The High-touch Legal Services® Blog…for Startups!

© 2009-2021 Dana H. Shultz

Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.

Logo of the Internal Revenue Service, which issues EIN (Employer Identification Number)Although Dana Shultz has retired as a lawyer, he still obtains EINs for international clients because such activity does not constitute the practice of law.

When a foreign company wants to start up in the U.S., it usually creates a separate corporation here so U.S. obligations and liabilities will not flow back to the overseas parent. The U.S. corporation needs a federal Employer Identification Number (EIN) – at the very least, to open a bank account, even if the corporation will have no employees in the U.S. In a recent post on its website (Responsible Parties and Nominees), the Internal Revenue Service recently made it more difficult for foreign companies to obtain an EIN.

To obtain an EIN, the corporation typically provides the social security number (SSN) of a “principal officer”. In the past, the IRS was rather vague as to what this term meant, stating that it referred to a “president, vice president, or other principal officer”. So, for example, if the corporation’s overseas president did not have an SSN because s/he never worked in the U.S., the corporation could temporarily appoint as vice president an individual who has an SSN, which the corporation then would use to apply for an EIN.

(more…)

How to Kill Your Company when That’s the Only Choice

Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of a California entity’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.

LLC section references below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The essence of the dissolution process for a California corporation is as follows: (more…)

Foreign Qualification Can Be Easy, or It Can Be Difficult

geauxBIZ screen shot for post about foreign qualification

Foreign qualification is how a given state permits an entity, such as a corporation or limited liability company, from elsewhere to do business in that state. In this context, “foreign” can mean from another state or from a different country.

Recently, one of my international clients formed a corporation in Delaware. We have been qualifying that corporation to do business in about a dozen other states. This post explains how easy, or how difficult, various states makes the foreign qualification process.

(more…)

What is Dissociation?

"Goodbye Friends" sign for post about dissociation from a partnership or LLC

This post explains what dissociation is. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.

Definition of Dissociation

Dissociation is the process by which one:

  • Stops being a member of a limited liability company (LLC); or
  • Stops being a partner in a partnership.

Alternatively, this process sometimes is called withdrawal.

(more…)

* EINs for Foreign Clients *

Internal Revenue Service logo, for post about how Dana Shultz obtains EINs for foreign clients

Although Dana Shultz has retired as a lawyer, he still obtains EINs for international clients because such activity does not constitute the practice of law.

This page about EINs for foreign clients 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).

During the past decade or so, I have received many inquiries from foreign owners of new companies in the U.S. They want to know how much it will cost to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. (more…)

May an LLC Manager Be a Minor?

Hand drawn workflow diagram representing an LLC manager whi is a minor

This post discusses whether an LLC manager (the person who manages a limited liability company) may be a minor.

In May a Minor Form an LLC?, I discussed whether the organizer of an LLC may be a minor. In that post, I noted that only five states – Colorado, Illinois, Minnesota, Oregon and Texas – prohibit a minor from organizing an LLC. So, those are the states to which I paid the closest attention in writing this post. (more…)

What is a Managing Member?

Logo for Quora, where Dana Shultz wrote about the meaning of the term " managing member "The post is about the definition of the term ” managing member “. I am writing this because of a Quora question that I answered a short while ago. Please see What is the difference between a managing member and a member in an LLC?

I have not confirmed whether all of the following background information applies equally to all states. However, I know that it applies to enough states that I will present the following as applying throughout the U.S., generally. (more…)

If You Incorporate in the U.S., You Can’t Remain Anonymous

Graphic: no anonymous usersRecently, 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…)

What Does “Amended and Restated” Mean?

Alaska Air Amended and Restated Certificate of Incorporation“Amended and restated” is a term that lawyers use a lot. (A Google search produces approximately 792,000 results.) This post discusses that term’s meaning and why lawyers use it. This is part of Dana Shultz’s Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminology.

“Amended and restated” can apply to virtually any type of legal document. Examples:

  • Certificate/articles of incorporation;
  • Corporate bylaws;
  • Limited liability company operating agreement;
  • Any other type of agreement;
  • etc.

(more…)

How to Form an LLC

Logo for Quora, where Dana Shultz answered a question about how to form an LLCI am writing this post about how to form an LLC (limited liability company) because of a question that I answered on Quora. Please see What are the basic requirements for forming of a LLC in US?

The following is an overview of the steps required to form an LLC properly in the U.S.: (more…)

Is an Operating Agreement Required for an LLC?

First page of OA for post that answers: Is an operating agreement required for an LLC?I have written many times about limited liability company operating agreements. This post answers the following question: Is an operating agreement required?

As is the case for many issues pertaining to limited liability companies, the answer varies from state to state. To answer this question, we need to examine the relevant statutes for each state.

Most States, Operating Agreement Not Required

Most states do not require that an LLC have an operating agreement. For example: (more…)

Do We Need One EIN or Two?

Internal Revenue Service logo, for post about whether a business needs one EIN or twoThis post is the result of an email exchange that I had with a foreign entrepreneur. He raised a question that I had not previously considered: When should a business have one EIN (Employer Identification Number), and when should it have two? (more…)

Units are to LLCs as Shares are to Corporations

Logo for Quora, where Dana Shultz answered a question about LLC unitsI am writing this post about limited liability company (LLC) units because of a question that I answered on Quora. Please see Why would an operating agreement for an LLC have a Schedule A and also a quantity of Class A interests?

LLC Membership Interests: Percentages

We can specify LLC membership interests in either of two ways. (more…)

You Can’t Just Stop Being a Shareholder

Logo for Quora, where Dana Shultz answered a question about how you can't just stop being a shareholderThis post explains why, in the U.S., one can’t just stop being a shareholder. I decided to write it after addressing this issue on Quora. Please see Corporate Law: What is the best method to abandon stock in a private company?

Ways to Stop Being a Shareholder

Corporate law does not permit a shareholder to unilaterally dispose of his or her shares. As a result: (more…)

What Are My Entity’s Compliance Obligations?

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.

(If you form a corporation in California, you can find additional information in the Postincorporation Matters document on the Downloads page – image above.) (more…)

$800 Franchise Tax is Due Even if LLC is Canceled

Logo for Quora, where Dana Shulltz answered a question about California's $800 franchise taxThis post about California’s $800 franchise tax is based on my recent answer to a Quora question.

Q.: In California, can someone shut down an LLC before the $800 franchise tax is due on the 15th day of the 4th month?

A.: One can cancel a California limited liability company before the 15th day of the fourth month. However, such cancellation will not eliminate the obligation to pay the $800 annual franchise tax. (more…)

May a Minor Be a Partner?

Logo for Avvo, where Dana Shultz answered a question about: May a minor be a partner in a partnership?This post answers the following question: May a minor be a partner (in a partnership legal entity)? It is based on my answer to an Avvo question. Please see In California, can a minor be a partner in a General Partnership?

As initially written, this answer applied solely to California. However, an update, below, discusses applicability to other states. (more…)

Are Dissolution and Cancellation the Same?

Logo for Avvo, where Dana Shultz answered a question about dissolution and cancellation of a limited liability company (LLC).This post is about dissolution and cancellation of limited liability companies (LLCs) in California.

It is based on an Avvo question that I answered. Please see What is the difference between a canceling or dissolving LLC? (more…)

CA-RULLCA Receives Corrections Two Years Later

Photo of CA Corporations Code, which contains CA-RULLCA statutesIn RULLCA Brings New LLC Laws to California in 2014 , I explained how California’s version of the Revised Uniform Limited Liability Company Act (“RULLCA” or “CA-RULLCA” – Corporations Code Sections 17701.01 – 17713.13 ) was to take effect January 1, 2014. This post describes changes to CA-RULLCA that took effect on January 1, 2016.

Most of the changes were minor clean-up of the sort that one expects when major new legislation is adopted. However, some of the changes are noteworthy. (more…)

Why Aren’t All LLCs Manager-managed?

Logo for Quora, where Dana Shultz answered a question about manager-managed LLCsThis post about manager-managed limited liability companies is based on a Quora question  that I answered. Please see Why are not all LLCs manager-managed?

In this post I will refer to California law. I expect that the law of many, if not all, other states is similar.

Default is Member-managed…

The default is that a limited liability company is member-managed. Corporations Code Section 17704.07(a) states: “A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.” (more…)

Yes, a Stranger Can Cancel Your LLC!

Logo for Quora, where Dana Shultz answered a question about how a stranger can cancel your LLC or corporationThis post discusses how (amazingly!) an unauthorized stranger can cancel your LLC (limited liability company) or corporation. It is based on a Quora question that I answered. See What prevents someone from filing a restated certificate of incorporation for a Delaware corporation in which they are not authorized to do so?

Unfortunately, the ease with which entity-formation documents can be filed in the U.S. – while facilitating business startups – does allow unauthorized filing of such documents. This means that, whether accidentally or intentionally, a stranger can cancel your LLC (or corporation). (more…)

“Work Made for Hire” Can Convert a Contractor to an Employee

California Labor Code, whcih can convert a contractor to an employeeIn California, a “work made for hire” (WMFH) provision in a contract can convert a contractor to an employee. This post describes the statutory basis for this little-known area of the  law.

Before providing details, I will note that the (likely unwanted) ability to convert a contractor to an employee will arise only under narrowly-defined circumstances.

  • The independent contractor must be an individual rather than a legal entity (a corporation or limited liability company).
  • The relevant contract must expressly specify WMFH treatment for the contractor’s work product.
  • The contractual relationship must be governed by California law. (I don’t know whether any other states have similar laws.)

(more…)

What is an Operating Agreement?

The first page of an operating agreementI have used the term “operating agreement” in quite a few of this blog’s posts. However none of those posts explains in detail what a limited liability company (LLC) operating agreement must contain. This post provides that information.

The required contents of an operating agreement depend on the state in which the LLC is formed.

Operating Agreement – California

In California, where I practice, the definition of an operating agreement is set forth in Corporations Code Section 17701.02(s). (more…)

May a Minor Form an LLC?

Photo of cheering children, symbolizing "May a minor form an LLC?This post – asking “May a minor form an LLC?” – is a companion to May a Minor Form a Corporation?

I have been wanting to write this post for more than two years, ever  since writing the corporation post referenced above. However, as  explained further below, I felt uncomfortable doing so because I was  somewhat unsure of the answer. (more…)

How to Dissolve a Delaware Corporation or LLC

Seal of the Delaware Division of Corporations, symbolizing this post by Dana Shultz about how to dissolve a Delaware corporation or LLCThis post discusses how to dissolve a Delaware corporation or LLC (limited liability company) – i.e., how to terminate the entity’s existence.

For information about dissolving California entities, see How to Kill Your Company when that’s the Only Choice. (more…)

How Much Does It Cost to Obtain an EIN?

Internal Revenue Service logo, symbolizing the cost to obtain an EINThis post about the cost to obtain an EIN (Employer Identification Number) in the United States 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).

Recently I have received many inquiries from foreign owners of new companies in the U.S. They want to know how much it will cost to obtain an EIN from the Internal Revenue Service. This post provides that information. (more…)

Under RULLCA Operating Agreements Have Limits

California State Flag, symbolizing this post about RULLCA operating agreementsAt the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.

RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons. (more…)

LLCs: Why an Operating Agreement is Important

Logo for Quora, where Dana Shultz discussed why an operating agreement is importantThis post discusses why an operating agreement is important for every limited liability company (LLC). It expands upon an answer I provided on Quora several months ago. (See In simple terms, why are operating agreements important?)

An operating agreement is an agreement among the members of an LLC. It addresses relations among the members and how the LLC will conduct its affairs. (more…)

Entity Conversion Can Be Easy – If You Know What You Are Doing

Logo for Quora, where Dana Shultz answered a question about entity conversionThis post about entity conversion is an expanded version of an answer that I provided on Quora yesterday. (How do I convert a Delaware LLC to a California LLC?)

In my experience, entity conversion typically occurs for either, or both, of the following reasons.

  1. The need to convert a limited liability company (LLC) to a corporation to accept an investment from an institutional investor, such as a venture capitalist.
  2. The need to move an entity from one state to another. This typically occurs because the founder relocates, or because an investor prefers to invest in a Delaware corporation.

(more…)

How Do We Issue LLC Membership Interests?

Logo for Quora where Dana Shultz answered a question about LLC membership interestsWhen one forms a limited liability company (LLC) without a lawyer, there is a high likelihood that LLC membership interests will not be issued properly. This post describes how to issue LLC membership interests. It is adapted from a Quora question about LLC membership vesting that I answered.

Properly-Issued LLC Membership Interests

If LLC membership interests are issued properly, one would expect to see several things. (more…)

RULLCA Brings New LLC Laws to California in 2014

Logo of the California Secretary of State, symbolizing RULLCA (the California Revised Uniform Limited Company Act)RULLCA is an abbreviation for the California Revised Uniform Limited Liability Company Act. That Act will bring new LLC laws to the state starting January 1, 2014.

RULLCA – Up to Date and in the Mainstream

RULLCA is intended to reflect changes in LLC law during the past 20 years. Also, it will make California’s LLC law more similar to LLC law in other states.

Perhaps most interesting, the new law applies automatically to all California LLCs in existence as of the effective date. It will apply to all out-of-state LLCs that are registered in California, as of that date, as well. No new documents need be filed with the Secretary of State. The new law has neither opt-in nor opt-out procedures.

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Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership

Label saying "100% free", symbolizing buying an equity interest by future services rather than cashFuture 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.

(more…)

Can I Have a Corporation with Multiple Businesses?

Photo of a man juggling, symbolizing a corporation with multiple businessesThis 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?

(more…)

How Do We Add a New LLC Member?

Photo of signing a contract, symbolizing amending an operating agreement to add a new LLC memberRecently, 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.

(more…)

Can I Sell a Partnership Interest in California?

Logo for Avvo, where Dana Shultz answered a question about whether one can sell a partnership interestI 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.

(more…)

How Should I Use a Fictitious Business Name?

Logo for Quora, the source for a question about fictitious business names

This post is adapted from my answer to a Quora question about use of a fictitious business name (FBN): Q. Must an LLC with a fictitious business name display the LLC name on its website?

A. In my opinion, an entity’s proper name and complete identification should be provided in every agreement. Agreements include website terms of service. Example showing how to include both the entity name and the FBN:

[Company Name], LLC, a California limited liability company doing business as [Fictitious Business Name], with a place of business at [address]

(more…)

Do LLC Officers Have a Fiduciary Duty?

Picture of a meerkat on duty, symbolizing whether LLC officers have fiduciary duties

Officers of a corporation have a fiduciary duty to both the corporation and its shareholders. (See California Officers Need to Be More Careful than Directors.) I recently had to consider, for a limited liability company in California, whether LLC officers have a similar duty.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

I was preparing the operating agreement for a client’s LLC. The client was to be the sole member (equity owner) and manager. (more…)

May a Minor Form a Corporation?

Logo for Quora, where Dana Shultz addressed "May a minor form a corporation?"

This post asking may a minor form a corporation is based on my answer to a Quora question. Please see Can a little kid register a company in United States?

Answer: States differ as to whether they let a minor form a corporation (i.e., whether a minor can act as an incorporator).

For example, Michigan, according to a 1981 Attorney General opinion, does not let a minor form a corporation. A footnote in that opinion lists 31 other jurisdictions whose incorporation statutes (as of that time) variously require that incorporators either be at least 18 years old or have the capacity to contract. As of the date of that opinion, those jurisdiction were:

(more…)

Is there Any Reason to Form a General Partnership?

Logo for Quora, where Dana Shultz answered a question about whether to form a general partnership

A short while ago, I answered a Quora question about whether and why a startup might want to form a general partnership. The question and my answer are paraphrased, with emphasis added, below.

Q. What are some of the reasons a business might organize itself as a general partnership? Considering all the liability risk that general partners might potentially face, why not organize as a limited liability company? Was there an era when the general partnership was an attractive form and, if so, why?

(more…)

Printing Legends on Share Certificates – Why and How

Sample Share Certificate to illustrate printing legends on share certificates

Sample Share Certificate with Legend from Attorneys Corporation Service, Inc.

Last year, I wrote about the importance of a corporation’s placing appropriate legends on share certificates (Why Do We Need a Corporate Records Book?) and likewise for limited liability company membership certificates (Should My LLC Issue Membership Certificates?). This post provides more details about why legends are required and how to print legends on share certificates. (Although I am using corporation-specific terminology, the considerations are similar for LLCs.)

When including legends on share certificates for clients, one of the most important states that the shares have not been registered under state or federal securities laws.  (I have the company that provides the certificates include it when the certificates initially are printed.) The reason: To put the shareholder on notice that, under applicable securities laws, the shares cannot be transferred unless certain circumstances are satisfied. Here is an example:

(more…)

LLC Accounting – Allocations vs. Distributions

Accountant's green and white ledger page, symbolixing LLC accounting practices

An entrepreneur who was trying to prepare a limited liability company (LLC) Operating Agreement on his own (apparently using someone else’s as a template) was puzzled by the concept of “sharing losses”. I could tell right away that he was not familiar with two fundamental concepts of LLC accounting: Allocations vs. distributions.

Before going further, I need to make two disclaimers:

  1. This post is not about taxes.
  2. The following discussion is extremely simple, addressing only the most basic considerations. One of the great things about LLCs is that the members can agree to make allocations and distributions in any way they desire to meet their business needs. As a result, LLC accounting can be far more complex than the following might suggest.

(more…)

Which Financial Information Must an LLC Provide to its Members?

Photo of a portion of a balance sheet, symbolizing financial information that an LLC must provide to its members

Several months ago, I wrote “Which Financial Information Must a Corporation Provide to its Shareholders? “ This post – prompted by a client’s question – discusses the financial information that a California limited liability company must provide to its members. It also explains that such information cannot be waived by any member.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014). (more…)

Who Can Sign a Contract for an LLC?

Photo of hand holding a pen, symbolizing who can sign a contract

Several months ago, I answered the question Who Can Sign Contracts for a Corporation? This post addresses who can sign a contract for a limited liability company (LLC).

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The LLC’s Articles of Organization may address who can sign a contract, but this rarely occurs. The subject is more likely to be addressed in the Operating Agreement.

(more…)

How Can I Revive My Suspended / Forfeited Entity?

Photo of man giving CPR to another man symbolizing post about how one can revive a suspended or forfeited corporation or LLC in California

Yesterday I wrote about how the status of a corporation or limited liability company (LLC) in California might be suspended or forfeited. Please see Why was My Corporation / LLC Suspended or Forfeited? This post explains how one may revive a suspended of forfeited entity.

Section references below reflect California’s new LLC law that took effect on January 1, 2014. See RULLCA Brings New LLC Laws to California in 2014.

The steps required to revive the entity depend on whether it was suspended or forfeited by the Secretary of State, by the Franchise Tax Board, or by both the SoS and the FTB: (more…)

Why was My Corporation / LLC Suspended or Forfeited?

California Secretary of State logo

If you do a business entity search using the California Secretary of State database, you might find that the status of a corporation or limited liability company (LLC) is “suspended” or “forfeited“. This post explains what those terms mean.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Corporations and LLCs have many “powers, rights and privileges” under California law. Those powers, rights and privileges can be taken away if the entity: (more…)

Are LLC Memberships Securities that Must be Registered?

California Department of Corporations logo

The following are (somewhat edited) an Avvo question and my answer: Q. Is it necessary to file a Form D securities exemption when forming a California limited liability company (LLC) and only issuing an interest to the forming members?

A. The short answer is “no“. The somewhat longer answer is as follows: (more…)

Legal Services

Statue of Justice representing legal services

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 description of Dana Shultz’s legal services 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).

Brief summary:  I help clients to

  • form their businesses,
  • do their deals, and
  • keep out of trouble.

Dana Shultz provides the essential legal services that startup and early-stage companies in the San Francisco (California) Bay Area typically need. You may read many Client Testimonials about Dana’s services. (more…)

Forming an LLC Online: You Get What You Pay For

Mannequins with "sale" signs symbolizing forming an LLC online

Update (November 17, 2010): I have decided to start identifying by name providers of corporate and LLC online formation services who, in my opinion, have delivered inadequate service to my clients. (The clients used those providers before retaining me.) The inadequate provider referenced, below, in this post is Rocket Lawyer, which has been added to the Hall of Shame page.

Update (April 27, 2011): I had a cordial conversation this afternoon with Rocket Lawyer’s VP of Sales & Business Development. He acknowledged that, last year, Rocket Lawyer was using a filing service (filing operations are outsourced) that did not meet the company’s expectations. He reported that the current filing service is performing at a much higher level and that Rocket Lawyer is paying closer attention to ongoing support of its customers.

* * *

Almost a year ago, I suggested (in Can I form an LLC without a lawyer?) that entrepreneurs seeking to save money when forming a limited liability company would be better off buying a book from Nolo than using an online LLC formation service. I now believe that more than ever.

(more…)

Can I Assign My LLC Membership?

For Sale By Owner Sign

Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

The applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:

Should We Issue LLC Membership Certificates?

Picture of LLC membership certificatesA friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.

The Section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Here are the points that I made in my response. (more…)

Why (not) form an S corporation?

Some companies are formed as S corporations to avoid “double taxation”: The corporation does not pay federal income tax. Instead, income flows through to the shareholders, who pay income taxes (as in a partnership).

This potential tax benefit is available, however, only if stringent requirements are met. Most notably:

  • There must not be more than 100 shareholders.
  • Permissible shareholders are limited to individuals (other than non-resident aliens), estates, tax-exempt organizations, and certain qualified trusts.
  • Only one class of stock is permitted.

Failure to meet a requirement, even if inadvertent, results in loss of S corporation status.

Entrepreneurs should think carefully about whether S corporation status is appropriate for the long term. Here’s why.

(more…)

IP Indemnification: Who Will Be There to Satisfy the Obligation?

Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?

A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.

What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.

Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.

Lesson: An indemnification obligation is only as valuable as the party takes it on.

Photo credit: Anna H-G via stock.xchng

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

A Member can Withdraw from an LLC, Despite the Operating Agreement

Photo of an exit sign, symbolizing the right of a member to withdraw from an LLCFrom time to time, I am asked how a member of a limited liability company (LLC) can stop being a member. In legal terms, this is referred to as a member wishing to withdraw from an LLC.

Section references below have been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Under this new law, the term “withdraw from a limited liability company” was changed to “dissociate as a member” or “withdraw as a member”.

A well-written Operating Agreement will address this question directly. It will specify the circumstances under which members may withdraw from an LLC, and the consequences of withdrawal.

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Can I assign a DBA to my new LLC?

Articles of Organization for an LLC, to which the founder wished to assign a DBAThis post is based on an answer that I provided on Avvo. The user wanted to know whether he could assign a fictitious business name (FBN) – or, colloquially, assign a DBA, short for “doing business as” – from his sole-proprietor business to a limited liability company (LLC) that he was about to form.

He probably would assign all of the sole-proprietor assets (and liabilities) to the new LLC. However, there are special considerations if one wants to assign a DBA / FBN. (more…)

California doesn’t *always* prohibit non-compete provisions

Photo pf a bike race symbolizing this blog post about non-compete provisionsCalifornia is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo. (more…)

Can we kick one of the members out of our LLC?

I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.

The section reference below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (more…)

Contracts with Minors can Lead to Major Problems

Photo of a child pringing "A", symbolizing contracts with minorsI recently was consulted concerning contracts with minors. In the first case, a teenager wanted to start a business. In the second, a father wanted his child to become a member of his limited liability company (LLC).

Here is an overview of California law concerning contracts with minors.

A minor is an individual who is under 18 years of age. An adult is an individual who is 18 years of age or older. Family Code Sections 6500-6501

Subject to certain exceptions (some of which are far-reaching, such as those precluding contracts related to real property or personal property not in the minor’s immediate possession or control), minors may enter into agreements. Family Code Sections 6700-6701

However, the minor generally may disaffirm (reject) the agreement before reaching majority, or during a reasonable time thereafter. Family Code Sections 6710-6713

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I Fell into the “Unintended Partnership” Trap – How do I Climb Out?

Earlier this year, I wrote about how business founders who agree to split earnings from their venture can find that they have unintentionally created a general partnership (Beware the Unintended Partnership). The problem: Any partner can subject all of the partners to unlimited personal liability for partnership obligations!

This post provides an overview of how an unintended, or otherwise undesirable, California general partnership can be terminated.

Half or more of the partners can decide to wind up the business of the partnership and dissolve it (California Corporations Code Section 16801(1)).

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Why (not) form an LLC in Nevada (or Wyoming)?

Nevada state seal for post about forming an LLC in NevadaQuestions about forming a limited liability company (LLC) in Nevada (or, increasingly, Wyoming) come up so frequently that I feel compelled to write about this topic.

There is something approaching the status of urban legend about the wisdom of forming an LLC in Nevada or Wyoming because they do not have an income tax. The problem is that lack of an income tax will benefit you only to the extent that you do business in in that state! (more…)

Ten Tips for Success in the U.S.

Having helped more than a dozen foreign companies set up operations here during the past few years, I am pleased to offer “Ten Tips for Success in the U.S.” on the Downloads page – just Sign Up for Free Downloads using the drop-down list in the sidebar.

Here are the titles of the ten tips, which are discussed in greater detail in the document:

  1. Work with complementary businesses that are already established here
  2. Manage overseas personnel on the principle “trust but verify”
  3. Form your corporation or limited liability company properly
  4. Be ready for a legal system that is different from the one back home
  5. Identify and protect intellectual property (IP) that is used here
  6. Develop detailed employee and independent contractor agreements
  7. Choose an accountant with international tax experience
  8. Be prepared to obtain a federal employer identification number
  9. Conduct due diligence on potential investors
  10. Agree on business terms before you prepare a written agreement

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Resolving Small-business Disputes: The 50-50 Deadlock

On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.

A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!

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Can I Form an LLC without a Lawyer?

Logo of the California Secretary of State, symbolizing filing Articles of Organization for an LLC without a lawyerRecently, several start-up entrepreneurs have asked me whether they can form a limited liability company – LLC – without a lawyer available to help. The following answer reflects practices in California.

Filing Articles of Organization for an LLC without a Lawyer is Easy

The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required. (Unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable.)

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Should I form an LLC or a corporation?

Drawing of question marks, illustrating the question whether to form an llc or a corporationFairly frequently, an individual will ask whether to should form an LLC (limited liability company) or a corporation for a business. Here are the factors that I typically find are most important.

First, we can pretty much dismiss basic income tax considerations. By default, an LLC is not taxed as a separate entity but a corporation is taxed separately. However, there are ways to override the default tax treatments. An LLC may elect to be taxed as a separate entity by filing IRS Form 8832. Subject to certain limitations, a corporation can avoid separate taxation (i.e., can become an “S corporation”) by filing IRS Form 2553. (Please note, however, that once a company is in business, certain types of transactions can have different consequences for LLCs than for corporations. Accordingly, every company should consult with a tax advisor both up-front and on an ongoing basis.)

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LLC Formation in Record Time

Last week, I formed a new limited liability company (LLC) for a client. The California Secretary of State turned the Form LLC-1 around in only two days rather than the standard one week! (24-hour turnaround is available for an additional fee of $350, which is hardly worth paying under these circumstances.)

Has the recession reduced the number of new businesses being formed? Datasearch, the filing service that I use in Sacramento, did not know.

Follow-up: Eighteen months later, turnaround times have deteriorated terribly – see Forming a Corporation in California? Get Ready to Wait.

Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Name that Business – Avoiding Rejection by the Secretary of State

California Secretary of State logo

California law requires the Secretary of State to determine that a proposed business entity name (for a corporation, limited liability company, or limited partnership) is not the same as or too similar to a reserved name or to the name of an existing business entity (of the same entity type) and is not misleading to the public.

The Secretary of State’s office adopted regulations on May 14, 2009 that provide guidelines to assist the public in selecting a business entity name prior to reserving the name or filing documents. These regulations are helpful because The Secretary of State returns documents unfiled if proposed business entity names are unavailable under the statutory standards. There now are specific guidelines for selecting business entity names prior to filing documents with the Secretary of State and, thus, more certainty that proposed business entity names submitted for reservation and/or filing will be acceptable.

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Buy-sell Agreement Objectives and Issues

Graphic showing :buy" and "sell" signs for this post about buy-sell agreement objectives and issuesThe founder of a company asked me whether he needs a buy-sell agreement. Having granted shares to key personnel, he wanted to make sure that a departure from the team did not jeopardize the company’s operations.

A buy-sell agreement can apply to any type of closely-held business (one in which ownership and voting control are concentrated in the hands of a few investors). I will refer, below, to shareholders of a corporation. However, most of the following information applies equally to members of a limited liability company and partners in a partnership. (more…)

Who Is Bound by a Pre-incorporation Contract?

Logo for Avvo, where Dana Shultz answered a pre-incorporation contract questionThis post about entering into a pre-incorporation contract is based on a question I answered on Avvo. See Can I legally speak as my company in things like terms & conditions if I have not officially registered the company yet?

The term “pre-incorporation contract” properly should apply only to corporations, because that is the only type of business entity that is incorporated. Other types of business entities, such as limited liability companies (LLCs), are formed, rather than incorporated. However, as is discussed below, a pre-formation contract (in California, at least) is treated like a pre-incorporation contract. See 02 Development, LLC v. 607 South Park, LLC . (more…)

Can I Walk Away from My Suspended LLC?

Photo of people walking, symbolizing walking away from a suspended LLCThis post addresses a question that arises frequently from founders of California limited liability companies that have been suspended: Can I walk away from my suspended LLC?

A suspended LLC is the result of a founder who has neglected to file Statements of Information with the Secretary of State, or file returns with or pay amounts due to the Franchise Tax Board, or both of the foregoing. Please see Why was My Corporation / LLC Suspended or Forfeited? (more…)

Equity-Based Crowd Funding: Pro and Con

Logo for WSJ.com, which published an article about equity-based crowd funding

Congress is considering legislation by which the Securities and Exchange Commission would lift limits on private equity investments, letting companies sell equity interests to investors online (“crowd funding”). Today the Wall Street Journal published a debate on this topic (Should Equity-Based Crowd Funding Be Legal?).

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Foreign Companies: Form a Corporation when You Come to the U.S.

United States flag, symbolic of the desire to form a corporation when a foreign business comes to the US

I have seen a recent increase in the number of foreign companies inquiring about doing business in the U.S. Their most frequent question: Should they just open a branch office here, or should they form a corporation or other legal entity? They almost always form a corporation. Here’s why: (more…)

Entrepreneurs Take Care: Raiding Employee Withholdings May Send You to Jail

Last month, I posted Your Business is Dead ? Are You Liable for its Obligations?, which stated that, generally, once a business is dissolved, the owners will be personally liable for the business’s obligations only to the extent that the owners received distributions at the time of dissolution.

A significant exception to the foregoing rule, however, concerns company personnel who are responsible for making, but fail to make, withholding payments to the Internal Revenue Service.

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Your Business is Dead – Are You Liable for its Obligations?

Last month, I wrote about how to terminate a company?s existence by dissolution (How to Kill Your Company when that’s the Only Choice). Since then, people have asked me what their personal responsibility is under California law if the corporation or LLC had outstanding obligations at the time it was dissolved.

The LLC section reference below has been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Assuming that you go through the dissolution process properly and that you do not have any “alter ego” problems, your personal liability generally will be limited to the amount of any distributions that you received at the time of dissolution.

This limitation is set forth in Corporations Code Section 2011 with respect to corporations and Section 17707.07(a)(1)(B) with respect to limited liability companies.

Dana H. Shultz, Attorney at Law  +1 510 547-0545  dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.

Teaming Agreements Teem with Issues

Separately, two clients asked me to review “teaming agreements” that had been presented to them. In each instance, the client was proposing to “team” with another company that had complementary expertise so they could carry out, jointly, a sophisticated technical project for a customer.

A brief aside: I prefer the term “teaming” to “partnering”, which often is used by technology companies to emphasize how closely they will work with one another. My concern about “partnering” is that the term suggests the companies may be partners rather than independent contractors, potentially sharing unlimited legal liability for their joint business activities. Fortunately, my clients avoided that trap.

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Beware Your Alter Ego

Banner of the California Courts, which have written opinions about the alter ego doctrineThis post discusses the alter ego doctrine, particularly as it is applied by courts in California.

The section references below has been updated to reflect California’s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).

Corporations have existed for centuries. One way they promote economic activity is by allowing stockholders to limit their personal liability for corporate debts to the amount of their individual investments in the corporation (“limited personal liability”). (more…)

Why (not) Incorporate in Delaware?

Delaware Division of Corporations logo symbolizing why one should (not) incorporate in Delaware

Let’s assume that you are starting a new business in the San Francisco Bay Area (where I live and work). And let’s assume, further, that you have decided to form a corporation to establish limited personal liability and to provide an easy way to accept investment capital, if and when appropriate. Should you incorporate in Delaware or in California?

Registered Agents Say Incorporate in Delaware

Registered agents cite a variety of reasons to incorporate in Delaware. Those reasons tend to fall into two categories: (more…)

Researching the Opposing Party: Forewarned is Forearmed

When I prepare to negotiate an agreement for a client, I start by researching the other party so I can gain insights that might help me represent my client more effectively. The obvious starting point is the website for the other party, where I can quickly understand its business and see who its executives are. But I also look for legal information that typically is available only elsewhere.

Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.

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