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…)How Most States Chose “Shareholder” as Delaware Kept “Stockholder”
“Shareholder” and “stockholder” are synonyms. This post explains how most states came to use the former term in their laws, while Delaware consistently has used the latter.
Before Delaware had a general corporation law, Delaware’s legislature created each corporation. The Constitution of Delaware – 1831 so provided in Article II, Section 17, but made no mention of stockholders (or shareholders).
Following a constitutional amendment, Delaware adopted its first general corporation law in 1875. (See Laws of the State of Delaware, Vol. 15 – Part 1, beginning at page 181.) That law includes a few references to “stockholder”, none to “shareholder”. (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…)
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?
How Delaware Became the Incorporation Capital
This post explains how Delaware became the incorporation capital of the U.S. It is based on a Quora question that I answered recently. Please see How did Delaware acquire its status as a corporate haven?
There are a number of law review articles about the history of Delaware corporate law and how Delaware became the home to so many U.S. corporations.
In my opinion, one of the most informative articles is Arsht, “A History of Delaware Corporation Law”, Delaware Journal of Corporate Law (1976). (more…)
What is an Operating Agreement?
I have used the term “operating agreement” in quite a few of this blog’s posts. However none of those posts explains in detail what a limited liability company (LLC) operating agreement must contain. This post provides that information.
The required contents of an operating agreement depend on the state in which the LLC is formed.
Operating Agreement – California
In California, where I practice, the definition of an operating agreement is set forth in Corporations Code Section 17701.02(s). (more…)
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…)
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…)
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…)
Can I Form a Corporation with a Future Filing Date?
This post expands upon an Avvo answer that I provided. Q. Can I form a corporation with a future filing date?
A. Yes. The answer will vary slightly depending on the state of incorporation.
Future Filing Date in Delaware
If you want a future filing date in Delaware, Section 103(c)(4) of the General Corporation Law says, in relevant part:
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 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….
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.
IncNow Joins Hall of Shame
Almost two years ago, I wrote about how Delaware corporations with no-par-value stock can find themselves obligated to pay extraordinarily high franchise taxes (In Delaware, No-Par-Value Can Cost a Bundle). Yesterday, a reader of this blog pointed out that IncNow, an online incorporation service, virtually lures naive customers into this tax trap.
Here is what the reader reported to me:
- IncNow’s default assumption is that no-par stock will be issued.
- IncNow does not invite the user to specify a par value (in contrast to LegalZoom, for example, which does).
- IncNow’s representative said that the reader “could assign a par value to shares, under special requests at the bottom of the checkout form” [emphasis added].
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.
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 a Corporation Issue More Shares than are Authorized?
This post is based on a question that I (and others) answered on Quora: What happens when a corporation issues more shares than are authorized under the Articles of Incorporation?
Answer: The supposedly-issued shares are void – in effect, they do not exist. For the shares to be issued, the Articles (CA) or Certificate (DE) of Incorporation must be amended to increase the authorized number of shares. Then, to be safe, the shares should be re-issued pursuant to an appropriate board resolution.
Related posts:
- Must a Corporation Issue All Authorized Shares?
- How Many Shares Should My Corporation Authorize and Issue?
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’s the Difference between a Shareholder and a Stockholder?
I recently learned that some people are confused by the terms “shareholder” and “stockholder” and wonder what the difference between them is. Short answer: There is no difference. Each refers to the owner of one or more shares of a corporation’s stock.
“Shareholder” is the term used in the California Corporations Code, and “stockholder” is the term used in the Delaware General Corporation Law.
When referring to the law of one of those states, I use the term that appears in that state’s statutes. In general discussions, however, I tend to use the term “shareholder” because I am, and most of the corporations that I form and counsel are, located in CA.
Related post: How Most States Chose “Shareholder” as Delaware Kept “Stockholder”
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’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 Financial Information Must a Corporation Provide to its Shareholders?
The CEO of a client recently asked about the level of financial detail that must be disclosed to a (troublesome) shareholder. The client corporation was formed in Delaware but is located in California, so both states’ laws apply.
California Corporations Code Section 1601 says, in relevant part (emphasis added), that “[t]he accounting books and records of any domestic corporation, and of any foreign corporation keeping any such records in this state or having its principal executive office in this state, shall be open to inspection upon the written demand on the corporation of any shareholder . . . during usual business hours, for a purpose reasonably related to such holder’s interests as a shareholder . . . . Such inspection . . . may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts.”
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…)
How to Resign as Agent for Service of Process (or Disclaim a Corporate Position)
In “Incorporation: Not All (States’) Agents are Created Equal“, I discussed how agents for service of process in California are less formal – in both their appointment and their responsibilities – than registered agents in other states. California agents can resign more easily, too.
Corporations Code Section 1503(a) states that an agent for service of process may resign simply by filing a signed and acknowledged written statement. The Secretary of State? has provided Form RA-100 for this purpose. (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.
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.
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…)
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.
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.
Why (not) Incorporate in Delaware?
Let’s assume that you are starting a new business in the San Francisco Bay Area (where I live and work). And let’s assume, further, that you have decided to form a corporation to establish limited personal liability and to provide an easy way to accept investment capital, if and when appropriate. Should you incorporate in Delaware or in California?
Registered Agents Say Incorporate in Delaware
Registered agents cite a variety of reasons to incorporate in Delaware. Those reasons tend to fall into two categories: (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.
