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

© 2009-2019 Dana H. Shultz, Attorney at Law

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.

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Top Ten Intellectual Property Mistakes of Startup Entrepreneurs

The document Top Ten Intellectual Property Mistakes of Startup Entrepreneurs is available as a Free Download on the Downloads page.

Here are the ten mistakes that are discussed:

  1. Failing to use employee invention agreements
  2. Assuming that the company owns contractors’ work product
  3. Using another company’s license agreement
  4. Thinking that patents are the only IP that matters
  5. Filing a for provisional patent before the scope of the invention is clear
  6. Treating the federal government like non-governmental infringers
  7. Neglecting to identify and protect trade secrets
  8. Believing that “open source” means “no restrictions”
  9. Giving the “family jewels” to an overseas supplier
  10. Registering the wrong entity as the owner of IP

Related post: The Top Ten Legal Mistakes of Startup and Early-stage 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.

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.

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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:

WSJ: More Funds for Startups, but Still Hard to Get

In an article yesterday, the Wall Street Journal reported that funding for startups is more plentiful than it was a year ago, but still is hard to come by (Start-Ups Chase Cash as Funds Trickle Back).

Among the phenomena discussed:

  • Angel investment groups that want to see profitability before they invest
  • Reduced availability of funds from home-equity and retirement-account loans because of lower? asset values
  • Dedication of additional money to protect existing investments rather than to start new investments
  • Availability of venture capital only if a company has a product or customers

Related post: Realistic Financing Options for Startup Companies

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.

Do VCs care where my company is incorporated?

Several weeks ago, a first-time entrepreneur called. He had read that venture capitalists prefer investing in Delaware corporations, and he sought my input on the subject.

I replied that, in my experience, incorporation either here in California or in Delaware is fine. Then I started wondering why what the entrepreneur read differed from what I had experienced.

I did some research and conducted an informal survey of a few VCs. Here are my tentative conclusions:

  • California-based VCs are comfortable investing in corporations that are formed in either CA or DE (thus my experience, because the vast majority of the VCs whom I know are here in the Bay Area).
  • VCs outside California have a preference for investing in Delaware-based corporations, though that preference can be weak or strong, depending on the VC. Even with a strong preference, however, a Delaware-preferring VC will invest in a corporation in another state if it is the right deal

Related posts:

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.

Sramana Mitra: Bootstrapping – Weapon of Mass Reconstruction

Photo of Sramana MitraLast evening I attended a meeting of eBig’s Startups / VCs SIG. Sramana Mitra presented “Bootstrapping – Weapon of Mass Reconstruction.” It was highly informative for the entrepreneurs in attendance.

Her first comment was one with which I agree completely: There is too much emphasis on on venture capital funding – few businesses qualify, and other forms of financing allow the entrepreneur to retain greater control and a larger share of the business. (See Realistic Financing Options for Startup Companies.)

Sramana then proceeded to expose a large number of myths about entrepreneurship, and she finished by answering attendees’ questions.

The Entrepreneur Journeys page of Sramana’s blog provides a large number of informative interviews with entrepreneurs from around the world.

Photo credit: Blog Business World

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.

Can I prepare a website Privacy Policy without a lawyer?

Photo of shredded paper, symbolizing a website privacy policy

Startup entrepreneurs always are looking for ways to save money. A question that I receive from time to time: Is it possible to prepare a website Privacy Policy without a lawyer’s help?

Simply copying another company’s Privacy Policy is a mistake, because two companies rarely want to handle all privacy matters exactly the same way. However, there are quite a few website Privacy Policy Generators (PPGs) online. Just do a Google search for “privacy policy generator”.

The user provides answers to a series of questions. Based on the user’s answers, the PPG provides recommended text for a website Privacy Policy.

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Need Funding? WSJ Offers Tips to Gain Credibility

In a November 30 article (“Trust Me”), the Wall Street Journal offers tips to entrepreneurs who want to gain credibility in the eyes of potential funding sources.

Based on a study of key individuals at 28 entrepreneurial ventures, the article asserts that “the most successful founders were masters at making symbolic gestures that signaled stability and credibility” in four vital areas:

  1. Personal CredibilityExample: Revealing personal details that strike a chord with listeners
  2. The Company’s ProfessionalismExample: Thoughtfully prepared web page and business cards
  3. The Track RecordExample: Showing a prototype or a controlled product demonstration
  4. Emphasizing and Building Ties Example: Being associated with prestigious stakeholders

Takeaway: In a tough, competitive economic environment – especially if you are an entrepreneur without a track record – sending a message of credibility is just as important as having a great? product, a large market, and the right management team.

Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.