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

© 2009-2021 Dana H. Shultz

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…)

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.

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Can a Partnership Have Just One Partner?

Picture of courthouse

This post’s title question about a one-partner partnership might seem silly: The common-sense answer is “No”, because one cannot be one’s own partner. As I learned recently working with a client who wants to dissolve a partnership, this is one situation where the law (in California, at least) and common sense agree.

To start, Corporations Code Section 16101(9) states that a partnership requires two or more partners.

Last year, in Corrales v. Corrales, the Court of Appeal for the Fourth District, Division 3 (courthouse pictured) answered an interesting question: What happens to a two-person partnership when one partner withdraws?

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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?

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Every Partnership Needs an EIN

I recently met two individuals who formed a business partnership. They were pretty informal about the process: They had no written partnership agreement. More surprisingly, they had not obtained an employer identification number (EIN) from the Internal Revenue Service.

Failure to obtain an EIN was a legal mistake. The IRS’s Do You Need an EIN? page states that when a business is operated as a partnership, it must obtain an EIN. (more…)

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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Beware the Unintended Partnership

Photo of two teddy bears, symbolizing an unintended partnershipThis post uses a real-life example to explain how an unintended partnership is created and why it can be a problem.

Client was one of two founders of a website. She provided content; Co-founder developed, maintained and promoted the site.

Client and Co-founder had been working together for three months when Co-founder presented a business agreement that had been prepared by his paralegal friend. Client asked that I review the agreement on her behalf.

I saw right away a problem that frequently arises in this situation: The parties were characterized as participating in a joint venture under which they would split earnings from the site. The problem arises because under California Corporations Code Section 16202(c)(3), subject to certain exceptions (see discussion below), “[a] person who receives a share of the profits of a business is presumed to be a partner in the business”. This is true even if the parties did not intend to form a partnership (Section 16202[a]), in which case they have created an unintended partnership.

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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.

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Protect Your IP when You Hire a Freelancer

Upwork logo for post about freelancer work product and intellectual property

This post explains how to make sure that you own work product and intellectual property (IP) when you use a freelancer service. Most of the following first appeared on Quora. Please see How can I protect my source code and its Intellectual Property Right while working with a very large team of remote freelancers (Upwork and Fiverr etc)? Are freelancing platforms ensuring IP protection?

When you use a freelancing platform, you need to ensure that you have an agreement with each freelancer. And that agreement must assign to you all work product and all intellectual property rights.

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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…)

Corporate Officers Need Not Be Human Beings (in Many States)

Logo for Quora, where Dana Shultz answered a question, stating that corporate officers need not be human beingsThis post discusses my surprise at finding that there apparently is no requirement that corporate officers be human beings.

My answer to a Quora question is the basis for this post. Please see Could an A.I. create a company and do all the functions typical of another company?

I was about to write an answer stating that corporate officers be natural persons (human beings). But with a bit of research, I found that apparently is not the case! (more…)

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…)

How Can I Find a Lost EIN?

Internal Revenue Service logo, symbolizing a lost EINAn Employer Identification Number, issued by the Internal Revenue Service, is the most important identifying number for US businesses, especially for tax purposes. This post addresses how you can find a lost EIN.

Find the Lost EIN Yourself

The IRS Lost or Misplaced Your EIN? page starts by recommending searches for existing records that should include the lost EIN:

  • The IRS confirmation notice that was provided when the EIN was issued.
  • Bank accounts that were opened, or governmental licenses that were issued, based on the EIN.
  • Tax return that were filed.
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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…)

What are General Partners and Limited Partners?

Logo for Quora, which was the source for a question about general partners

This post is based on a question about general partners that I answered on Quora a couple of weeks ago.

Q.: Why do general partnerships and limited partnerships both have a “general partner” position?

A.: General partners – in each type of partnership – have control over and manage the business. They are jointly and severally liable for the partnership’s obligations. (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:

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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…)

Implied Copyright License: A Life-and-Death Example

Seal of the US Court of Appeals for the First Circuit, which decided an implied copyright license caseSeveral months ago, I wrote about the circumstances under which courts will find an implied copyright license if there has not been an assignment of copyright. (If You Don’t Set the Terms of a Copyright License, a Court Will) In a recent case (Estate of Hevia v. Portrio Corp.), the U.S. Court of Appeals for the First Circuit held that there was an implied copyright license in a partnership context.

The decedent, Roberto Hevia-Acosta, was an architect. Following his death, his estate and heirs waged an intensive legal battle against his business partner over copyrights in the decedent’s architectural designs.

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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.

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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?

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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…)

Investor Due Diligence Should Go Both Ways

"Due Diligence" sign for blog post about investor due diligenceDue diligence is a routine part of an investor’s decision whether to invest in a company. The company also should conduct its own investor due diligence.

A couple of years ago, I worked with a company (“Client”) that provided e-mail security products. Previously, Client’s founder (“Founder”) had arranged for an equity investment by a company controlled by an individual in Southern California (“Investor”).

First Mistake: No Legal Counsel

One of Founder’s huge mistakes was not seeking legal counsel to review the terms of the investment. Two of those terms were disastrous for Founder. (more…)

How detailed should a legal document be?

This topic was suggested by Tim Greene at FizzTalk based on a comment posted at the LinkedIn Legal Blogging group.

In my experience, a document’s level of detail should be driven by the nature of the business transaction and the parties’ relationship. I will give some examples both from in-house work and from my private practice that pertain to agreements with independent contractors.

Long and Detailed

When I was VP and Legal Counsel at Visa, I negotiated hundreds of contracts. Given that most were for IT products or services, a lot of money often was at stake, especially if a relationship was to continue for a period of years.

Accordingly, I prepared a series of detailed standard-form agreements – typically 15-20 pages – that served as a starting point. To minimize the amount of negotiation that would be required, the agreements were reasonably balanced, yet they, nevertheless, protected my client’s essential business and legal interests.

The agreements were long, but the length was justified by (a) the size of the deals and (b) the fact that each standard-form agreement would be used many times in the future, with minor revisions as required.

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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…)