Foreign Qualification Can Be Easy, or It Can Be Difficult
Foreign qualification is how a given state permits an entity, such as a corporation or limited liability company, from elsewhere to do business in that state. In this context, “foreign” can mean from another state or from a different country.
Recently, one of my international clients formed a corporation in Delaware. We have been qualifying that corporation to do business in about a dozen other states. This post explains how easy, or how difficult, various states makes the foreign qualification process.
(more…)California Corporate Officers are Employees
This post discusses why – especially now that Assembly Bill No. 5 (AB-5) has taken effect – in California corporate officers are considered employees rather than independent contractors.
California Corporate Officers Employees by Statute
The starting point is California Unemployment Insurance Code Section 621. This Section states, in relevant part:
(more…)“Employee” means all of the following:
(a) Any officer of a corporation.
Stakeholders Matter, but Shareholders Still #1
This post about corporate stakeholders is based largely on my answer to a Quora question. Please see How many companies do you think will adopt the Business Roundtable’s statement that the purpose of a corporation is to take into account ALL stakeholders
The Business Roundtable describes itself as an association of chief executive officers of America’s leading companies. On August 19, 2019, the Roundtable garnered headlines when it announced that it had redefined the purpose of a corporation to promote an economy that serves all Americans. In my opinion, that characterization is not accurate.
Roundtable Statement about Stakeholders…
Here is what the relevant portion of the Roundtable’s Statement on the Purpose of a Corporation says:
(more…)How to Redomesticate when Your State Won’t Permit It
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…)Should We Authorize Preferred Shares when We Incorporate?
This post discusses whether founders should authorize preferred shares, in addition to common shares, when they incorporate.
As I discussed in What is Preferred Stock?, corporations typically issue preferred shares to institutional investors, such as venture capitalists (VCs). The term “preferred” refers to preferences that those shares have relative to common shares.
(more…)Board Members Aren’t Necessarily Equal in Delaware
People typically think about corporate board members having equal voting rights: One director, one vote. However, for Delaware corporations, that is not always the case.
Delaware Statute – Board Members
This unusual situation is the result of a Delaware statute. (more…)
Delaware Corporation Stockholders Can Waive Inspection Rights
Several years ago, I wrote about stockholder inspection rights. (See Which Financial Information Must a Corporation Provide to its Shareholders? ) This post explains how stockholders of a Delaware corporation can waive inspection rights.
Delaware General Corporation Law Section 220 gives stockholders a right to “inspect for any proper purpose, and to make copies and extracts from…[t]he corporation’s stock ledger, a list of its stockholders, and its other books and records”. Furthermore, “proper purpose” means “a purpose reasonably related to such person’s interest as a stockholder.” (more…)
How Does a Corporation Declare a Dividend?
This post discusses the process by which a corporation may declare a dividend. This is part of Dana Shultz’s Canonical Questions on the Law™ series of questions and answers about legal issues, concepts and terminology.
Please note that this post assumes that the corporation will pay a cash dividend to its shareholders. If, instead, the corporation wishes to pay a stock dividend (issue more shares to existing shareholders), then somewhat different rules will apply. (more…)
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?
If You Incorporate in the U.S., You Can’t Remain Anonymous
Recently, 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 is a Corporation’s Incorporation Date?
This post explains how a state assigns a corporation’s incorporation date and how you can find the incorporation date for a given corporation. I first wrote about this in my answer to a Quora question. Please see What is the date of incorporation? Is it the date the articles of incorporation are adopted and signed, or when the state agency accepts them (USA)? (more…)
Can We Have a Corporate Incorporator?
Most 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…)
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?
I 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…)
How Can I Calculate My Share Ownership Percentage?
I am writing this post about calculating one’s share ownership percentage because of an email exchange I had on behalf of a client.
We had formed a Delaware corporation with 10 million authorized shares. Of the authorized shares, 8 million had been issued to the founder.
The founder and an independent contractor had agreed on equity compensation for the contractor. The agreed-upon share ownership percentage was 2%.
The contractor thought that he should receive 200,000 shares (2% of 10 million). The rest of this post explains how and why the contractor was incorrect. (more…)
When is a Shareholder Vote Required?
This post discusses when a California corporation must hold a shareholder vote.
It is based on an Avvo answer that I wrote recently. Please see Beside elections, are there corporate decisions that REQUIRE the vote of the shareholders?
California Shareholder Vote Requirements
A corporation must hold a shareholder vote to approve the following actions. Please note that this may not be a comprehensive list. Reference links are to the relevant California Corporations Code sections. (more…)
Are Dissolution and Cancellation the Same?
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…)
Corporate Compliance Center Joins Hall of Shame
It is time to add another corporate compliance vendor – Corporate Compliance Center – to this blog’s Hall of Shame.
This story is so common that it would be boring if we weren’t discussing scam artists. (more…)
Should I Form Separate Legal Entities for Different Lines of Business?
This 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…)
How to Dissolve a Delaware Corporation or LLC
This 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…)
A DBA is not a Legal Entity
This 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…)
Can I Walk Away from My Suspended LLC?
This 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…)
Entity Conversion Can Be Easy – If You Know What You Are Doing
This 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.
- 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.
- 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.
How Do We Issue Corporate Shares?
Several 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?
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…)
Must a Corporation Issue All Authorized Shares?
Sample Stock Transfer Ledger
This post is based on a conversation I had with a foreign client recently. Q. Must a corporation issue all authorized shares?
A. No, a corporate may, but it does not need to, issue all authorized shares.
Foreign Parent Audit
This question arose because my foreign client was being audited. The auditors thought that they had uncovered a problem.
Who Appoints the Members of a Board Committee?
This post addresses a generalized version of a question that I answered on Quora concerning committees of corporate boards of directors. Q. Who appoints the members of a board committee?
A. Appointment of board committee members is governed by the corporation’s bylaws, or by applicable statutes if there are no bylaws. In my experience, bylaws (or statutes) state that a board committee is appointed by a majority of the board members. Committees are not appointed by the CEO or the Chair of the Board. (more…)
What if I Don’t File a Limited Offering Exemption Notice?
This post is based on a question that I answered on Quora: What happens if you do not file a Limited Offering Exemption Notice in California?
Limited Offering Exemption Notice Requirement
I first addressed the Limited Offering Exemption Notice in Section 25102 (f) – Securities Law Compliance if You Incorporate in California. As that post explains, LOEN filing is required for corporate share issuances that are exempt from securities registration requirements in California.
(more…)
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.
Can I Have a Corporation with Multiple Businesses?
This post is based on a question I have seen online many times. Q. Can I have a corporation with multiple businesses?
A. Yes, you can have a corporation with multiple businesses. Furthermore, those businesses need not be similar or related. So, for example, your corporation might do both software development and per sitting.
However, there is a more important question. Should you have a corporation with multiple businesses?
Enforcing Inspection Rights – “Absolute” Does not Mean “Absolute” in California
In Directors’ Inspection Rights Include (Almost) Anything in California, I discussed corporate directors’ inspection rights. Quoting California Corporations Code Section 1602, I noted that directors have an “absolute right” to inspect corporate records and physical properties. This post explains that in enforcing inspection rights, “absolute” is not really “absolute”.
The fundamental limitation, established in case law, is that a director may not use inspection rights to harm the corporation. (more…)
Required Officers – California Corporations are Unique
Officers conduct a corporation’s day-to-day business. Among the states, California law is unique in its set of required officers.
California Corporations Code Section 312(a) states that each California corporation must have:
- A chairman of the board or a president or both;
- A secretary; and
- A chief financial officer.
Additional officers are optional.
That Code section also provides that the president is the chief executive officer of the corporation, unless the articles of incorporation or the bylaws state otherwise.
Other states typically take an approach similar to that specified in Delaware General Corporation Law Section 142 (emphasis added):
What is a Stock Assignment Separate from Certificate?
I recently introduced a client to the document called a Stock Assignment Separate from Certificate. While well-known to business lawyers, this document is not known to most business owners.
The client was implementing employee and management stock plans. To provide stock for the plans, the corporation was going to repurchase shares from the founders.
The CFO asked whether and how the founders should complete and sign the assignment provision on the back of their share certificates.
What is an Inc. and Why Should I Want One?
Frequently, an international prospect or client will tell me that he wants to create an Inc. to run his business in the in the United States. This post explains what an “Inc.” is and where the term comes from.
History and Other Countries
For centuries, in the interest of fostering economic activity, governments have recognized certain types of businesses as separate legal entities. Investors’ liability is limited to the amount invested (“limited personal liability”). Investors’ other assets, beyond the amount invested, may not be taken to satisfy the business’s debts or other obligations.
Directors’ Inspection Rights Include (Almost) Anything in California
I have written about shareholders’ rights to inspect corporate financial records and shareholder lists. This post discusses directors’ inspection rights, which are far greater.
California Corporations Code Section 1602 states:
Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation of which such person is a director and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. This section applies to a director of any foreign corporation having its principal executive office in this state or customarily holding meetings of its board in this state. (more…)
Who Gets to See the Shareholder List?
The founder of a closely-held corporate client, knowing that some employees soon would be shareholders, recently asked whether those employee-shareholders would have the right to find out how many shares he owns. Here is the information I provided concerning who gets to see the shareholder list.
Because the client is a California corporation, Corporations Code Section 1600(a) governs who gets to see the shareholder list. That Section states, in relevant part (emphasis added):
A shareholder or shareholders holding at least 5 percent in the aggregate of the outstanding voting shares of a corporation…shall have an absolute right to…inspect and copy the record of shareholders’ names and addresses and shareholdings during usual business hours upon five business days’ prior written demand upon the corporation….
The Definition of Director May Depend on the Context
While working with one of my international clients several months ago, I re-learned a lesson that I already knew: The meaning of a word (in this case, the definition of Director) may depend on the context.
The client is located in Vietnam and wanted to open a branch office in the Bay Area. It would be “doing business” in California, so it needed to qualify as a foreign corporation.
I duly prepared a Statement and Designation by Foreign Corporation and had it signed by the client’s most senior officer. That officer’s title, translated as “Director,” was entered onto the form.
Incorporation is for Corporations, not for LLCs
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…)
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.
What is a Board of Directors?
This post is based on a Quora question that I answered: Q. What is the board of directors? What are the functions of the board of directors? What is the function of each member of the board?
A. The board of directors, which is subject to shareholder election and removal, generally is responsible for managing the corporation’s business and affairs.
Specific responsibilities typically undertaken by a board (particularly in a mature company) include, but are not necessarily limited to, the following: (more…)
Avoid Paying California $800 per Year … for 15 Days
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.
How Can I Enter a Non-US Address on the Statement of Information Form?
This post is adapted from an Avvo question that I answered. The questioner was having trouble figuring out how to enter foreign addresses in the Statement of Information form that California corporations file with the Secretary of State each year.
Q. I need to file Form SI-200 for a California corporation. The officers are foreign persons living outside of the US, but the form does not have a field for country. How can I solve this Problem?
What is a Branch Office?
Generally, when a foreign client starts a new business in the U.S., we form a new corporation for both business and legal reasons. Recently, however, I had an interesting experience helping a foreign client set up a branch office without forming a new legal entity.
The client acknowledged the benefits of a new corporation. However, procedural issues for the client (located in Southeast Asia), would result in the necessary approvals taking too long. As a result, the client asked that I first provide help setting up a branch office in Silicon Valley. That branch office later would be used by a new California corporation that we would form.
(more…)
What is Preferred Stock?
Preferred stock typically is issued to venture capitalists or other institutional investors. Its name is derived from the fact that it has significant “preferences” relative to common stock, which is the basic equity security that is issued when a corporation is formed.
Common stockholders’ principal right is to vote on the election of directors and on other fundamental corporate matters. In addition, common stock has the potential to increase in value if the corporation performs well financially.
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:
What is a Quasi-California Corporation?
This post is the result of my research on the duties of a director of a Delaware corporation that is located, and doing much of its business, in California. Specifically, I wanted to confirm that California law governed those duties, because it is a so-called quasi-California corporation.
Quasi-California Corporation Criteria
Corporations Code Section 2115 addresses non-California corporations for which (a) most voting shares are held by shareholders in California and (b) the average of the following three factors exceeds 50%.
- The percentage of its property that is located in California.
- The percentage of its payroll that is paid in California.
- The percentage of its sales that take place in California.
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.
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…)
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.
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:
Corporate Officer Can Be Personally Liable for Copyright Infringement
In Blue Nile v. Ideal Diamond Solutions, the U.S. District Court for the Western District of Washington held that co-defendant Larry Chasin, founder and an officer of defendant IDS, was personally liable for infringement of plaintiff Blue Nile’s copyrighted images, even though Chasin claimed he had no role in putting infringing images on websites and he did not know the images were infringing.
Blue Nile is an online jewelry and diamond retailer. Chasin founded and operated IDS to create websites for brick-and-mortar jewelers to help them compete online. The websites included some of Blue Nile’s copyrighted images.
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.
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.
If You Accept Venture Capital, You will Lose Control of Your Company
After several years of hard work, a client has gained so much traction that venture capitalists – on their own initiative – are asking to make an investment. When the first term sheet arrived, however, the founder / CEO was disappointed – the valuation was fine, but his ability to make significant decisions would be curtailed. I pointed out: If you accept venture capital, you will lose control of your company.
The loss of control does not result from a change in voting power: The VC will own a minority of the corporation’s shares and will control a minority of the seats on the board of directors.
I Think the Economy – and Business Confidence – are Improving
I think the economy – and business confidence – are improving. The reason: During the past week, two of my clients received unsolicited acquisition overtures from well-known Bay Area companies.
I’ll readily admit that this? does not represent a statistically valid sampling of local businesses. Nevertheless, I find this development meaningful because the last time a client was acquired was years ago. (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…)
Who Can Sign a Contract for an LLC?
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.
Why was My Corporation / LLC Suspended or Forfeited?
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…)
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!
Why did both the President and the Secretary of the Corporation Sign that Document?
Contracts and other documents usually are signed on behalf of a party by a single representative (see Who Can Sign a Contract for a Corporation?). However, at least in California, important documents often are signed on behalf of a corporation by two officers, such as the President and the Secretary. This post explains the reason for two signatures.
Corporations Code Section 313 says, in relevant part (emphasis added) that: (more…)
No, You Can’t Marry a Corporation
Now for something on the lighter side, a Quora question and my answer: Q. If marriage is a constitutionally protected right between people, and corporations are guaranteed the rights of a person, is it possible to marry a corporation? (Emphasis added.)
A. No. Marriage is reserved for natural persons (let’s not get into which pairs of natural persons). Corporations and other business entities are artificial persons.
Photo credit: Andrew C. 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.
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…)
Directors’ Fiduciary Obligations: Delaware vs. California
Delaware: Paying Ovitz $130 million was not grossly negligent.
In Why are So Many Corporations Formed in Delaware?, I stated that Delaware law minimizes directors’ responsibility for decisions that have made. This post explains my point by comparing Delaware and California law regarding directors’ fiduciary obligations. (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…)
How Can I Change the Name of My Corporation?
Sometimes a corporation needs to change its name – perhaps its products or services have changed, or the name is similar to another company’s name, or there is a better way to suggest what makes the company special. This post explains how easy it is for California and Delaware corporations to change their names. (There are exceptions, but the following will apply under most circumstances.)
California corporations:
- Both the board of directors and the shareholders (before or after the board) must approve the name change. (Corporations Code Section 902(a))
- Then the corporation files a Certificate of Amendment of Articles of Incorporation.
How Can I Switch from a Sole Proprietorship to a Corporation?
This post is based on (and is an edited version of) a Quora question and my answer. Q. How do you switch from a sole proprietorship to a corporation? You do, of course, want to keep all your intellectual property and brand and street cred and so on. Can you treat that as equity?
A. Yes, you can treat the assets of your sole proprietorship as the consideration for which your shares are issued. You need to create an agreement by which you (as an individual) assign those assets (including the intellectual property rights therein) to the corporation. This is, of course, a friendly transaction, so the assignment agreement can be simple – no need for endless pages of legal boilerplate to protect against litigation that never will occur.
Related post: How to Assign a Patent Application to Your Startup 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.
Foreign Companies: Form a Corporation when You Come to the U.S.
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.
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.
What Does the Chairman of the Board Do?
Earlier today I answered the following Quora question: What does the Chairman of the Board do?
Here is the answer that I provided:
The Chairman of the Board does what the Bylaws and the Board of Directors say s/he will do. Here is some typical Bylaws language: (more…)
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…)
When Should We Have our First Annual Meeting of Shareholders?
Having read Annual Meetings: The Basics, a fan of this blog asked the following question: When must we hold our first annual shareholder meeting?
The answer is stated by implication, rather than directly, in applicable statutes (which depend on the state of incorporation).
California Corporations Code Section 600(c) says, in relevant part:
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.
Who Can Sign Contracts for a Corporation?
A 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.
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.
Cumulative Voting: Board Representation for Minority Shareholders
Cumulative voting for corporate directors is a process by which each shareholder’s voting power is multiplied by the number of directors to be elected. The objective: By allocating all of their votes to one or a small number of directors, minority shareholders can ensure that their interests are represented on the board. (I.e., a majority shareholder will not automatically control all board seats.) (more…)
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.
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.
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!
California doesn’t *always* prohibit non-compete provisions
California is well-known for refusing to enforce non-compete provisions, especially in the post-employment context (see Choice-of-Law and Non-Compete Provisions), so individuals will not be deprived of gainful employment. But provisions limiting competition aren’t always taboo. (more…)
Can a Corporation Enter into a Business Transaction with One of its Directors?
From time to time, a client corporation wants to enter into a business transaction with one of its directors. An astute CEO, recognizing the potential for a conflict of interest, will ask whether and how such a transaction can take place without violating any laws or any fiduciary obligations to the corporation.
California Corporations Code Section 310 provides that, generally, a transaction between a corporation and one of its directors is permitted if, following disclosure of all material facts and the director’s interest in the transaction, it is approved either by a disinterested majority of the board of directors (usually the easier approach) or by the shareholders. (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.
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.
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:
- Choose the right type of legal entity for your business
- If you choose a corporation or LLC, comply with applicable formalities
- Buy the right types and amounts of insurance
- Identify and protect your intellectual property
- Use your form of client agreement whenever possible
- Be careful when assigning or waiving intellectual property rights
- Be careful when collaborating or subcontracting
- Be careful with nondisclosure / confidentiality agreements
- Avoid oral agreements whenever possible
- 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!
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…)
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.)
The Top Ten Legal Mistakes of Startup and Early-stage Companies
I am pleased to make the article “The Top Ten Legal Mistakes of Startup and Early-stage Companies” available as a Free Download on the Downloads page.
Here are the ten mistakes that are discussed:
- Failing to comply with corporate formalities
- Pretending that employees are independent contractors
- Neglecting to provide and update an employee handbook
- Failing to establish or adhere to discipline or termination procedures
- Failing to ensure that the company owns its intellectual property
- Believing that “open source” means “no restrictions”
- Thinking that all NDAs have the same terms
- Believing that websites can unilaterally change their terms of use
- Using another company’s standard-form agreement
- Giving “family jewels” to an overseas supplier
Related post: Top Ten Intellectual Property Mistakes of Startup Entrepreneurs
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.
Annual Meetings: The Basics
Sometimes, in an effort to reduce legal fees, clients conduct corporate annual meetings, and prepare minutes, on their own. Regrettably, if they do not know what they are doing, they can make a mess. Here is a quick overview of how to do things right.
Both California (Corporations Code Section 600(b)) and Delaware (General Corporation Law Section 211(b)) require that every corporation hold an annual meeting of its shareholders to elect directors for the coming year. (In the case of a Delaware corporation, however, the directors may be elected by written consent without calling a meeting.) Any other proper business may be transacted at the shareholder meeting.
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 Your Alter Ego
This 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…)
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.
Buy-sell Agreement Objectives and Issues
The 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…)
Researching the Opposing Party: Forewarned is Forearmed
When I prepare to negotiate an agreement for a client, I start by researching the other party so I can gain insights that might help me represent my client more effectively. The obvious starting point is the website for the other party, where I can quickly understand its business and see who its executives are. But I also look for legal information that typically is available only elsewhere.
Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.
