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Welcome to Legal Basics for Business Protecting your business & your brand © Casoni Law Group 2009 p 1
Course Overview Seven week class with possible bonus sessions Guest speakers By the end of class you will: Select an entity choice you are comfortable with for your business Understand how to protect your brand through trademarks and copyrights Understand contract obligations and have key templates you can start using now Understand legal dispute processes such as litigation, mediation, and arbitration and have some insight as to beneficial business insurance options © Casoni Law Group 2009 p 2
Guidelines for the upcoming weeks No stupid questions. Take off your expert hat and try to listen for things you dont already know. Be open to learning something new or hearing something from a different perspective. These sessions will be recorded and distributed. There will be a 24 hour delete policy. Accelerated learning strategies This class will provide information but is not intended to be legal advice. As a student in this class, you have not entered into an Attorney/Client relationship with Dava Casoni. © Casoni Law Group 2009 p 3
Lesson 1: What did all that legal jumbo mean? Why does it matter if we have an Attorney/Client relationship? The point at which the attorney/client relationship is formed may determine whether or not the communication is confidential. Important Takeaway: Dont discuss information you would like to keep confidential on this call. © Casoni Law Group 2009 p 4
Introduction to the law Statutory Law: Body of law created by acts of legislature in contrast to constitutional law, administrative law and common law. Common/Case Law: Body of law developed and derived through judicial decisions. Certain states base their marital property rights on common law. In these common law systems, each spouse owns whatever he/she earns. Other states are called community property states. Under community property systems, one half of the earnings of each spouse is considered owned by the other spouse. Community Property states: Louisiana, Texas, New Mexico, Arizona, California, Washington, Idaho, Nevada and Wisconsin. © Casoni Law Group 2009 p 5
Week 1: Entity formation How to determine which entity is the best for your business Considerations: Your Business Vision Risk/Liability Exposure Tax Treatment Fees and On-going filing requirements Ease of transferability © Casoni Law Group 2009 p 6
Different liability options Unlimited Liability structures: 1.Sole Proprietorship 2.General Partnership 3.Limited Partnership (hybrid): GP has full management responsibility & liability Limited Liability structures: 1.Limited Liability Company 2.Corporation Note: Limited liability does not extend where business owner takes some action (or fails to take some action that he is legally obligated to take), the responsibility for resulting damage or injury is the individual's, whether or not the business is incorporated or an LLC. For example, if a business owner driving a car causes injury to another person in a car accident, the business owner will be liable for that injury, whether or not the accident occurred on company business, whether or not the company is incorporated, and whether or not the corporate veil is strong. © Casoni Law Group 2009 p 7
Different Tax Treatment Options Flow Through: Sole Proprietorship General Partnership Limited Partnership Limited Liability Company S-Corp Double Taxation C-Corp © Casoni Law Group 2009 p 8
How to create No Action Required/DBA: Sole Proprietorship General Partnership Filing with Secretary of State/Notice: Limited Partnership Limited Liability Company Corporation © Casoni Law Group 2009 p 9
Where to create Different States have different filing requirements and different fees. Check your states Secretary of State website/business division for filing requirements and fees: State Website California www.sos.ca.gov/business/www.sos.ca.gov/business/ Delaware corp.delaware.gov/howtoform.shtmlcorp.delaware.gov/howtoform.shtml New York www.dos.state.ny.us/corp/corpwww.htmlwww.dos.state.ny.us/corp/corpwww.html Nevada www.sos.state.nv.us/business/www.sos.state.nv.us/business/ Others www.statelocalgov.net/50states-secretary-state.cfmwww.statelocalgov.net/50states-secretary-state.cfm © Casoni Law Group 2009 p 10
DBA/Fictitious name filing © Casoni Law Group 2009 p 11
Forum shopping Forum Shopping: Need to have presence in forum state Foreign entity filings required Registered agent for service of process required Approximate Filing Fees: CorporationLLC California$100/$25 yrly/ $800 tax$70/$20 biennial/ $800 tax New York$125/$9 biennial/$325-800$200/$50 pub./$9 bi/$325 Delaware Based on number of shares/ $75-$165k $250/$250 Texas$300/% of revenue, min 0Same as Corporation Colorado$50/% of revenue, min 0Same as Corporation © Casoni Law Group 2009 p 12
Comparison of Entities Sole Proprietorship/ DBA LLCCorporation FormationNo filing required unless using a fictitious name. File: Articles of Incorporation,Statement of Information, Annual Optional:Sub-chapter S election (60 days post formation),501(c)(3) election for non-profits File: Articles of Incorporation, Statement of Information, Annual Optional: Sub-chapter S election (60 days post formation, 501(c)(3) election for non-profits, Professional Corporation OwnershipPersonal/DirectMembership Interests or UnitsShares of Stock: Common and Preferred LiabilityUnlimited LiabilityMembers generally not personally liable for entity debts. Shareholders generally not personally liable for entity debts. Tax TreatmentIncome/Loss passed through to owners. S-Corp: Income/Loss passed through to shareholders. C-Corp: Entity level taxation, dividends distributed to shareholders and considered taxable dividend income. ManagementSole Proprietor has full control, Partnership management is outlined in partnership agreement. Flexible management outlined in Operating Agreement (not filed with state). Board of Managers is optional. Managed by Board of Directors who are elected by shareholders. Board appoints officers who manage day to day. Board has fiduciary duties to shareholders and significant authority to hire/fire officers and make other corporate decisions. © Casoni Law Group 2009 p 13
Comparison of entities contd Sole Proprietorship/ DBA LLCCorporation Pros Minimal formalities Maximum flexibility Pass through taxation Fewer formalities Significant flexibility Pass through taxation Limited Liability S-Corp: Reasonable flexibility Pass through taxation C-Corp: Limited Liability Extensive tax and ownership/transfer flexibility Cons Maximum liability Some formalities Some transfer limitations S-Corp: Maximum formalities C-Corp: Double taxation Maximum formalities © Casoni Law Group 2009 p 14
Piercing the corporate veil Shareholders who blur the distinction between the corporation and themselves should not be allowed to hide behind the corporate veil. California cases dating back to the early 1900's have consistently held that two requirements must be met before shareholders can be exposed to liability under California law: First, there must be such a "unity of interest and ownership" between the corporation and the shareholders that the personalities or identities of the corporation and the individual are no longer separate. Second, it must be found that, if the acts are treated as those of the corporation alone, there will be an "inequitable result." © Casoni Law Group 2009 p 15
Steps to avoid a piercing the corporate veil include: Adequately capitalize the corporation. Do not allow the corporation to be financially dependent on shareholders for working capital. Make sure stock is issued and that you have complied with requirements relating to issuance of a security. Maintain corporate records, including minutes of shareholders and directors meetings held at least annually. Maintain separate financial records. Keep balance sheets and profit and loss statements from each year. Maintain separate bank accounts for the corporation, and make few loans between the shareholders and the corporation. Document all loans made and make payments in accordance with the repayment terms. Do not verbally assure corporate creditors that you will personally take care of corporate obligations if the corporation is unable to. Do not blend corporate and personal obligations. © Casoni Law Group 2009 p 16
Corporate and LLC Records LLC: Operating Agreement and May Have Minutes or Resolutions Corporation: Bylaws and Minutes/Resolutions © Casoni Law Group 2009 p 17
Do you need an attorney? Basic entity filing - single owner - can generally complete without attorney Amendments: File basic application and amend later, Cons: Can be too late. Multiple parties: consider having a corporate attorney/tax attorney create underlying documents (discuss conflicts) Lawyer referral service: http://www.calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10182 Modest fee service: http://tinyurl.com/d5wqz9http://tinyurl.com/d5wqz9 Non-profits/pro bono Search atty database to confirm standing: http://members.calbar.ca.gov/search/member.aspx © Casoni Law Group 2009 p 18
Sample Organizational Minutes © Casoni Law Group 2009 p 19
Operating Agreements/Articles cover: Articles cover formation matters such as name, purpose, agent address Articles or Operating Agreements MAY contain: Managed by manager v. members/management fee Provisions governing member admission Time at which LLC will dissolve Events triggering dissolution Limitations on member or manager authority to bind the company Capital contributions/members accounts Profit/loss sharing Distributions Management decisions Indemnification Transfer of interest limitations (right of first refusal, unapproved transfer limited to profit share not management, etc.) © Casoni Law Group 2009 p 20
By-laws cover: Number of directors or range (eg, not less than three or more than seven), generally not less than three unless the corporation only has one or two shareholders, in which case can be one or two, respectively. Time, place and manner of conducting shareholder meetings Qualifications, duties, compensation of directors and annual election details Quorum requirements Board committees Appointment, duties, compensation and tenure of officers Making of annual reports and financial statements to shareholders Indemnification of Directors and Officers (note: fiduciary duties, corporate opportunity) Lost Certificates Note: Stock classes and rights are handled in separate filing and/or in Articles of Org. © Casoni Law Group 2009 p 21
Miscellaneous Timing: Liability for pre-filing obligations, novation Name Change v. Dissolution Pros and Cons of Running Multiple Businesses under one LLC/Corporation © Casoni Law Group 2009 p 22
Secretary of State LLC article filing © Casoni Law Group 2009 p 23
Articles of incorporation (non-profit) © Casoni Law Group 2009 p 24
Articles of incorporation © Casoni Law Group 2009 p 25
Written Consent © Casoni Law Group 2009 p 26
Sample Minutes Sole Shareholder Corp. © Casoni Law Group 2009 p 27
Sample DE Certificate of Incorporation © Casoni Law Group 2009 p 28
Sample Annual Meeting Minutes © Casoni Law Group 2009 p 29
Sample Consent in lieu of annual meeting © Casoni Law Group 2009 p 30
Stock certificate © Casoni Law Group 2009 p 31
Licenses & Permits Visit http://www.calgold.ca.gov/Default.asp?VW=CChttp://www.calgold.ca.gov/Default.asp?VW=CC © Casoni Law Group 2009 p 32
For latest tips for entrepreneurs, visit: www.legalbasicsforbusiness.com/ebrief © Casoni Law Group 2009 p 33
MY BORROWER IS A ____________________* WHAT DO I NEED TO KNOW? AND WHO HAS THE AUTHORITY TO SIGN? *CORPORATION, PARTNERSHIP, LLC…OTHER COLORFUL ADJECTIVES.
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