Delaware’s Franchise Tax – A Tale of Two Methods
In an earlier post, In Delaware, No Par Value Can Cost a Bundle, I discussed the two methods by which Delaware’s franchise tax for a corporation may be calculated. This post discusses the history of those two methods.
To some extent, this post is educated guesswork. It is based on a Quora question that I answered. Please see What is the rationale/reason (not math) behind the two methods of calculation for Delaware’s domestic franchise tax fee?
What Does an Incorporator Do?
This post discusses the role of the incorporator when a corporation is formed. I decided to write this after answering a Quora question. Please see When a third party files Articles of Incorporation as the incorporator for a company, what are the necessary steps to ensure that the company is legally released to the directors?
The incorporator signs the corporation’s Articles or Certificate of Incorporation. When I form a corporation for a client, the client typically takes that role.
(more…)
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 Do We Issue LLC Membership Interests?
When 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…)
Vator Splash Oakland – May 6-7 – Special Discounts Available
Vator Splash Oakland – a two-day startup competition and educational event – will take place May 6-7, 2014 at Jack London Square.
Readers of this blog are entitled to a 35% discount on all tickets except Scrappy Observer and Afterparty, which already are greatly reduced. Use discount code Schulz5. (more…)
How Can I Move My Corporation to Another State?
This 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…)
Virtual Office Choices when You Need a Physical Address
Many of my startup clients begin with a virtual office, rather than a physical facility. They do this for convenience and to save money – or because the client is located outside the U.S. Sometimes, however, a physical address is required. This post discusses commonly-used physical address alternatives.
Definition of Virtual Office
The term virtual office can have different meanings in different contexts.
When Is It OK to 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:
Future Services Can’t Buy Shares in CA but *Can* Buy LLC Membership
Future 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.
Social Media and Investors – WSJ Explains How
In an article published today, the Wall Street Journal discusses how social media and investors can come together for the benefit of startup entrepreneurs. (If You Look Good on Twitter, VCs May Take Notice)
According to the article, more “venture capitalists are taking social media into consideration before they decide to pour millions of dollars into a startup” [emphasis added].
The article includes the following eight tips [emphasis added] for how to bring a startup’s social media and investors together most effectively.
Section 25102 (f) – Securities Law Compliance if You Incorporate in California
When startups incorporate, they typically want to avoid the expense, delay and effort associated with registering the sale of their shares. In California, the most common exemption from registration is found in Corporations Code Section 25102 (f).
Section 25102 (f) says that a corporation need not register the sale of its shares if all of the following requirements are met:
- The shares are sold to no more than 35 shareholders.
- All purchasers have a preexisting relationship with the corporation or its officers, directors or controlling persons.
- Each purchaser is buying shares for the purchaser’s own account and not for resale.
- The offer and sale of the shares is not accompanied by the publication of any advertisement.
Which is Best – “Inc.”, “Corp.” or Something Else?
This post is based on and expands upon an answer I provided on Quora. Q. Which company suffix to choose: “Inc.”, “Corp.”, etc? What are the criteria?
Many states – notably including Delaware (General Corporation Law Section 102(a)(1)) but, under most circumstances, excluding California – require that the name of a corporation include a word or abbreviation designating corporate status. Those that are used commonly include Corporation (Corp.), Incorporated (Inc.) and Limited (Ltd.).
The choice is totally a matter of style. This is more a marketing issue than a legal issue.
In my experience, “Inc.” is most popular – typically without a preceding comma, nowadays, for a cleaner look. Indeed, most of my foreign clients say “an Inc.” when they mean “a corporation”!
Related post: What is an Inc. and Why Should I Want One?
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.
When a Handshake Deal Isn’t Really a Handshake Deal
Last week Y Combinator announced The Handshake Deal Protocol [no longer available online – apparently because of the Protocol’s shortcomings discussed below]. A “handshake deal” is an oral commitment to a funding transaction between a startup’s founders and an investor. This sometimes is considered necessary in Silicon Valley because, in the world of startups, one must move quickly.
As Y Combinator notes, however, a handshake deal can create problems:
Unfortunately, things don’t work as smoothly in Silicon Valley as among diamond dealers. This is not a closed community of pros who deal with one another day after day. Many participants in the funding market are noobs, and some are dishonest.
WSJ: Most Accelerators Are of Doubtful Value
Accelerators offer entrepreneurs seed funding and one-to-one mentoring in exchange for an equity stake, making a profit when some of their startups receive institutional (VC) funding. However, according to a Wall Street Journal article published yesterday (Start-Ups Crowd ‘Accelerators’), most accelerators – especially those outside Silicon Valley, Boston and New York – are of doubtful value.
You Can’t Use “Corp” in the Name of an LLC (in CA or NY)
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.
Why You Shouldn’t Use a Finder to Find Venture Capital
I recently spoke with three startup entrepreneurs who had just retained a finder to locate venture capital in exchange for an equity stake in the form of warrants (the right to purchase shares at a specified price by a specified date). They got very nervous when, after reading their agreement with the finder, I told them the business and legal reasons why retaining the finder was a bad idea: (more…)
Angel Investment: California Leads in Deals and Dollars
On March 8, The Angel Resource Institute, Silicon Valley Bank and CB Insights released the first Halo Report, which analyzes early-stage investments by angel investment groups. Of particular note: In 2011, California accounted for 21% of the deals and 29.8% of the funds invested.
Other noteworthy findings: (more…)
How Can I Have Reverse Vesting in an LLC?
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…)
Is there Any Reason 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?
WSJ: Angel Investors are Getting Harder to Sell
In an article published today (Chasing the New Angel Investors), the Wall Street Journal discusses why entrepreneurs must work ever-harder to persuade angel investors to invest.
According to the article, although seed and startup angel investment has increased, there are several reasons why that money is more difficult to attract:
- Since the recession, many angels have become more demanding, looking for proof of marketplace acceptance rather than a hunch that it exists.
- Angel groups, which syndicate deals among their members, have a more-formal review process that may involve discussions by dozens of potential investors.
- With less venture capital available, angels are more concerned about whether a company can grow to profitability or a successful exit.
The article’s advice for entrepreneurs: Have something to show, know your business thoroughly, and polish your pitch.
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 Invest More Money in My Corporation?
This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
WSJ: Rent a Desk, Rather than an Office
In an article yesterday (Can’t Afford an Office? Rent a Desk for $275), the Wall Street Journal observed that use of shared workspaces – renting a desk in an open space, rather than renting an office – is increasing throughout the United States.
Such resources have been used for many years by technology startups here in the San Francisco Bay Area. The article specifically cited Plug and Play Tech Center in Sunnyvale (which is exploring expansion to other cities).
Can an Undocumented Immigrant Form a Corporation?
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.
Printing Legends on Share Certificates – Why and How
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:
LLC Accounting – Allocations vs. Distributions
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:
- This post is not about taxes.
- 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.
Merchant Accounts in the U.S.for Foreign Companies – A Problem with Workarounds
I have helped dozens of foreign clients launch their businesses in the U.S. Almost every impediment to forming a corporation and running the business under that corporation can be overcome. But there’s one problem I have not been able to solve: Opening U.S. merchant accounts (for processing credit and debit card transactions) if companies does not have personnel in the U.S.
The first potential stumbling block is opening a bank account if the client has no U.S. personnel (and no home-country bank with an affiliate in the U.S.). See Post-formation Issues for Foreign Companies Coming to the U.S..
MarketWatch: Europe’s Start-ups still Drawn to the Valley
An article, “For Europe?s start-ups, Silicon Valley still calls”, was published yesterday by MarketWatch, part of The Wall Street Journal Digital Network. It discusses why the tech entrepreneurs behind Europe’s start-ups continue to flock to the San Francisco Bay Area.
The article’s theme:
Divided by geography, language, regulation and, in some cases, just old-fashioned cultural prejudice, the region has struggled to shed fully its image as a place where men and women with ideas are born, but where they do not necessarily stay, prosper or secure funding.
In which State should My Startup Incorporate?
This post about the state in which a startup should incorporate brings together points I have made in earlier posts (please see below) and is based on a comment I made on another Quora participant’s answer.
I admit to having a point of view that differs from that of many other lawyers. However, as explained toward the end of this post, my point of view results directly from the types of clients that I serve.
You May Not Need a Lawyer (Yet)
A few days ago, a first-time entrepreneur contacted me, asking that I advise him on such issues as employees vs. independent contractors, equity compensation, and the like. As we exchanged e-mails, however, I could see that there were fundamental business issues to which he had not given sufficient consideration. (more…)
Can I Get an H-1B Visa Working for My Own Company?
I have written about opportunities for foreign entrepreneurs who wish to obtain U.S. work visas. (See Visa Basics for Foreign Entrepreneurs Coming to the U.S., Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?) This post focuses on a particularly interesting aspect of this issue. It asks whether and how a foreign entrepreneur can form a corporation in the U.S. and, then, obtain an H-1B visa to work for that corporation.
WSJ: Lots of Money for Social Startups
In an article published yesterday (“Money Rushes Into Social Start-Ups”), the Wall Street Journal reported that VCs are investing in companies that are taking social networking from computers to mobile phones. The rationale, according to the article (emphasis added):
Behind the spurt of new services is also the idea that the phone, carried by people at all times, can reinvent the notion of a social network by sharing more real-time information about where people are, what they’re seeing and even who they’re around.
Other points made in the article: (more…)
Post-formation Issues for Foreign Companies Coming to the U.S.
Forming a corporation for a foreign client is a lot like forming a corporation for a domestic client. (See Foreign Companies: Form a Corporation when You Come to the U.S.) Having gone through the process dozens of times, however, I realize that there are three important post-formation issues that foreign clients often need help addressing: (more…)
How Much Does It Cost to Incorporate?
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).
What’s in a Name? A Lot, if You’re a Corporation
In Act II, Scene II of Shakespeare’s Romeo and Juliet, Juliet wishes that she and Romeo could simply set aside their warring families, famously asking, “What’s in a name?” I thought about this question recently as I was helping a foreign client set up a corporation here in the U.S.
The foreign client is based in the U.K. It wanted to form a U.S. subsidiary with a similar name for brand-identification purposes. To avoid revealing the identity of the client, I will refer to it as “Amalgamated Widget Solutions, Ltd.” and the desired name of its U.S. subsidiary as “Amalgamated Widget Solutions, Inc.”
Which is the Easiest, Cheapest and Best Way to Incorporate?
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…)
Visa Basics for Foreign Entrepreneurs, Part 2: What Constitutes Work?
In Visa Basics for Foreign Entrepreneurs Coming to the U.S., I discussed certain immigration statuses (visa waiver, B-1 and H-1B visas) that permit a non-resident alien to take a passive role in a business (such as forming it) but not to work for it. This post discusses the boundary between permissible passive activities and prohibited work.
Unpaid Interns: What You Need to Know
Many companies – especially startups – like the idea of using unpaid interns as free labor. This post discusses whether and how a California company can use unpaid interns.
Paid or Unpaid Interns vs. Employees
If individuals are interns under California law (as discussed below), then they need not be paid. Furthermore, they are not subject to other employment protections, because they are not employees.
If, on the other hand, individuals are determined to be employees, then they must be paid at least minimum wage.
(more…)
Accelerated Vesting may Mean Little if Your Employer is Acquired
This post is adapted from a question that I answered on Quora. Q. How can an acquirer make an employee with single-trigger vesting commit to a “lock-up” period to receive all his shares? Say you’re an engineer at a just-acquired startup with 0.5% of the old company, and your shares fully vested upon acquisition. The acquirer’s terms were that current employees get 50% of their payout up front, and 50% if they stay on board for 5 years. How is that possible, legally?
A. It is difficult to provide a definitive answer without looking at the relevant documents. However, I suspect that this situation is possible because 50/50 pertains to shares in the acquiring company rather than the acquired company.
In my experience, acquired companies will put some effort into converting employee equity interests directly into comparable interests in the acquiring company, but there is no guarantee this will happen.
So you may (I can’t be sure, not having reviewed the documents) have a choice: Keep your 0.5% fully-vested interest in the acquired company (which is likely to have little, if any, market value in the foreseeable future), or accept the 50/50 conversion to an equity interest in the acquiring company.
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.
Three Ways to Protect Yourself when Developing Software Offshore
Many startups have software developed offshore to save money. There is good reason to be concerned, however, about loss of money or, even worse, loss of intellectual property when a developer is located half-way around the world. This post discusses ways to minimize those concerns.
I recommend the following:
- Ensure that the agreement with your overseas developer assigns all rights to the software (including all intellectual property rights) to you.
- Don’t send your “family jewels” offshore. For any portion of the development that requires disclosure of your most important trade secrets, use a local developer.
- Time deliverables and payments such that you never will be too severely financially exposed. If your relationship with the developer sours, you can go somewhere else without a catastrophic financial loss.
If you take care of these three points properly, everything else should be pretty routine.
Photo credit: Rajesh Sundaram via stock.xchng
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 Must We Do Regarding Corporate Board Meetings?
The following question (edited for length) is from Founders Space. Q. What’s the minimum two founders must do regarding board meetings for a startup Delaware corporation doing business in California?
A. You should hold an annual stockholder meeting – or, alternatively, prepare a written consent – at which the stockholders elect the board of directors. See Delaware General Corporation Law Sections 211 and following. (more…)
Incorporation: Not All (States’) Agents are Created Equal
In a post last week (FreeRegisteredAgent.com Inaugurates Hall of Shame), I wrote that corporations (and other entities) formed in California do not require registered agents. After replying to a comment on that post and a separate e-mail from another reader, I realize that I should be more explicit about how an agent for service of process (in California) differs from a registered agent (in Delaware and many other states).
Here is the difference:
- A registered agent typically is picked from a list maintained by the state and is paid for its services. (In Delaware, especially, registered agents are a major industry.) Furthermore, there generally is a requirement that the registered agent be available at its office sufficiently frequently to receive service of process, and it must forward to the corporation notice of its obligation to file an annual franchise tax report. (See, e.g., Delaware General Corporation Law Section 132.)
- An agent for service of process can be any individual or any corporation (other than the one being formed, and subject to Corporations Code Section 1505) in California and need not necessarily be paid. So, for example, an individual forming a corporation in California can designate himself, or (presumably, with permission) his brother-in-law or his lawyer, as the corporation’s agent for service of process. Furthermore, the Corporations Code does not subject the agent obligations such as availability to receive service. California agents can resign more easily, too – see “How to Resign as Agent for Service of Process“.
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.
FreeRegisteredAgent.com Inaugurates Hall of Shame
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!
WSJ: Startup Obtains Financing via LinkedIn
Yesterday the Wall Street Journal published a fascinating article (Dear Contact: Send Cash) about a startup that obtained first-round funding of approximately $350,000 via LinkedIn.
The founder sent an appeal to his 700 contacts, offering ownership of 2% of his company in exchange for approximately $35,000. Within eight days, ten investors (the target number) were lined up
The founder must have had an impressive set of contacts. In any event, I’m impressed – this was a creative approach that saved the founder a huge amount of time.
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.
Are LLC Memberships Securities that Must be Registered?
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…)
Online Incorporation: It’s Time to Call Out Inadequate Providers
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…)
In Delaware, No Par Value Can Cost a Bundle
In “How Many Shares Should My Corporation Authorize and Issue?“, I warned that “If you are forming a Delaware corporation with a large number of shares, be sure to specify a low par value, such as $0.0001 per share, to avoid having to pay excessive annual fees to the state.” This post gives more details about this issue.
There are two methods for calculating Delaware’s annual franchise tax. (more…)
Forming an LLC: Figuring Out What’s Really Required
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.
How to Assign a Patent Application to Your Startup
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…)
Why Do We Need a Corporate Records Book?
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.
Why are So Many Corporations 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…)
WSJ: Super-Angels Fill Funding Gap
Many startup companies are betwixt and between when it comes to funding: They need too much for angel investor groups, but too little for venture capitalists. According to the Wall Street Journal (‘Super Angels’ Alight), there is a new breed of investor that fills the gap, the “super angel”.
What makes these angels “super” is their ability to attract other investors. Whether collaborating with one another informally or through recently-formed funds, they can invest $1 million or so and be satisfied with an exit a few months to a few years later.
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.
Do I Need a Separate Corporation/LLC for My New Business?
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.
Where Do I Get a Business License?
You’ve started a new business. Don’t forget to apply for (and next year, renew) your business license!
Most cities (in some instances, counties) require that businesses located within their borders obtain what is commonly called a business license. In reality, this is an application to pay business taxes.
Here are links to the business license applications for several of California’s largest cities:
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.
Foreign Parent + U.S. Sub = Legal Firewall
I have helped dozens of foreign companies establish subsidiaries here. Sometimes, the foreign company asks, “Do we really need to form a separate company in the U.S.? Can’t we just hire some people in the U.S. to work for our existing overseas entity?”
In responding, I make the following points: (more…)
Professors Confirm Limits on Startup Interest in Patents
Last November, I wrote You Can Have a Successful Business Even if You Don?t Have a Patent. Many of the points that I made in that post are reiterated in an article that will be published this summer in the Berkeley Technology Law Journal.
The article, “High Technology Entrepreneurs and the Patent System”, is available as a Free Download on the Downloads page. Among the findings presented in the article:
- Whereas life sciences companies see patents as critical, software and Internet companies rely more on copyrights and trademarks.
- Patents are used to reduce competition and to attract capital; they do not provide strong incentives to innovate.
- The major reason why companies do not apply for patents is that they are expensive to obtain and to enforce.
- Many companies find it is more important to be the “first mover” than to obtain patents.
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.
WSJ: Startups can Pitch to Angels for Free
In an article published today (Start-Ups Get Free Chance to Pitch to Angel Investors), the Wall Street Journal discusses ways that startups can pitch to angel investors without having to pay a fee.
Thrust of the article: Some angel investment groups require that entrepreneurs who need funding pay for the right to present their businesses for consideration. Organizations fighting the “pay-to-pitch” approach include Open Angel Forum and AngelList.
Check out all posts about angel investors.
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.
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:
- Failing to use employee invention agreements
- Assuming that the company owns contractors’ work product
- Using another company’s license agreement
- Thinking that patents are the only IP that matters
- Filing a for provisional patent before the scope of the invention is clear
- Treating the federal government like non-governmental infringers
- Neglecting to identify and protect trade secrets
- Believing that “open source” means “no restrictions”
- Giving the “family jewels” to an overseas supplier
- 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.
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…)
Doing Business in CA? Be Sure to Register
Sometimes 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…)
How Many Shares Should My Corporation Authorize and Issue?
This post discusses the number of shares that a corporation should authorize, and the number of authorized shares that a corporation should issue.
On a couple of occasions, I have worked with founders whose corporations (prior to retaining me) issued a small number of their authorized shares.
In one instance, four founders formed a corporation that was authorized to issue 50,000 shares, but had issued (to themselves) fewer than 400. They asked me to help reallocate shares among them because, as time had passed, they saw that their respective contributions to the business differed from what they initially had expected.
Statements of Information: Easy is Good
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.
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:
- Why (not) Incorporate in Delaware?
- Why are So Many Corporations Formed in Delaware?
- In which State should My Startup Incorporate?
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.
Should My Corporation Provide Stock Certificates to Shareholders?
Let’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
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!
So how important is this legal stuff, anyway?
Two recently-acquired clients had similar situations that brought up the importance of complying with legal requirements.
Each company is a multi-founder startup where one founder became non-productive, and even somewhat detrimental to the business. The other founders wanted to move the problem founder off to the side, where he could cause no more trouble, in a manner that would be fair to everyone involved.
Unfortunately, each company had failed to comply with some of the most basic legal requirements: Holding annual shareholder meetings to elect directors, annual board of director meetings to appoint officers, etc. As a result, in each instance we had to spend time and money taking corporate actions, and recording those actions appropriately in meeting minutes, before the real problem could be solved.
WSJ: Startups Will Keep Struggling in 2010
In an article published yesterday (Start-Ups Will Keep Struggling in 2010), the Wall Street Journal reported that startup funding will remain tough to find in 2010.
The major problems:
- Most entrepreneurs use personal savings or contributions from friends and family, but personal wealth – often tied to the value of homes or stock portfolios – has not bounced back from the economic downturn.
- For both conventional bank loans and those insured by the Small Business Administration, entrepreneurs most show (a) that they have invested a significant amount of their own money and (b) solid cash-flow projections.
- During the first half of 2009, the total value of angel investments fell 30% compared to 2008; 2010 is expected to continue at the 2009 level.
- While venture capitalists are continuing to invest, they typically have been protecting later-stage companies already in their portfolios rather than funding startups.
The minor bits of good news:
- While angels are investing less per deal, the total number of deals increased during the first half of 2009 over 2008.
- Stimulus-related measures may increase SBA loans from 1% of all small-business lending to between 5% and 10%.
* * *
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.
Stock is Great – but Don’t Give It Away Too Quickly!
Most startups and early-stage companies have limited cash. As a result, they often are eager to use stock as a major component of? compensation. They need to make sure, however, that personnel stick around long enough to make the contributions for which they are being compensated.
In some instances, the corporation creates a tax-qualified incentive stock option plan. Employees are granted options to purchase stock, and they do not have to pay any tax on the stock (actually, on profits from their sale of the stock) until they exercise the option (purchase the stock, presumably, at a low price) and, later, sell the stock. (Tax law is less favorable to independent contractors.)
Foreign Company Alert: Obtaining an EIN may be your Biggest Challenge in the U.S.
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.
Why (not) form an LLC in Nevada (or Wyoming)?
Questions about forming a limited liability company (LLC) in Nevada (or, increasingly, Wyoming) come up so frequently that I feel compelled to write about this topic.
There is something approaching the status of urban legend about the wisdom of forming an LLC in Nevada or Wyoming because they do not have an income tax. The problem is that lack of an income tax will benefit you only to the extent that you do business in in that state! (more…)
Ten Tips for Success in the U.S.
Having helped more than a dozen foreign companies set up operations here during the past few years, I am pleased to offer “Ten Tips for Success in the U.S.” on the Downloads page – just Sign Up for Free Downloads using the drop-down list in the sidebar.
Here are the titles of the ten tips, which are discussed in greater detail in the document:
- Work with complementary businesses that are already established here
- Manage overseas personnel on the principle “trust but verify”
- Form your corporation or limited liability company properly
- Be ready for a legal system that is different from the one back home
- Identify and protect intellectual property (IP) that is used here
- Develop detailed employee and independent contractor agreements
- Choose an accountant with international tax experience
- Be prepared to obtain a federal employer identification number
- Conduct due diligence on potential investors
- Agree on business terms before you prepare a written agreement
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.
Resolving Small-business Disputes: The 50-50 Deadlock
On occasion when I help a client form a new corporation or limited liability company (LLC), the company will have two owners, each owning 50% of the company.
A major risk with 50-50 ownership is that disagreement on an important issue can deadlock the company. In an extreme situation, the dispute might even put the company out of business!
Can I Form an LLC without a Lawyer?
Recently, 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.)
Pre-formation Contracts: Avoiding Personal Liability
This 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.
Should I form an LLC or a corporation?
Fairly 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.)
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.
Intellectual Property Essentials for Start-ups
“Intellectual Property Essentials for Start-ups” now is available as a Free Download on the Downloads page.
Here are some of the questions that the document addresses:
- Which types of intellectual property (IP) should a start-up be aware of?
- How can we be sure to own IP created by independent contractors?
- Are there special considerations if the contractor is located overseas?
- It is pretty easy to register a trademark online; where might I go wrong?
- A provisional patent application is inexpensive and can be filed quickly; are there any risks I should keep in mind?
- Money is tight; can we use another company’s form of agreement rather than paying to develop one of our own?
- Open source software is hot; does it bring along any special dangers?
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.
Multiple Founders: Avoiding Landmines
Many clients ask me to help them form new businesses. On several occasions, however, when there were two or more founders, the business never got off the ground. The common thread running through these situations is that while the founders thought that they had agreed on business terms, each party had unstated assumptions that came out only when legal documents were prepared.
If you find yourself talking about a new business with one or more other founders, here are some issues you should think about: (more…)
Corporate Housekeeping: Keeping Documents in Order
From time to time, clients with established businesses have asked me to bring order to their legal affairs. I refer to this as ” corporate housekeeping “.
Usually, the request results from an extraordinary, but desirable, event. This might be an acquisition offer, a prospective new investor, or a restructuring for tax purposes. In each instance, the client quickly realizes that it has not been paying close enough attention to legal documentation.
Although the clients are in different industries, their stories are similar. In essence, they limit their legal activities and expenditures to those required to bring business in the door, satisfy customers’ needs, and pay employees. This approach works on a day-to-day basis. Yet when the extraordinary event comes up, the company suddenly needs to devote scarce resources to legal clean-up. (more…)
Beware the Unintended Partnership
This 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.
Postincorporation Matters
Have you ever wanted a list of what you need to do, once a corporation is formed, to comply with the various legal requirements that confront businesses nowadays? This post may help you.
I am pleased to offer, as a Free Download on the Downloads page, the 10-page document on Postincorporation Matters that I provide to clients once I form their corporations. It addresses such issues as maintaining the separate existence of the corporate entity; conducting annual meetings of shareholders and the board of directors; payment of taxes; personnel hiring and terminations;and intellectual property issues; and much more.
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.
Top Ten IP Mistakes of Small to Mid-Size Tech Companies
On June 18, I will make a presentation to the East Bay MashEx. The title: “The Top Ten Intellectual Property Mistakes of Small to Mid-Size Technology Companies”. (The handout is available as a Free Download on the Downloads page.)
Here are the mistakes that I will talk about:
- Failing to use employee invention agreements
- Assuming that the company owns contractors’ work product
- Using another company’s license agreement
- Thinking that patents are the only IP that matters
- Filing for a provisional patent before the scope of the invention is clear
- Treating the federal government like non-government infringers
- Neglecting to identify and protect trade secrets
- Believing that “open source” means “no restrictions”
- Giving the “family jewels” to an overseas supplier
- Registering the wrong entity as the owner of IP
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.
Realistic Financing Options for Startup Companies
Sure, you dream of venture capital to turn your great idea into entrepreneurial success. But guess what: The vast majority of startups will never come close receiving venture funding.
There are alternatives, however. Here are approaches that my clients typically consider: (more…)
A Law Blog for Startup and Early-stage Companies
After a number of in-house legal positions, I started my own solo law practice in 2004. Most of my clients are startup or early-stage companies, typically technology-related.
For most of the time since then, I have published a well-received monthly e-mail on various legal topics for clients, colleagues and friends.
Now, having received encouragement from a number of people, I am starting my first blog. The tag line for my practice is “High-touch Legal Services for High-tech Companies”, so I have decided to call this the “High-touch Legal Services Blog”.
I hope you will find my posts both interesting and informative.
