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…)What is Dissociation?
This post explains what dissociation is. This is part of Dana Shultz’s Canonical Questions on the Law® series of questions and answers about legal issues, concepts and terminology.
Definition of Dissociation
Dissociation is the process by which one:
- Stops being a member of a limited liability company (LLC); or
- Stops being a partner in a partnership.
Alternatively, this process sometimes is called withdrawal.
(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…)May an LLC Manager Be a Minor?
This post discusses whether an LLC manager (the person who manages a limited liability company) may be a minor.
In May a Minor Form an LLC?, I discussed whether the organizer of an LLC may be a minor. In that post, I noted that only five states – Colorado, Illinois, Minnesota, Oregon and Texas – prohibit a minor from organizing an LLC. So, those are the states to which I paid the closest attention in writing this post. (more…)
What is a Managing Member?
The post is about the definition of the term ” managing member “. I am writing this because of a Quora question that I answered a short while ago. Please see What is the difference between a managing member and a member in an LLC?
I have not confirmed whether all of the following background information applies equally to all states. However, I know that it applies to enough states that I will present the following as applying throughout the U.S., generally. (more…)
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…)
How to Form an LLC
I am writing this post about how to form an LLC (limited liability company) because of a question that I answered on Quora. Please see What are the basic requirements for forming of a LLC in US?
The following is an overview of the steps required to form an LLC properly in the U.S.: (more…)
Is an Operating Agreement Required for an LLC?
I have written many times about limited liability company operating agreements. This post answers the following question: Is an operating agreement required?
As is the case for many issues pertaining to limited liability companies, the answer varies from state to state. To answer this question, we need to examine the relevant statutes for each state.
Most States, Operating Agreement Not Required
Most states do not require that an LLC have an operating agreement. For example: (more…)
Units are to LLCs as Shares are to Corporations
I am writing this post about limited liability company (LLC) units because of a question that I answered on Quora. Please see Why would an operating agreement for an LLC have a Schedule A and also a quantity of Class A interests?
LLC Membership Interests: Percentages
We can specify LLC membership interests in either of two ways. (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…)
$800 Franchise Tax is Due Even if LLC is Canceled
This post about California’s $800 franchise tax is based on my recent answer to a Quora question.
A.: One can cancel a California limited liability company before the 15th day of the fourth month. However, such cancellation will not eliminate the obligation to pay the $800 annual franchise tax. (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…)
CA-RULLCA Receives Corrections Two Years Later
In RULLCA Brings New LLC Laws to California in 2014 , I explained how California’s version of the Revised Uniform Limited Liability Company Act (“RULLCA” or “CA-RULLCA” – Corporations Code Sections 17701.01 – 17713.13 ) was to take effect January 1, 2014. This post describes changes to CA-RULLCA that took effect on January 1, 2016.
Most of the changes were minor clean-up of the sort that one expects when major new legislation is adopted. However, some of the changes are noteworthy. (more…)
Why Aren’t All LLCs Manager-managed?
This post about manager-managed limited liability companies is based on a Quora question  that I answered. Please see Why are not all LLCs manager-managed?
In this post I will refer to California law. I expect that the law of many, if not all, other states is similar.
Default is Member-managed…
The default is that a limited liability company is member-managed. Corporations Code Section 17704.07(a) states: “A limited liability company is a member-managed limited liability company unless the articles of organization contain the statement required by paragraph (5) of subdivision (b) of Section 17702.01.” (more…)
Yes, a Stranger Can Cancel Your LLC!
This post discusses how (amazingly!) an unauthorized stranger can cancel your LLC (limited liability company) or corporation. It is based on a Quora question that I answered. See What prevents someone from filing a restated certificate of incorporation for a Delaware corporation in which they are not authorized to do so?
Unfortunately, the ease with which entity-formation documents can be filed in the U.S. – while facilitating business startups – does allow unauthorized filing of such documents. This means that, whether accidentally or intentionally, a stranger can cancel your LLC (or corporation). (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…)
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…)
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…)
Under RULLCA Operating Agreements Have Limits
At the beginning of this year, the California Revised Uniform Limited Liability Company Act (RULLCA) took effect. (See RULLCA Brings New LLC Laws to California in 2014.) This post discusses how under RULLCA operating agreements for LLCs have a wide variety of limits.
RULLCA operating agreements‘ limits are addressed in Corporations Code Section 17701.10. Unfortunately, that section’s discussion of mandatory provisions is pretty difficult to understand for the following reasons. (more…)
LLCs: Why an Operating Agreement is Important
This post discusses why an operating agreement is important for every limited liability company (LLC). It expands upon an answer I provided on Quora several months ago. (See In simple terms, why are operating agreements important?)
An operating agreement is an agreement among the members of an LLC. It addresses relations among the members and how the LLC will conduct its affairs. (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 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…)
RULLCA Brings New LLC Laws to California in 2014
RULLCA is an abbreviation for the California Revised Uniform Limited Liability Company Act. That Act will bring new LLC laws to the state starting January 1, 2014.
RULLCA – Up to Date and in the Mainstream
RULLCA is intended to reflect changes in LLC law during the past 20 years. Also, it will make California’s LLC law more similar to LLC law in other states.
Perhaps most interesting, the new law applies automatically to all California LLCs in existence as of the effective date. It will apply to all out-of-state LLCs that are registered in California, as of that date, as well. No new documents need be filed with the Secretary of State. The new law has neither opt-in nor opt-out procedures.
(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.
How Do We Add a New LLC Member?
Recently, I have seen several limited liability company (LLC) members ask, online, how they can add a new LLC member. This post provides the answer, which is pretty simple.
Short answer: One must amend the Operating Agreement to add a new LLC member.
Slightly longer answer: An Operating Agreement (OA) can be oral or written. A written OA is better because it clearly documents the members’ agreement concerning the LLC.
How Should I Use a Fictitious Business Name?
This post is adapted from my answer to a Quora question about use of a fictitious business name (FBN): Q. Must an LLC with a fictitious business name display the LLC name on its website?
A. In my opinion, an entity’s proper name and complete identification should be provided in every agreement. Agreements include website terms of service. Example showing how to include both the entity name and the FBN:
[Company Name], LLC, a California limited liability company doing business as [Fictitious Business Name], with a place of business at [address]
California Secretary of State Reduces Turnaround Times!
California Secretary of State turnaround times for corporate and LLC formation – which stretched to their longest ever early this year – now have been reduced significantly.
The reason: In April, the state Legislature passed a bill authorizing $1.6 million for overtime and temporary personnel to resolve a backlog of 122,000 business filings! (more…)
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…)
Do LLC Officers Have a Fiduciary Duty?
Officers of a corporation have a fiduciary duty to both the corporation and its shareholders. (See California Officers Need to Be More Careful than Directors.) I recently had to consider, for a limited liability company in California, whether LLC officers have a similar duty.
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).
I was preparing the operating agreement for a client’s LLC. The client was to be the sole member (equity owner) and manager. (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?
Single-Member LLCs – What’s the Deal?
From time to time, I receive question from entrepreneurs about alleged deficiencies in single-member LLCs (limited liability companies). (As is discussed below, single-member LLCs are different from multi-member LLCs.) This post is adapted from a question about single-member LLCs that I answered on Avvo.
Single-Member LLCs Provide Limited Liability Protection
Q. What is a best way to include a relative-foreigner as LLC member in CA? I formed single-member LLC in CA. Unfortunately I found later that single-member LLCs do not provide usual limited liability protection. (more…)
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…)
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?
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.
Which Financial Information Must an LLC Provide to its Members?
Several months ago, I wrote “Which Financial Information Must a Corporation Provide to its Shareholders? “ This post – prompted by a client’s question – discusses the financial information that a California limited liability company must provide to its members. It also explains that such information cannot be waived by any member.
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). (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!
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…)
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.
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.
Attention LLC Members: You Have the Right to Be Heard
I have written about annual meetings of corporations’ shareholders (Annual Meetings: The Basics). Although limited liability companies (LLCs) have no obligation to hold, and typically do not hold, annual meetings of their members, meetings of members can take place.
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).
For California LLCs,? meetings of members are governed by Corporations Code Section 17704.07.
Forming an LLC Online: You Get What You Pay For
Update (November 17, 2010): I have decided to start identifying by name providers of corporate and LLC online formation services who, in my opinion, have delivered inadequate service to my clients. (The clients used those providers before retaining me.) The inadequate provider referenced, below, in this post is Rocket Lawyer, which has been added to the Hall of Shame page.
Update (April 27, 2011): I had a cordial conversation this afternoon with Rocket Lawyer’s VP of Sales & Business Development. He acknowledged that, last year, Rocket Lawyer was using a filing service (filing operations are outsourced) that did not meet the company’s expectations. He reported that the current filing service is performing at a much higher level and that Rocket Lawyer is paying closer attention to ongoing support of its customers.
* * *
Almost a year ago, I suggested (in Can I form an LLC without a lawyer?) that entrepreneurs seeking to save money when forming a limited liability company would be better off buying a book from Nolo than using an online LLC formation service. I now believe that more than ever.
Can an LLC have Members with a Non-ownership Economic Interest?
Today I answered a LinkedIn question about forming an LLC where some members have no ownership of the LLC but receive a share of cash resulting from the business’s profits (their economic interest). The question and answer are reproduced, in somewhat edited form, below. (Since I first wrote this post, LinkedIn has shut down its Q&A feature, so you no longer can find this question there.)
Q: Can you have a Manager Managed LLC where Members have zero ownership interest but receive a share of economic interest? So, the Operating agreement would look like this: 2 Manager Members w/ 50/50% ownership share and 25/25% economic share; 2 Additional Members w/ 0% ownership share and 25/25% economic share. (more…)
Can I Assign My LLC Membership?
Recently I have received several questions about assigning LLC (limited liability company) memberships. Here is a brief summary of California law on this topic.
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 applicable statutes are Corporations Code Sections 17705.01-17705.04. If assignment of membership interests (known as “transferable interests” under RULLCA) is not covered in the LLC’s Articles of Organization or Operating Agreement, the the following statutory provisions apply:
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.
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…)
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.
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…)
Should We Issue LLC Membership Certificates?
A friend recently asked whether his limited liability company, which was seeking investors, should issue LLC membership certificates.
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).
Here are the points that I made in my response. (more…)
IP Indemnification: Who Will Be There to Satisfy the Obligation?
Almost a year ago, I posted IP Warranties and Indemnification: How Much is Reasonable? This post addresses a related subject: If you get the other party to agree to indemnify you, who will be around to satisfy the obligation?
A client is in the process of acquiring all of the rights to certain software, which was developed by several recent college graduates who formed a limited liability company (LLC). The client knew to ask for indemnification against claims that the software infringes any third party’s intellectual property rights.
What the client had not thought about, however, was whether the LLC could satisfy the indemnification obligation – which is unlikely, given that the LLC probably (a) has few assets and (b) will be dissolved once the transaction is consummated.
Accordingly, I recommended that we include in the agreement the LLC members’ covenant to satisfy the indemnification obligation if the LLC, itself, doesn’t. The members may be unhappy, but if they want the transaction badly enough, they will agree.
Lesson: An indemnification obligation is only as valuable as the party takes it on.
Photo credit: Anna H-G via stock.xchng
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.
A Member can Withdraw from an LLC, Despite the Operating Agreement
From time to time, I am asked how a member of a limited liability company (LLC) can stop being a member. In legal terms, this is referred to as a member wishing to withdraw from an 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).
Under this new law, the term “withdraw from a limited liability company” was changed to “dissociate as a member” or “withdraw as a member”.
A well-written Operating Agreement will address this question directly. It will specify the circumstances under which members may withdraw from an LLC, and the consequences of withdrawal.
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.
Can I compete with my own LLC?
I recently had a Q-and-A dialogue on Avvo with an LLC member-manager who had a falling out with the other (50%) member and wanted to know whether he could form a separate business that would compete with the existing LLC. An edited version of our exchange appears below.
Q. I have an LLC with a partner. We each own 50% of the business (its an e-commerce store) and we’re member-managers. I’d like to buy him out, but his price is higher than I’m willing to pay. I have been pondering starting another e-commerce store selling kind of the same thing. Question is a) Would an e-commerce business out there competing for new customers constitute a breach of fiduciary duty? b) Would it be possible to rescind title as manager in the LLC which would eliminate that non compete fiduciary duty of a manager?
Forming a Corporation in California? Get Ready to Wait
July 2013 update: California Secretary of State Reduces Turnaround Times!
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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!
Can I assign a DBA to my new LLC?
This post is based on an answer that I provided on Avvo. The user wanted to know whether he could assign a fictitious business name (FBN) – or, colloquially, assign a DBA, short for “doing business as” – from his sole-proprietor business to a limited liability company (LLC) that he was about to form.
He probably would assign all of the sole-proprietor assets (and liabilities) to the new LLC. However, there are special considerations if one wants to assign a DBA / FBN. (more…)
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 we kick one of the members out of our LLC?
I recently ran across a situation where several members of a limited liability company wanted to get rid of a fellow member whose disruptive behavior was harming the LLC, but they did not know whether or how they could kick him out.
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).
California Corporations Code Sections 17706.02(b) and (c) say that an LLC operating agreement may provide for dissociation of a member. Upon dissociation, the member loses the right to participate in the LLC’s activities and holds any transferable interest in the LLC as a transferee. (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.
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.
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!
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…)
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.
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…)
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.
