Understanding Investors Rights Agreements

When making an investment in a closely held corporation, an investor will typically require certain rights with respect to the company, especially where the amount of the investment only amounts to a minority interest in the company. Read more

Inadequate Capitalization: Courts Know it When They See it

In corporate law, “capitalization” refers to a corporation’s funding. Every corporation must be capitalized, at the time of formation and on an ongoing basis. And not just any capitalization will do: all corporations must be “adequately” capitalized to avoid piercing the corporate veil. Read more

Debunking the “Nevada Incorporation” Myth

Radio advertisements, even scholarly print and web-based articles, tout the notion that entrepreneurs are substantially better protected from litigation, or receive other tax and financial benefits, if their corporation is formed in Nevada rather than in California or other states. These are myths. Incorporation businesses – and even the State of Nevada itself – use mass marketing and the media to popularize the concept that there is some benefit to incorporating in Nevada. This article examines California and Nevada law to analyze and debunk the most popular myths as it applies to for-profit small businesses. Read more

The Importance of Well-Drafted Corporate Documents

California courts evaluate the facts and circumstances of a particular situation, but to “pierce the veil” there are two legal requirements: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist, and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow. Read more

How does a S corporation differ from a limited liability company?

While LLCs and S Corporations are both taxed as so-called “pass through” entities, the S Corporation is strongly discouraged for the ownership of real estate because S Corporation shareholders may not be able to maximize their depreciation deductions. The reason for this potential pitfall is because the amount of tax loss that may be used by a shareholder or a LLC member is limited to the member/shareholder’s tax basis. The tax basis of shareholders and LLC members is computed very differently. For a LLC member, tax basis includes debt, but debt is not included in the calculation of tax basis for a shareholder of a S Corporation.

In addition, while S Corporations are limited to a single class of stock, there may be more than one class of economic interest held in the LLC, thus permitting special allocations of income, loss and cash flow among the members. Finally, while an S Corporation cannot include more than 75 shareholders, and permitted shareholders may not include corporations, partnerships, non-qualified trusts or foreign shareholders, none of those limitations apply to LLCs.

When does my corporation exist?

The corporation “exists” when the Articles are filed with the Secretary of State. However, bylaws, minutes of an organizational meeting, issuance of shares, share certificates, are required to properly complete the organization of the corporation. Failing to complete all steps in the organizational process could enable a creditor to “pierce the corporation veil”.

What is the annual cost of maintaining a LLC?

You should speak to your accountant regarding the annual cost of preparing K-1s for the LLC. Generally speaking, the LLC is subject to an annual California Franchise tax, which is $800 plus an amount determined by the gross receipts of the LLC.

In order to do business in California, every LLC must pay an annual tax of $800. California Revenue and Taxation Code Section 17942 also requires that every LLC must pay an annual fee based on total gross revenue.

California LLC Fees

Annual Gross Receipts	Annual Fee
less than $250,000	$800
$250,000 to $499,000	$800 + $900
$500,000 to $999,999	$800 + $2,500
$1 million to $4,999,999	$800 + $6,000
$5,000,000 or more	$800 + $11,790

 

 

Are there any restrictions on the name of my corporation?

A corporate ending (e.g, “Inc”, “Corp”, “Incorporated”) is common but only required for statutory close corporations or where the name of the company is a personal name. A corporate name cannot include the words “bank”, “trust”, or “trustee”, “industrial loan”, “investment and loan”, or “thrift”. There is also a ban on the use of the words “cooperative”, “Olympic”, or “Olympiad”. A professional corporation must include the designation “a professional corporation”, “a law corporation”, or a “medical corporation”, as the case may be. In some cases, the desired name is not available, because the Secretary of State will not accept Articles of Incorporation for filing that are confusingly similar to the name of an existing corporation.

What are Bylaws?

The Bylaws of a corporation are the “play book” for the rules of corporate governance. Typical provisions include the roles of the officers, number of authorized directors, and the time and place of the annual meetings of shareholders and directors.

What is the difference between a “C” and “S” corporation?

“S” and “C” corporations are the same from a corporate law standpoint. The difference relates to tax treatment only. Any corporation that does not file an IRS Form 2553 (Subchapter “S” election) will be treated as a “C” corporation.

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