings). But with a bit of research, I found that apparently is not the case! (more…)
In California, the so-called Business Judgment Rule (“BJR“) protects corporate directors. They are not responsible for honest mistakes of business judgment. A recent case revealed that the BJR does not protect corporate officers in California.
During 2007, Indymac Bank bought more than $10 billion in risky residential loans. These loans ultimately generating losses of more than $600 million. Indymac closed. The Federal Deposit Insurance Corporation was appointed receiver.
In Blue Nile v. Ideal Diamond Solutions, the U.S. District Court for the Western District of Washington held that co-defendant Larry Chasin, founder and an officer of defendant IDS, was personally liable for infringement of plaintiff Blue Nile’s copyrighted images, even though Chasin claimed he had no role in putting infringing images on websites and he did not know the images were infringing.
Blue Nile is an online jewelry and diamond retailer. Chasin founded and operated IDS to create websites for brick-and-mortar jewelers to help them compete online. The websites included some of Blue Nile’s copyrighted images.
Recently, two different individuals emailed me about their desire to form and run a legal entity while remaining anonymous.
I had to tell them that they could not achieve their objective. This post explains why that is the case.
Initial Formation is Easy
It is easy for a founder to be anonymous when taking the first step to form a corporation or a limited liability company (LLC). (more…)
Several weeks ago, I wrote about how to issue LLC membership interests. In this post, I am addressing how a small corporation should issue corporate shares.
To start, one must examine the Certificate of Incorporation (Delaware) or Articles of Incorporation (California) to determine the maximum number of shares that may be issued. (To simplify this discussion, I will assume that only one class of common shares has been authorized.) A corporation may not issue more shares than are authorized. (more…)
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 that 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.
That Code section also provides that the president is the chief executive officer of the corporation, unless the articles of incorporation or the bylaws state otherwise.
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.
This post explains the difference between a corporation’s board of directors and an advisory board – a point that may not be clearly understood by some people, especially those from other countries, where corporate governance is different from that in the U.S.
The board of directors is elected by the shareholders and is responsible for management of the company. It appoints and removes officers (who run the corporation’s day-to-day business) and makes important decisions about finances and other matters. (more…)
The following question (edited for length) is from Founders Space. Q. What’s the minimum two founders must do regarding board meetings for a startup Delaware corporation doing business in California?
A. You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Sections 211 and following. (more…)
In “Incorporation: Not All (States’) Agents are Created Equal“, I discussed how agents for service of process in California are less formal – in both their appointment and their responsibilities – than registered agents in other states. California agents can resign more easily, too.
Corporations Code Section 1503(a) states that an agent for service of process may resign simply by filing a signed and acknowledged written statement. The Secretary of State? has provided Form RA-100 for this purpose. (more…)
This post about corporate stakeholders is based largely on my answer to a Quora question. Please see How many companies do you think will adopt the Business Roundtable’s statement that the purpose of a corporation is to take into account ALL stakeholders
The Business Roundtable describes itself as an association of chief executive officers of America’s leading companies. On August 19, 2019, the Roundtable garnered headlines when it announced that it had redefined the purpose of a corporation to promote an economy that serves all Americans. In my opinion, that characterization is not accurate.
Roundtable Statement about Stakeholders…
Here is what the relevant portion of the Roundtable’s Statement on the Purpose of a Corporation says:(more…)
An Employer Identification Number, issued by the Internal Revenue Service, is the most important identifying number for US businesses, especially for tax purposes. This post addresses how you can find a lost EIN.
Find the Lost EIN Yourself
The IRS Lost or Misplaced Your EIN? page starts by recommending searches for existing records that should include the lost EIN:
- The IRS confirmation notice that was provided when the EIN was issued.
- Bank accounts that were opened, or governmental licenses that were issued, based on the EIN.
- Tax return that were filed.
In Why are So Many Corporations Formed in Delaware?, I stated that Delaware law minimizes directors’ responsibility for decisions that have made. This post explains my point by comparing Delaware and California law regarding directors’ fiduciary obligations. (more…)
Earlier today I answered the following Quora question: What does the Chairman of the Board do?
Here is the answer that I provided:
The Chairman of the Board does what the Bylaws and the Board of Directors say s/he will do. Here is some typical Bylaws language: (more…)
In How Can I Move My Corporation to Another State?, I explained that there are three ways to move a corporation from one state to another. This post describes one of those ways: Reincorporation.
Three Ways to Move among States
That earlier post described those three ways to move a corporation to another state as follows: (more…)
“Shareholder” and “stockholder” are synonyms. This post explains how most states came to use the former term in their laws, while Delaware consistently has used the latter.
Before Delaware had a general corporation law, Delaware’s legislature created each corporation. The Constitution of Delaware – 1831 so provided in Article II, Section 17, but made no mention of stockholders (or shareholders).
Following a constitutional amendment, Delaware adopted its first general corporation law in 1875. (See Laws of the State of Delaware, Vol. 15 – Part 1, beginning at page 181.) That law includes a few references to “stockholder”, none to “shareholder”. (more…)
Frequently, the first service I provide to a client is to form a new legal entity (corporation or limited liability company). And frequently, once that entity is formed, the client’s first question is “What are my entity’s compliance obligations?”
This post provides a high-level answer to that question.
This post discusses when a California corporation must hold a shareholder vote.
It is based on an Avvo answer that I wrote recently. Please see Beside elections, are there corporate decisions that REQUIRE the vote of the shareholders?
California Shareholder Vote Requirements
A corporation must hold a shareholder vote to approve the following actions. Please note that this may not be a comprehensive list. Reference links are to the relevant California Corporations Code sections. (more…)
This post discusses the role of the incorporator when a corporation is formed. I decided to write this after answering a Quora question. Please see When a third party files Articles of Incorporation as the incorporator for a company, what are the necessary steps to ensure that the company is legally released to the directors?
The incorporator signs the corporation’s Articles or Certificate of Incorporation. When I form a corporation for a client, the client typically takes that role.
This post answers a question I have heard many times: How can a foreigner open a bank account in the U.S.?
Foreign entrepreneurs often ask this question. Because of the large market here, they want to start a business in the U.S. And because they want to do so effectively, they usually need a U.S. bank account. (more…)
Dana Shultz recently retired from the practice of law. As a lawyer, Dana dispensed as much business advice as legal advice. Accordingly, although he no longer is practicing law, Dana occasionally provides business consulting services to owners of small businesses.
If you need legal representation, Dana provides referrals to experienced business lawyers.
The remainder of this page is being retained online for archival purposes.
This page about fees for the services that Dana Shultz provides is an Advertisement under Rule of Professional Conduct 1-400, Standard 5 (now subject to Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018).
Fixed fees typically apply to entity formation-related services. Please see:
- How Much Does It Cost to Incorporate?
- How Much Does It Cost to Obtain an EIN? (if the company’s principal officer does not have a social security number, thus cannot obtain an Employer Identification Number quickly online)
This post is the result of my research on the duties of a director of a Delaware corporation that is located, and doing much of its business, in California. Specifically, I wanted to confirm that California law governed those duties, because it is a so-called quasi-California corporation.
Quasi-California Corporation Criteria
Corporations Code Section 2115 addresses non-California corporations for which (a) most voting shares are held by shareholders in California and (b) the average of the following three factors exceeds 50%.
- The percentage of its property that is located in California.
- The percentage of its payroll that is paid in California.
- The percentage of its sales that take place in California.
If you form a corporation, the Postal Service soon will inundate you with official-looking forms from companies offering to create or file corporate documents on your behalf. Earlier this week I rescued a client from one of these unnecessary companies, Compliance Services.
A successful exit by acquisition is one of the great thrills of entrepreneurship. That exit does not come easily, however. This post discusses, by category, the most important documents and information that you will need to provide during the acquirer’s due diligence process.
- Articles of incorporation and bylaws, as amended
- Minutes of board and shareholder meetings and actions
- Share transfer ledger, including name and address of each shareholder
- Agreements pertaining to shares and shareholders’ rights (buy-sell, voting rights, etc.)
- List of holders of option or warrants and all applicable agreements
Last year, I wrote (Beware Your Alter Ego) about how entrepreneurs sometimes lose the protection against personal liability supposedly offered by their corporations (or, similarly, their LLCs). This post – adapted from Counseling California Corporations by Continuing Education of the Bar (CEB) – provides detailed recommendations about what should be done to avoid “alter ego” problems.
Two recently-acquired clients had similar situations that brought up the importance of complying with legal requirements.
Each company is a multi-founder startup where one founder became non-productive, and even somewhat detrimental to the business. The other founders wanted to move the problem founder off to the side, where he could cause no more trouble, in a manner that would be fair to everyone involved.
Unfortunately, each company had failed to comply with some of the most basic legal requirements: Holding annual shareholder meetings to elect directors, annual board of director meetings to appoint officers, etc. As a result, in each instance we had to spend time and money taking corporate actions, and recording those actions appropriately in meeting minutes, before the real problem could be solved.
Sometimes, in an effort to reduce legal fees, clients conduct corporate annual meetings, and prepare minutes, on their own. Regrettably, if they do not know what they are doing, they can make a mess. Here is a quick overview of how to do things right.
Both California (Corporations Code Section 600(b)) and Delaware (General Corporation Law Section 211(b)) require that every corporation hold an annual meeting of its shareholders to elect directors for the coming year. (In the case of a Delaware corporation, however, the directors may be elected by written consent without calling a meeting.) Any other proper business may be transacted at the shareholder meeting.