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

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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…)

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…)

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…)

$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…)

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…)

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…)

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…)

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…)

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…)

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.

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Incorporation is for Corporations, not for LLCs

Logo for Quora, where Dana Shultz wrote an answer about the term "incorporation"

This post about incorporation discusses legal terminology. I have adapted it from a Quora answer that I wrote almost two years ago. Q. Why do you “incorporate” corporations but “form” LLCs? Why the differing terminology?

A. Corporations have existed for much longer than LLCs. “Incorporation” is the single word that denotes “forming a corporation”. The obvious tie between the words “corporation” and “incorporation” is why the latter applies only to corporations. (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…)

Single-Member LLCs – What’s the Deal?

Logo for Avvo, where Dana Shultz answered a question about single-member LLCs

From time to time, I receive question from entrepreneurs about alleged deficiencies in single-member LLCs (limited liability companies).  (As is discussed below, single-member LLCs are different from multi-member LLCs.) This post is adapted from a question about single-member LLCs that I answered on Avvo.

Single-Member LLCs Provide Limited Liability Protection

Q. What is a best way to include a relative-foreigner as LLC member in CA? I formed single-member LLC in CA. Unfortunately I found later that single-member LLCs do not provide usual limited liability protection. (more…)

You Can’t Use “Corp” in the Name of an LLC (in CA or NY)

Logo for Quora, symbolizing Dana Shultz's answer to a question about the name of an LLC

This post is based on a question about limited liability companies that I answered on Quora. (The answer focuses on NY, because that was the questioner’s state, and CA, because that is where I practice.) Q. Can I use the word “Corp” in the name of an LLC (for example, AcmeCorp LLC or WhateverCorp LLC)?

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).

A. No. NY LLC Law Section 204(e) states, inter alia, that the name of an LLC may not contain “corporation” or “incorporated” or any abbreviation or derivative thereof. This prohibition is not unique to NY. California Corporations Code Section 17701.08(e) has a similar prohibition for LLC names.

Check out all posts about LLCs.

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.

How Can I Have Reverse Vesting in an LLC?

Quora logo

I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.

Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement? (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.

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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…)

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…)

Forming an LLC: Figuring Out What’s Really Required

LinkedIn logo

Here (slightly edited) are a LinkedIn question and my answer (which no longer are available at LinkedIn because it Q&A feature was discontinued). Q. I need to get an operating agreement for my Nevada LLC startup. I plan on selling membership in the future. There are online services that do this for cheap, but I’m unsure about doing that. This is a bootstrapped startup, so I have very little/no cash to pay for an attorney at this point in time. Plus I haven’t been able to find a good referral to a NV business attorney.

A. I’m afraid that I can’t provide a useful direct answer to your question (I don’t know how to get something – especially something good – for nothing), but I can provide some warnings because I see several red flags popping up.

(more…)

Attention LLC Members: You Have the Right to Be Heard

Sample LLC Notice of Meeting of Members

I have written about annual meetings of corporations’ shareholders (Annual Meetings: The Basics). Although limited liability companies (LLCs) have no obligation to hold, and typically do not hold, annual meetings of their members, meetings of members can take place.

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).

For California LLCs,? meetings of members are governed by Corporations Code Section 17704.07.

(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:

Do I Need a Separate Corporation/LLC for My New Business?

Finger Pressing Start Button

Recently I have received questions from entrepreneurs who are starting a second line of business. They want to know whether the new business should be under the same legal entity – perhaps with a separate fictitious business name (FBN – or DBA for “doing business as”) – or under a separate corporation/LLC.

This is not really a legal issue: Either approach can work just fine. The differences between the two approaches are business-oriented.

(more…)

Can Personal Creditors Threaten My LLC?

I recently answered an Avvo question about whether personal financial problems would create trouble for the LLC that an individual was forming. The question and answer, substantially edited, are provided below.

Q. I am starting a new company. I wish to establish an LLC. I had a recent foreclosure and they are coming at me for 70k on a 3rd against the property. I also have a credit card judgment for 18k and 30k of other outstanding debt. Question is whether an LLC can protect me. I have investors placing 50-100k in this project and i cannot have any issues moving forward. [Emphasis added.] (more…)

Funding Your LLC: Avoiding Mistakes

I recently answered an Avvo question about capital contributions and loans to an LLC. The question and answer are reproduced, in somewhat edited form, below.

Q: I am the sole member of an LLC. What is the best way to make capital contributions? Can I do this in the form of a loan? (more…)

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…)

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.

(more…)

Can I compete with my own LLC?

I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.

Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?

(more…)

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…)

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…)

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…)

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.)

(more…)

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.

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…)

How to Redomesticate when Your State Won’t Permit It

Great Seal of the State of California for post about how to redomesticate an entity

In How Can I Move My Corporation to Another State?, I discussed redomestication, i.e., how to move a legal entity from one state to another. In this post, I explain how to redomesticate an entity when the existing state’s law prohibits redomestication.

California Corporation Cannot Redomesticate

About a year ago, the CEO of a California corporation contacted me. He was relocating to Pennsylvania, so it made sense to move his corporation there, too. Unfortunately, California does not permit its corporations, in contrast to limited liability companies (LLCs), to redomesticate. (Please see the CA Secretary of State’s Conversion Information page.)

(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 Are the Types of Partnerships?

Logo for Quora, where Dana Shultz wrote about the types of partnerships in the U.S.I am writing this post about types of partnerships because of a question that I answered on Quora. Please see Why would a group of people organize their business as a partnership?

in the U.S.,  there are different types of partnerships. (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…)

Can We Have a Corporate Incorporator?

Sample Articles of Corporation for blog post about the corporate incorporatorMost of us think about an individual being the party that forms a corporation. As an alternative, this post discusses the corporate incorporator, i.e., a corporation that forms another corporation. (For information about incorporators generally, please see What Does an Incorporator Do? )

To start, I wondered whether various states’ statutes permit a corporate incorporator. (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…)

Parent and Subsidiary – Who Owns What?

Logo for Quora, where Dana Shultz answered a question about parent and subsidiary ownershipI am writing this post about parent and subsidiary ownership because of a question that I answered recently on Quora and a similar question that a prospective client posed to me. (Please see Can an LLC allocate ownership to individuals on a per investment basis (vs at the LLC level)?)

I always have thought that parent and subsidiary ownership were straightforward. However, that apparently is not the case for everyone. I will use an example to explain this concept. (I will refer to corporations. This discussion can apply equally to other types of entities, such as limited liability companies.) (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…)

HTML Code Receives Copyright Protection

An example of simple HTML codeHTML (HyperText Markup Language) is the standard markup language that is used to create web pages. In a recent decision, the U.S. District Court for the Northern District of California determined that HTML code may receive copyright protection.

The case is Media.net Advertising FZ-LLC v. Netseer, Inc. Plaintiff Media.net alleged, among other causes of action, copyright infringement. (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…)

Should I Form Separate Legal Entities for Different Lines of Business?

Sign for a forked road, symbolizing separate legal entitiesThis post discusses whether one should form separate legal entities (corporations or limited liability companies) for different lines of business.

I am writing this post because I have seen this type of question online many times. The most recent occurrence was on Avvo. See Should I set up a subdivision or have a LLC or corporation own another LLC? (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…)

Trade Dress Protection for Look and Feel

Logo of Ingrid & isabel, plaintiff in a case about trade dress protection of website look and feelIn How Can I Protect the Look and Feel of My Website?, I explained that the “look and feel” of a website – or a smartphone – can be protected as trade dress or by a design patent.

This post examines a recent case that discusses the elements of trade dress protection in detail. That case is Ingrid & Isabel, LLC v. Baby Be Mine, LLC, decided by the United States District Court for the Northern District of California. (more…)

What is Successor Liability and Why Should I Care?

Logo for Quora, which was the inspiration for this post about successor liabilityThis post about successor liability is prompted by a question that I answered recently on Quora. (See Can I dissolve my corporation and transfer its website to my personal ownership?)

The following is oriented somewhat toward California law, but similar considerations likely apply in other states. (more…)

A DBA is not a Legal Entity

Logo for Avvo, where Dana Shultz answered a question, noting that a DBA is not a legal entityThis post is based on a question that I answered on Avvo. The question illustrates a common misunderstanding concerning DBAs. (DBA is an abbreviation for “doing business as” – i.e., in California terminology a fictitious business name or FBN.) The questioner did not realize that a DBA is not a legal entity!

Q. Can someone sue a DBA for breach of contract by the parent corporation? (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 Corporate Shares?

Share certificate, symbolizing how to issue corporate sharesSeveral 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…)

How Can I Move My Corporation to Another State?

Logo for Quora, where Dana Shultz answered a question about moving a corporation to another stateThis post addresses how one may move an existing corporation to another state. It is based on a question that I answered on Quora (What state is best to incorporate an S-corp if you plan on moving away?).

I find that for most entrepreneurs, it makes sense to incorporate in the state where the entrepreneur resides. As I wrote in In which State should My Startup Incorporate?

Incorporate in the state in which you are doing business, unless there is a good reason to do otherwise [in which case the other state chosen probably will be Delaware]. (more…)

When Is It OK to Incorporate Online?

Ads for "incorporate online"Many entrepreneurs need to control expenses – including legal fees. One way to do that is to incorporate online rather than work with a lawyer. Occasionally I am asked, “When is it OK to incorporate online?

My greatest concern when entrepreneurs incorporate online is that they have no way to know whether the process has been completed properly. This is particularly true with respect to issuing shares – a critical task.

In answering this question, I look for activities that increase the likelihood of a dispute or a lawsuit. I ask:

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…)

Section 25102 (f) – Securities Law Compliance if You Incorporate in California

Banner for California Department of Business Oversight, where Section 25102 (f) notices are filedWhen 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.

(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…)

California Secretary of State Reduces Turnaround Times!

California Secretary of State logo

California Secretary of State turnaround times for corporate and LLC formation – which stretched to their longest ever early this year – now have been reduced significantly.

The reason: In April, the state Legislature passed a bill authorizing $1.6 million for overtime and temporary personnel to resolve a backlog of 122,000 business filings! (more…)

Avoid Paying California $800 per Year … for 15 Days

Logo of Franchise Tax Board, which charges the California $800 annual tax

The California $800 per year minimum franchise tax applies to both corporations and limited liability companies. Many people do not realize, however, that the tax can be avoided – at least, for a short time.

As explained in Franchise Tax Board Publications 1060 (for corporations) and 3556 (for LLCs), there is a “15-day rule” or “15-day exception” stating that the minimum franchise tax need not be paid for an initial tax year if:

  • The corporation or LLC was formed (Articles filed with the Secretary of State) during the last 15 days of the entity’s tax year, and
  • The entity conducted no business during that period.

So, if an entity has a tax year ending December 31 (as most do), then it can be formed on December 17 or later, and it will not have to pay the California $800 minimum franchise tax until the following year.

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.

You Can’t Change Online Terms Solely by Email

Great Fun logo

In Changing Online Terms of Use? Be Sure to Give Notice First!, I discussed a case that held that merely changing a website’s online terms does not bind users to the new terms – the users must receive notice that the terms have changed and how they have changed. This post discusses a recent case (Schnabel v. Trilegiant Corp.) that comes to a consistent conclusion from a different direction: Merely sending an email that adds a provision to existing online terms does not bind users to that provision.

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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…)

Corporate Officers in California Need to Be More Careful than Directors

Logo of Indymac Bank, whose corporate officers in California were not protected by the Business Judgment Rule

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.

(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…)

I’m One of Several Inventors – Who Owns the Patent?

A recently-acquired client is one of three inventors of a device that received a U.S. patent. She asked me whether she can freely license to an LLC owned by two of the inventors the right to manufacture products covered by the license. I replied “yes” – here’s why.

35 U.S.C. Section 262 says:

In the absence of any agreement to the contrary, each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States, or import the patented invention into the United States, without the consent of and without accounting to the other owners.

(more…)

Can an Undocumented Immigrant Form a Corporation?

U.S. Citizenship and Immigration Services Logo

This post is based on a question that I answered on OnStartups.com. The short answer is “Yes, an undocumented immigrant can form a corporation.” The rest of this post is adapted from the full answer that I provided.

You can form a corporation – no problem. I have helped dozens of foreign clients (non-citizens, no social security number) go through that process.

(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…)

How Much Does It Cost to Incorporate?

Picture of antique cash register - representative of the post's topic, the cost to incorporate a business

This post about the cost to incorporate in the U.S. 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 seen a huge increase in the number of inquiries from prospective clients – especially foreign companies – interested in forming a corporation. One of their first questions usually is, “How much does it cost to incorporate?” This post answers that question.

First, though, I need to make a couple of points:

  • The following is merely illustrative. While the services described below suffice for many clients, we can know whether they are right for you only after we discuss your specific requirements in detail.
  • The only way we can agree that I will provide incorporation services is via an engagement letter signed by both of us. (The engagement process is discussed below).

(more…)

Which is the Easiest, Cheapest and Best Way to Incorporate?

Quora logo

The following is an almost-verbatim copy (emphasis added) of a Quora question posted today and my answer. Q. Which is the easiest, cheapest and best way to incorporate a California C corporation, preferably online?

A. Cheapest: Use the appropriate nolo.com book.

Best and easiest: Use a qualified lawyer.

Preferably online: None of your three criteria will be satisfied. If you are interested in the basis for this opinion, please go to my blog’s Hall of Shame. (more…)

Which Financial Information Must a Corporation Provide to its Shareholders?

Financial balance sheet

The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.

California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”

(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…)

FreeRegisteredAgent.com Inaugurates Hall of Shame

Logo for FreeRegisteredAgent.com

I’ve run across another online incorporation / LLC formation service – FreeRegisteredAgent.com – with deficiencies that I must bring to readers’ attention. There now are enough of these companies that I have listed them on my new Hall of Shame page.

FreeRegisteredAgent.com’s claim to fame is that it provides registered-agent services at no charge for one year, and for $99 per year thereafter.

Their Free California Registered Agent Service page touts their service for California corporations, LLCs and other entities. The problem I have is that California does not require any entity to have a registered agent, so after the first year, companies are paying for a service that they don’t need!

(more…)

Online Incorporation: It’s Time to Call Out Inadequate Providers

The Company Corporation's logo

I have not been a big fan of online incorporation and LLC formation services. (See, e.g., Forming an LLC Online: You Get What You Pay For.) However, the way a client recently was treated by one of these services – The Company Corporation – convinces me that it is time to expose their shortcomings and add them to the Hall of Shame page.

The client used The Company Corporation to incorporate in September 2006. Two months later, the client retained me to provide a variety of services. (more…)

How to Assign a Patent Application to Your Startup

Detail from an illustration of a machine by Leonardo da Vinci symbolizing a patent application

Detail from an illustration of a machine by Leonardo da Vinci

Your invention is so novel and non-obvious that you have submitted a patent application to the U.S. Patent and Trademark Office. Good for you!

Furthermore, you have formed a legal entity to turn the patent, once it issues, into a revenue stream. (See Should I form an LLC or a corporation?)

This post explains how you can assign the patent application to your new entity so your startup company can begin conducting business. (more…)

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…)

Why Do We Need a Corporate Records Book?

Corporate Kit from Attorneys Corporation Service, Inc., symbolizing corporate records

Corporate Kit from Attorneys Corporation Service, Inc.

I recently answered a question on Quora. If you incorporate a company [in Delaware], should you purchase a corporate kit? My answer about corporate records books, and a follow-up exchange about providing records electronically, are reproduced, slightly edited, below.

A: When I form a corporation for a client, I include a corporate records kit in the fee (and do similarly for LLCs) because:

  • It is important – both to the company and to any shareholders or directors who may have an inspection right – that there be a single specified location where the complete, up-to-date corporate records book is kept.
  • The kit includes share certificates, which should be prepared – including applicable securities and restrictive legends – and signed to protect against allegations by third-parties that ownership interests were transferred to them.
  • The kit includes a corporate seal, which may (or may not) be helpful or necessary at some point.

(more…)

Why are So Many Corporations Formed in Delaware?

Delaware Division of Corporations logo, symbolizing why so many corporations are formed in Delaware

I recently answered the question “Is it best to form an LLC in Delaware?” on Quora. In response to a user comment, I opined on why so many corporations are formed in Delaware. My opinion, slightly edited, is reproduced below.

First, I’ll point out that I have what may be a minority opinion, so others may well disagree. (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…)

Who Can Sign Contracts for a Corporation?

Photo of hand with pen on paper, symbolizing who can sign contracts for a corporationA couple of weeks ago, I answered a question on Avvo about who can sign contracts on behalf of a corporation. This issue comes up from time to time, so I will discuss it at some length in this post.

Authorization to sign contracts is addressed in the corporation’s bylaws and / or in resolutions of the board of directors. (more…)

Why does our Operating Agreement have a Spousal Consent?

I recently received questions about whether and why Spousal Consents are necessary with respect to certain business-ownership agreements. Here is a summary of the most important points that you need to know.

California is a community property state. If, during marriage, an individual acquires an interest in a business, the individual’s spouse has a community-property interest in that business.

(more…)

Doing Business in CA? Be Sure to Register

Seal of the California Secretary of State, which provides a registration form for a foerign entity doing business in CaliforniaSometimes California-based entrepreneurs think that they can avoid CA registration fees and taxes by forming their business entities in another state. Usually, that belief is incorrect. If the entity is doing business in CA, then it must register with the CA Secretary of State, even if the entity was formed elsewhere.

Section references and content 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…)

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…)

Legal Fees: Avoiding Sticker Shock

I just got off the phone with the founder of a website that caters to small businesses. He commented that small-business owners routinely suffer sticker shock when they receive invoices from their attorneys. I responded that lawyers can do three things to reduce the likelihood that the amounts of their fees will be a surprise. (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.

Statements of Information: Easy is Good

Logo for CA Secretary of State for post about filing Statements of Incorpation

This post discusses Statements of Information, which corporations and limited liability companies need to file with the California Secretary of State.

When you form your corporation or LLC, the Secretary of State’s welcome letter will tell you to file a Statement of Information within 90 days.

You need to update a corporation’s Statement of Information every year. For an LLC, you need to update every two years every two years.

(more…)

Avoiding “Alter Ego” Problems: A To-Do List

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.

Recommendations:

Assessing Personal Liability – Read Formation Documents Carefully!

A client, majority shareholder in a California corporation, asked whether there was any way to make a minority shareholder pay part of the corporation’s losses to date. In this particular case, the answer was “no” – but the question got me thinking about when a corporate shareholder or LLC member might be have personal liability beyond the amount payable for the ownership interest.

The LLC section reference and content 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).

A century ago, corporations routinely issued assessable shares, i.e., shares that carried an obligation for the shareholder to pay additional amounts to the corporation under certain circumstances, such as to cover losses or to buy property. Today, however, almost all shares are non-assessable.

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Should My Corporation Provide Stock Certificates to Shareholders?

Image of a stock certificate for a post about stock certificatesLet’s assume that you are one of the founders of a new corporation. Should the corporation provide stock certificates to shareholders when their shares are issued?

For most startups formed in California, the answer is “yes” – and not merely because the founders will feel good having tangible evidence of their ownership interests. (more…)

Forming a Corporation in California? Get Ready to Wait

California Secretary of State logo

July 2013 update: California Secretary of State Reduces Turnaround Times!

* * *

California’s budget crisis is affecting how quickly entrepreneurs can form their business entities: Standard turnaround time for hand-delivered Articles of Incorporation now is close to four weeks. (The situation for limited liability companies [LLCs] is better at two weeks, though still much longer than it was just half a year ago – see LLC Formation in Record Time.)

Update as of February 6, 2013: LLC filing time now is approximately six weeks, and corporation filing time is more than seven weeks!

(more…)

When should I apply for a DBA?

Form used in San Francisco to apply for a DBAThis post continues the last post’s discussion of the fictitious business name (FBN – or, colloquially, the DBA for “doing business as”). I am writing this because of a client’s question as to when his company should apply for a DBA / fictitious business name.

California Business & Professions Code Section 17910(a) states that a Fictitious Business Name Statement must be filed within 40 days of the time when the registrant first used the FBN to conduct business in the state. (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…)

Rewarding Key Personnel: Restricted Stock or Options?

Sotck price graph, symbolizing restricted stockAs I write this post, I am in the process of helping an early-stage client develop a stock-based compensation plan for a key officer. The principal choice was between a stock option and restricted stock.

A stock option is the right to purchase a specified number of shares at a specified price at some point in the future. The option typically “vests” over a period of years. The longer the individual stays with the company, the greater the portion of the option s/he has the right to exercise. At the end of the vesting period, the individual has the right to purchase all of the shares specified in the option. (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

(more…)

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…)

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.

Client Testimonials

Photo of individuals with right hand raised taking oath, conveying the idea of client testimonials

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.


Client testimonials concerning Dana Shultz and his services (a) are based outcomes that result from each client’s factual and legal circumstances and (b) do not constitute a guarantee, warranty, or prediction regarding the outcome of any client’s legal matter. (Just in case you are wondering, Board of Governors Standard (2) adopted pursuant to CA Rule of Professional Conduct 1-400(E) – now governed by Chapter 7 of the Rules of Professional Conduct that took effect on November 1, 2018 – requires that I provide a disclaimer.)

Please see, in addition to these client testimonials, the recommendations on Dana’s LinkedIn profile. (more…)

Top Ten Legal Tips for Independent Contractors

I just made available on the Downloads page (sign up using the drop-down list in the sidebar) “Top Ten Legal Tips for Independent Contractors,” a document that describes how independent contractors can avoid exposing themselves to unnecessary legal risks.

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

  1. Choose the right type of legal entity for your business
  2. If you choose a corporation or LLC, comply with applicable formalities
  3. Buy the right types and amounts of insurance
  4. Identify and protect your intellectual property
  5. Use your form of client agreement whenever possible
  6. Be careful when assigning or waiving intellectual property rights
  7. Be careful when collaborating or subcontracting
  8. Be careful with nondisclosure / confidentiality agreements
  9. Avoid oral agreements whenever possible
  10. Understand what distinguishes independent contractors from employees

For more information about distinguishing independent contractors from employees (tip 10), please see Avoiding the “Independent Contractor” Trap.

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.

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…)

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!

(more…)

Pre-formation Contracts: Avoiding Personal Liability

Logo for LinkedIn, where Dana Shultz answered a question about pre-formation contractsThis post is based on my answer to a LinkedIn question [before the LinkedIn Answers feature was terminated] – the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed:

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease? (more…)

How to Avoid Corporate Guarantees

Startup and early-stage entrepreneurs often are pressured to provide personal guarantees for their companies’ obligations. Presser & Goldstein, LLC in Boca Raton, Florida has posted Avoiding Corporate Guarantees, which discusses how business owners can avoid or limit personal guarantees.

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.

Small Claims Court: Litigation without Litigators

Picture of the Tulare County Courthouse to illustrate where small claims cases can be filed

I am not a litigator (trial attorney), so I normally do not write about litigation. Recently, however, I have discussed several matters where small claims court seems appropriate. I will share some basic information about small claims cases in California.

The CA Courts’ Small Claims Self-Help Center provide extensive, detailed information. The most important point is that small claims court judgments are limited to ordering the payment of money. You cannot, for example, ask a small claims court to order that the defendant stop infringing a patent or trademark.

(more…)

Spam Arrest: I Think I’ll Stay as Far Away as Possible

Spam Arrest logo

Today a client received an e-mail bounce-back from Spam Arrest, which provides a challenge-response system to stop automated junk mail. The first time a sender sends e-mail to a protected recipient, the sender must follow a link in the bounce-back message to a web page where, following user entry of a one-time verification code, the sender is identified as a legitimate e-mail sender.

During the past several years I have gone through the Spam Arrest verification process a few times and never thought much of it. But when I followed the link in the client’s e-mail, I saw something that, to the best of my knowledge, I had never seen before: the Sender Agreement reproduced toward the end of this post.

(more…)

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…)