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Business Law


Business Law

The other major source of wealth has been the investment of time and money in business ventures. Although business transactions are governed by laws that are relatively new (compared to real estate law), complex laws and regulations involving tangible personal property (such as equipment and inventory) and intangible personal property (such as accounts receivables, good will, ownership of business entities, and taxes) must be followed. A business transaction may be a trap for the unwary or the unprepared due to unforeseen or undisclosed liabilities or your unintended waiver of your rights. Many business transactions also involve real estate, which makes the practice of business law and real estate law an effective combination.

Business Law Tips

How can you protect yourself if you are buying or selling a business? 
There are so many traps for the unwary, such as assumption of unknown liabilities, income and property tax issues and licensing and governmental regulations.
Tip: Many times purchasing the assets of a business is better than buying the stock of the corporation, because by purchasing the assets and not the stock, you do not inherit the corporations’ liabilities, including undisclosed, unknown or unasserted claims. But even if you purchase just the assets, if you continue the same business under the same or similar name, a court may still hold you liable for the former company's product liability claims.
If you are starting a business, what form of ownership should it be in? Sole proprietorship, corporation, partnership, limited partnership or limited liability company? 
Each one of these choices may have major legal and tax consequences. See Choice of Entities below.
Tip: Some landlords, banks and other creditors want the owners to personally guaranty the lease or obligation, which will defeat the limited liability of certain legal entities, such as corporations and limited liability companies. Check to see if such guaranty provisions are part of your lease, loan documents or supplier agreements.
If you are in business with other co-owners, what will happen if you or another co-owner dies, gets divorced, becomes disabled, retires or just stops working?
Tip: A buy-sell or shareholder agreement can prevent problems and litigation. Life insurance and disability insurance can be used to fund the purchase of a deceased or disabled co-owner's interest in the company under a buy-sell agreement.
How do you protect your personal assets from your business's creditors if your business fails or is sued? The form of your business entity, such as a corporation, may not protect you if it is not properly set up and administered.
Tip: Doing business as a corporation or a limited liability company can provide some insulation from claims and debts. Transferring your assets to a friend or a relative usually does not give any protection. Treat your corporation as a separate person. Do not co-mingle funds, or pay personal bills with the corporate checking account or vice versa. If you need to lend money to your corporation have the corporation give you a promissory note that is approved by formal action of the board of directors. Creditors can "pierce the corporate veil" and hold you personally liable if you fail to honor the corporate formalities.
What do you do if you are sued? What will your insurance cover?
Tip: You should notify your insurance company immediately. Your insurance company will hire a lawyer to defend you if the claim is or might be covered by the policy. The cost of defending a lawsuit can be enormous. Your comprehensive general liability insurance covers many types of claims arising out of a business, except workers' compensation. See an attorney immediately if your insurance company refuses to defend or sends you a "reservation-of-rights letter."
What do you do with that problem employee?
Tip: A properly drafted employee manual can be used to support your disciplining or firing an employee and protect you against allegations that you wrongfully terminated the employee.

Choice of Entities in California

Sole Proprietorship (Individual)
Advantages
  • No organizational documents or government filings needed to create or maintain
  • No separate tax filing - 1040 Schedule C
Disadvantages
  • No limitation of liability
  • Can have only one owner
Fictitious Business Names
Business and Professions Code Section 17900
Purpose: to protect those dealing with individuals or partnerships doing business under fictitious names, and make available to the public the identities of persons doing business under the fictitious name.
"Fictitious business name" means:
  1. In the case of an individual, a name that does not include the surname of the individual or a name that suggests the existence of additional owners, as described in subdivision (c).
  2. In the case of a partnership or other association of persons, other than a limited partnership, a name that does not include the surname of each general partner or a name that suggests the existence of additional owners, as described in subdivision (c).
  3. In the case of a domestic or foreign corporation, limited partnership, limited liability company, any name other than the name stated in its organizational documents, on file with the Secretary of State. (c) A name that suggests the existence of additional owners is one that includes such words as "Company," "& Company," "& Son," "& Sons," "& Associates," "Brothers," and the like, but not words that merely describe the business being conducted.
§17910.  Every person who regularly transacts business in this state for profit under a fictitious business name shall do all of the following:
    1. File a fictitious business name statement in accordance with this chapter not later than 40 days from the time the registrant commences to transact such business.
    2. File a new statement after any change in the facts
    3. File a new statement when refiling a fictitious business name statement.
Cannot use "Corporation," "Corp.," "Incorporated," or "Inc." unless that person is a corporation organized pursuant to the laws of this state or some other jurisdiction, or "Limited Liability Company" or "LLC" or "LC" unless that person is a limited liability company organized pursuant to the laws of this state or some other jurisdiction.
A person is not prohibited from using the complete words "Limited" or "Company" or their abbreviations in the person's business name as long as that use does not imply that the person is a limited liability company.
Does not apply to a nonprofit corporation or association, including, but not limited to, organizations such as churches, labor unions, fraternal and charitable organizations, foundations, and similar organizations.
The fictitious business name statement shall be filed with the clerk of the county in which the registrant has his or her principal place of business in this state or, if the registrant has no place of business in this state, with the Clerk of Sacramento County.
A fictitious business name statement may be filed in a county other than that where the principal place of business is located, as long as the above-requirements are also met.
After filing, the fictitious business name statement must be published in a newspaper once a week for four successive weeks and an affidavit of publication filed with the county clerk when publication has been accomplished.
The valid fictitious business name statement is good for five years.
Does not guaranty the right to use that name -
Use will be subject to trademark and other rights of others
Abandonment of Fictitious Business Name
  • When business is sold
  • When business is closed
  • When a partnership is dissolved
Withdrawal from partnership operating under Fictitious Business Name.
  •  When a partner is bought out
  •  When a partner withdraws from partnership
General Partnership (GP)
  • Joint Venture (JV) (or joint "adventure") is a partnership formed for a single transaction or single series of transactions, thus being more limited in both scope and duration.
  • § 16100 Corporations Code: The Uniform Partnership Act of 1994
"Partnership" An association of two or more persons to carry on as co-owners a business for profit and includes, for all purposes of the laws of this state, a registered limited liability partnership.
"Partnership agreement" means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.
Whether a partnership is a distinct legal person or entity or merely a group of individuals is a question which sometimes has important implications.
Advantages of General Partnerships
  • Easy to set up – no filing with the Secretary of State is required.
  • No formalities required
  • Pass-through entity for tax purposes
  • No franchise tax
Disadvantages of General Partnerships
  • Each partner has unlimited personal liability for all partnership contracts, debts and torts
  • Generally each partner can bind other partners, if acting within the scope of the partnership, even without knowledge or consent.
  • Partners are fiduciaries with a duty of disclosure, not interfere with or take a "partnership opportunity" and liability to account for profits
  • Knowledge of one partner is imputed to the other partners
  • Withdrawal or sale may be complicated, especially without adequate partnership agreement.
Corporations
State of Incorporation
  • California
    General Corporation Law - Corporations Code §100 to 2319
  • Other States
    Governed by the laws of the state of formation
    Must register and qualify to conduct intrastate business in California
    Problem with names: may not be able to use corporate name in California if the name is already used.
    California agent for service of process
Taxed under Subchapter S of the Internal Revenue Code
  • Pass through for tax purposes
  • Must have only one class of stock
  • Must not have more than 100 shareholders. Spouses are automatically treated as a single shareholder
  • Shareholders must be U.S. citizens or residents, and must be a person
  • Profits and losses must be allocated to shareholders proportionately to each one's interest in the business
  •  Form 2553: "Election by a Small Business Corporation" filed by the fifteenth day of the third month of the tax year for which the election is intended to be effective, or at any time during the year immediately preceding the tax year. Often, the IRS will accept a late S election
Advantages of a Corporation
  • Limited Liability – but limitation of liability may be lost due to failure to maintain strict corporate formalities
  • Structured ownership
  • Structured management
  • Can have as few as one shareholder
  • Usually can be licensed in a profession
Disadvantages of a Corporation
  • Need for formalities – high maintenance
  • Subchapter C – separate taxpaying entity
  • Subchapter S – pass-through entity; not always available
  • Franchise tax must be paid
California Close Corporation
§ 158 Corporations Code: (a) "Close corporation" means a corporation whose articles contain, in addition to the provisions required by Section 202, a provision that all of the corporation's issued shares of all classes shall be held of record by not more than a specified number of persons, not exceeding 35, and a statement "This corporation is a close corporation."
§ 202 Corp. The articles of incorporation shall set forth:   (a) The name of the corporation; provided, however, that in order for the corporation to be subject to the provisions of this division applicable to a close corporation (Section 158), the name of the corporation must contain the word "corporation," "incorporated" or "limited" or an abbreviation of one of such words.
§ 300 Corp.(b) . . . no shareholders' agreement, which relates to any phase of the affairs of a close corporation, including but not limited to management of its business, division of its profits or distribution of its assets on liquidation, shall be invalid as between the parties thereto on the ground that it so relates to the conduct of the affairs of the corporation as to interfere with the discretion of the board or that it is an attempt to treat the corporation as if it were a partnership or to arrange their relationships in a manner that would be appropriate only between partners.
§ 300 Corp.(e) The failure of a close corporation to observe corporate formalities relating to meetings of directors or shareholders in connection with the management of its affairs, pursuant to an agreement authorized by subdivision (b), shall not be considered a factor tending to establish that the shareholders have personal liability for corporate obligations.
Nonprofit Corporations – Corporations Code §5000 - 10847
Nonprofit Mutual Benefit Corporation
  • Formed for any lawful purpose; except where all of the assets of which are irrevocably dedicated to charitable, religious, or public purposes and which as a matter of law or according to its articles or bylaws must, upon dissolution, distribute its assets to a person or persons carrying on a charitable, religious, or public purpose or purposes.
  • Articles must state: "This corporation is a nonprofit mutual benefit corporation organized under the Nonprofit Mutual Benefit Corporation Law. The purpose of this corporation is to engage in any lawful act or activity, other than credit union business, for which a corporation may be organized under such law."
  • They are usually formed principally for the mutual benefit of their members (e.g. fraternal organizations, tennis clubs) or for the mutual benefit of those engaging in a particular type of business (e.g. trade associations, Chambers of Commerce) or activity (e.g. Home Owners Associations, automobile clubs).
  • Will not qualify for IRS §501(c)(3) exemption as a charity
Nonprofit Public Benefit Corporation
  • Formed for any public or charitable purposes
  • Articles must state: "This corporation is a nonprofit public benefit corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Public Benefit Corporation Law for (public or charitable (insert one or both)) purposes."
Nonprofit Religious Corporation
  • Formed primarily or exclusively for any religious purposes.
  • Articles must state: "This corporation is a religious corporation and is not organized for the private gain of any person. It is organized under the Nonprofit Religious Corporation Law (primarily or exclusively (insert one or both)) for religious purposes."
Professional Corporation - §13400 Corp.
"Professional corporation": a corporation that is engaged in rendering professional services in a single profession, pursuant to a certificate of registration issued by the governmental agency regulating the profession and that in its practice or business designates itself as a professional or other corporation as may be required by statute. However, any professional corporation or foreign professional corporation rendering professional services by persons duly licensed by the Medical Board of California or any examining committee under the jurisdiction of the board, the Osteopathic Medical Board of California, the Dental Board of California, the California State Board of Pharmacy, the Veterinary Medical Board, the California Architects Board, the Court Reporters Board of California, the Board of Behavioral Sciences, the Speech-Language Pathology and Audiology Board, the Board of Registered Nursing, or the State Board of Optometry shall not be required to obtain a certificate of registration in order to render those professional services.
"Professional services": any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.
Limited Partnership
General provisions governing limited partnerships are found in the California Corporations Code commencing with Section 15611 et seq. if the limited partnership is not subject to the Uniform Limited Partnership Act of 2008 (the Act of 2008); or 15900 et seq. if the limited partnership is subject to the Act of 2008, i.e. if it was formed on or after January 1, 2008; or (2) if it was formed prior to January 1, 2008, and has elected to be governed by the Act of 2008. All foreign limited partnerships, regardless of when they registered in California, are subject to the Act of 2008. Effective January 1, 2010, all California limited partnerships will be subject to the Act of 2008. The Act of 2008.
Name must contain the phrase "limited partnership" or the abbreviation "L.P." or "LP" at the end of its name
A partnership formed under the Corporations Code and having one or more limited partners and one or more general partners
Requires the filing of Certificate of Limited Partnership (LP1) form with Secretary of State
The limited partnership is managed by the general partner(s)
A limited partner cannot participate in the control of the business and is not generally liable for the obligations of the partnership, the only risk of the limited partners being their capital contributions to the partnership

Advantages of a Limited Partnership 
  • Unlimited personal liability for general partner(s)
  • A limited partner can become liable as a general partner, if he takes part in the control of the business
  • Franchise Tax must be paid
Limited Liability Company  
A hybrid business entity that combines aspects of both a partnership and a corporation.
Formed under the Corporations Code by filing a Articles of Organization (LLC1) with the Secretary of State
Must have an Operating Agreement
Its name must contain either the words "limited liability company" or the abbreviation "LLC" or "L.L.C." as the last words in the name of the limited liability company. The words "limited" and "company" may be abbreviated to "Ltd." and "Co.," respectively.
Consists of "members" who own membership interests.
Members may be individuals, corporations, partnerships, or other limited liability companies.
Members may be individuals, corporations, partnerships, or other limited liability companies. It provides members with limited liability to the same extent enjoyed by corporate shareholders, yet allows members to actively participate in management and control.
Can be taxed as partnership by "checking the box."
Advantages of a LLC
  • Limited liability for all members, but . . .
  • Flexibility in organization and management
  • Can be "member managed" or "manager managed" - manager does not have to be a member
  • Does not require a general partner or other person or entity that will have unlimited personal liability
  • Members can be involved in management without losing limited liability status
  • Can be taxed as a partnership-"Check the Box" on tax return
  • Can have one member, which will make the LLC a disregarded entity for income tax purposes, not requiring the filing of a separate tax return for the LLC
Disadvantages of a LLC

  • Cannot perform services that require a license issued under the Business & Professions Code
  • Requires compliance with operating agreement
  • More formalities
  • Gross receipts tax may have to be paid
  • Franchise Tax must be paid
Limited Liability Partnerships
Limited Liability Company Act expressly denied LLC benefits to persons rendering professional services.
Limited liability partnerships may only be formed by licensed persons for the practices of public accountancy, law or architecture.
No registered limited liability partnership or foreign limited liability partnership may render professional limited liability partnership services in this state except through licensed persons.
The name of the LLP must contain the words "Registered Limited Liability Partnership" or "Limited Liability Partnership" or one of the abbreviations "L.L.P.," "LLP," "R.L.L.P.," or "RLLP" as the last words or letters of its name.
Malpractice insurance required:
– For the practice of public accountancy, total aggregate limit of liability
For partnerships with five or fewer licensed persons shall not be less than $1,000,000,
For partnerships with more than five licensees rendering professional services an additional $100,000 of insurance for each additional licensee;
The maximum amount of insurance is not required to exceed $5,000,000 in any one designated period
Unless the partnership has had a net worth equal to or exceeding $10,000,000, each partner of the LLP automatically guarantees payment of the difference between the maximum amount of security required for the partnership and the security otherwise provided that the aggregate amount paid by all partners under these guarantees shall not exceed the difference.
– For the practice of law, total aggregate limit of liability 
  • For partnerships with five or fewer licensed persons shall not be less than $1,000,000,
  • For partnerships with more than five licensees rendering professional services an additional $100,000 of insurance for each additional licensee;
  • The maximum amount of insurance is not required to exceed $7,500,000 in any one designated period
  • Unless the partnership has had a net worth equal to or exceeding $15,000,000, each partner of the LLP automatically guarantees payment of the difference between the maximum amount of security required for the partnership and the security otherwise provided that the aggregate amount paid by all partners under these guarantees shall not exceed the difference.
– For the practice of architecture, total aggregate limit of liability 
  • Starting 1/1/2008, for partnerships with five or fewer licensed persons shall be $1,000,000
  • For partnerships with more than five licensees rendering professional services an additional $100,000 of insurance for each additional licensee;
  • The maximum amount of insurance is not required to exceed $5,000,000 in any one designated period
  • Unless the partnership has had a net worth equal to or exceeding $10,000,000, each partner of the LLP automatically guarantees payment of the difference between the maximum amount of security required for the partnership and the security otherwise provided that the aggregate amount paid by all partners under these guarantees shall not exceed the difference