Month: October 2015

Seller’s Permit vs. Resale Certificate in California

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Many new business owners know that they need to collect sales tax on items that they sell, but aren’t sure if they need a Seller’s Permit or a Resale Certificate. In California, this is an important distinction because only one may be required, but using both may save you a significant amount of money.  Seller’s… Read More

Many new business owners know that they need to collect sales tax on items that they sell, but aren’t sure if they need a Seller’s Permit or a Resale Certificate. In California, this is an important distinction because only one may be required, but using both may save you a significant amount of money. 

Seller’s Permit

All businesses that are 1) engaged in business in California and 2) sell or lease “tangible personal property” that is ordinarily subject to sales tax must have a Seller’s Permit issued by the California Department of Tax and Fee Administration. The definition for “engaged in business” is broad, and includes having an office, sales room, warehouse, or other place of business in the state; having a sales representative or agent operating in the state; or receiving rental payments from the lease of property in the state. Even if your sales are only temporary (lasting no longer than 90 days), such as seasonal sales, you at least need a temporary seller’s permit.

Tangible personal property (items that can be “seen, weighed, measured, felt, or touched”) that is “ordinarily subject to sales tax” includes both sales of the goods and any labor costs if the labor results in the creation of tangible personal property. For example, the total amount charged for a table that you made, which would necessarily include labor time, would be taxable, whereas the amount charged for your labor to fix a table would not be taxable because you are repairing existing property.

You can apply for a Seller’s Permit through the Department of Tax and Fee Administration. If you have more than one business location you may need a separate permit for each location.

Resale Certificate

Once you have a Seller’s Permit, you use this account to report your sales and pay sales tax to the CDTFA online. Additionally, businesses that purchase goods from other suppliers solely for resale should also use a Resale Certificate so they only pay sales tax once on these products.

When a business purchases tangible personal property for resale, as opposed to personal use, this initial transaction will not be subject to sales tax if a Resale Certificate is properly in place. Use of a Resale Certificate ensures that you don’t pay sales tax on the goods first when you purchase them from the supplier, and then a second time when you sell them to a customer (even if the tax is pushed on to the customer). Instead, goods that are solely purchased for resale will be subject to sales tax only when they are finally sold for personal use.

In California, you can submit a form Resale Certificate to each supplier indicating that the goods that you are purchasing are solely for resale pursuant to a valid Seller’s Permit. You need to submit a Resale Certificate for each supplier, but if you make many purchases from the same supplier the initial certificate can be kept on file; you do not need a separate certificate for every purchase from the same supplier.

You should only use a Resale Certificate if you are absolutely certain that you will resell the goods. If you are not sure if you are purchasing the goods for personal use or resale, you should pay sales tax on the goods to the supplier, and then if you later decide to resell the item before using it for personal use, you can take a deduction on the tax return on which you report the sale.

Each state has its own rules regarding resale requirements, so if you are making purchases for resale from a supplier outside of California, make sure to ask that supplier what requirements, if any, exist to allow you to avoid sales tax on purchases made solely for resale. Such purchases may also be subject to California’s use tax.

Bend Law Group, PC helps many clients obtain Seller’s Permits and navigate Board of Equalization requirements each year. Please contact us at (415) 633-6841 or info@bendlawoffice.com if you have any questions about this process.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Notice of Scams for California Entities

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Once a new company is registered with the California Secretary of State, the business address becomes public and easily accessible on the Secretary of State’s website. As a result, the entity will likely begin receiving solicitations from private companies trying to sell unnecessary corporate services or outright scams. The California Franchise Tax Board, Board of… Read More

Once a new company is registered with the California Secretary of State, the business address becomes public and easily accessible on the Secretary of State’s website. As a result, the entity will likely begin receiving solicitations from private companies trying to sell unnecessary corporate services or outright scams.

The California Franchise Tax Board, Board of Equalization, and Employment Development Department (EDD) are a few legitimate state government organizations that may send notices to a new entity and should not be ignored. Private companies, however, with names such as “Corporate Compliance Center,” “Compliance Document Services,” and “CBFS” do not have any enforcement authority and are simply trying to make money. These solicitations should be ignored for two main reasons:

  • They ask you to pay them for services that you don’t need. For example, many of these companies offer to get a Certificate of Status for your entity, which is actually only needed in very limited situations and can be obtained by anyone for $5. Another company sends a “Labor Law Compliance Notice” selling employment posters for $84, when these posters are available online from the EDD for free.
  • They are selling “corporate templates” that are not specific to your company. Often the private solicitations offer templates of documents that are necessary for a new entity, such as corporate bylaws or an LLC operating agreement. In order for your new business to run properly and for you to receive liability protection, you need governance documents that reflect the circumstances and needs of your specific business–not generic documents that are meant to apply to every business from software companies to restaurants to car mechanics. We highly recommend working with an attorney to draft these crucial documents, rather than paying $47.99 for documents that may not fit your situation and may subject you to personal liability.

By reading the fine print on documents addressed to your business, you can determine if these are legitimate notices with which you need to comply. All of these private solicitations will include that the organization is not a governmental agency, or that the product or service has not been endorsed or approved by any governmental agency. You are not required to give money to these private businesses.

These private solicitations come in many forms and are constantly changing, so consult with an attorney if you have questions about your company’s compliance with state or local regulations.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Three Security Exemptions Founders Should Understand

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A large part of my practice involves assisting companies as they divide up stock amongst the founders and plan for how to best use equity to incentivize service providers, as well as selling securities to investors. Founders should be knowledgeable of securities exemptions under the SEC security laws that are likely to come into play… Read More

A large part of my practice involves assisting companies as they divide up stock amongst the founders and plan for how to best use equity to incentivize service providers, as well as selling securities to investors. Founders should be knowledgeable of securities exemptions under the SEC security laws that are likely to come into play as their company first forms and continues to grow. As all founders should be aware, every issuance of securities must be registered with the SEC unless a particular exemption applies. The three most common exemptions are discussed below.

“Founder’s Stock” and Rule 4(a)(2)

We should start by saying there is no such thing as “founder’s stock.” Rather, it is simply a term given to promoters and other insiders who work to form the company. In the end, it is simply common stock provided to those who played a crucial role in setting up the company.

Under Securities Act Rule 4(a)(2) an exemption from registering an issuance of securities with the SEC is carved out for transactions not involving a public offering, in which stock is sold to those who “take the initiative in founding or organizing the business” (See SEC Release No. 33-4552). However, even if you are selling shares to founders under this exemption, you must also file any necessary filings under “blue sky” laws, which in California tends to be a 25102(f) notice fling with the California Department of Financial Protection and Innovation.

“Reg D” Offering and Rule 506 (and the less commonly used 504 and 505)

A “Reg D offering” is a term used to describe a private placement offering that allows you to raise an unlimited amount of money from accredited investors under Securities Act Rule 506, or up to $5 million under Rule 505 and $1 million under Rule 504 during a 12-month period, and not register the offering with the SEC.

One important thing to remember is that a convertible note is considered a security and the company must comply with the proper SEC exemptions. The abundance of open source documents around convertible notes, and even series seed rounds, have caused many founders to think so long as they use those documents they are all set, and therefore, forget about complying with the rules that apply to a Reg D offering.

Under Rule 506(b) a company may raise unlimited funds from accredited investors and up to 35 non-accredited investors who are “wealthy and sophisticated,” provided the company does not generally solicit the offering, is available to answer questions from non-accredited investors, and provides audited financials.

The burden of providing audited financials (the type of financials required if you were registering the securities with the SEC) leads many startups to lean on Rule 506(c). Under 506(c) all purchasers must be accredited, which includes taking reasonable steps to verify they are accredited, but there is not the same requirement for audited financials.

Less frequent Reg D offerings include offerings that rely on Rules 504 and 505. These exemptions are less commonly used as they have limits on the amount raised, geographical restrictions, and increase the burden as to disclosures. Using Rules 504 and 505 can widen the investor base from which you can raise capital, but as a general rule of thumb the increased requirements around disclosures and the simple reality that taking money from someone who cannot afford to lose it makes using 506(c) the better option for most companies.

Much like stock issued to founders, even if exemptions apply for a private placement such that you do not need to register with the SEC, you must still look to satisfy blue sky laws within the state you solicit and sell securities within.

Incentivizing service providers under Rule 701

Under Rule 701 of the Securities Act, a startup is permitted to offer equity as part of a written compensation agreement to consultants, employees, and directors without having to comply with complex federal securities registration. In order to stay within the parameters of Rule 701, however, the total sales of stock during a twelve month period must not exceed the greater of (1) $1 million, (2) 15% of the issuer’s total assets, or (3) 15% of all the outstanding securities of that class.

Additionally, the offering of securities must not be included in any other offering of equity (such as for capital raising purposes as discussed above), and all optionees and shareholders must be given a copy of the plan under which the securities are being granted. If total sales exceed $5 million, additional disclosure requirements can come into play. Furthermore, just because the offering fits into an exemption does not excuse the antifraud provisions, which means any and all disclosures cannot be materially false or misleading.

Offerings under Rule 701 must still comply with any applicable “blue sky” laws (noticing a trend?!), and in California this typically involves filing a 25102(o) notice with the Department of Business Oversight when crafting an equity incentive plan.

Informed founders can take the first step to proper upfront planning to avoid downstream complications when it comes to issuing securities to other founders, service providers and investors. Additional rules and requirements may apply to your situation and you are strongly encouraged to speak with an experienced attorney as the penalties can be quite harsh. If you have any questions, don’t hesitate to reach out to us at 415-633-6841, or at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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The Convenient and Practical Features of a Delaware Corporation

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If you are a California resident considering starting a company, you’ve probably heard by now why investors traditionally prefer the Delaware Corporation over a California Corporation. These reasons include, but are not limited to, a well-established legal precedent that makes disputes easier to resolve, corporate attorneys’ familiarity with Delaware corporate law, and making VC deals… Read More

If you are a California resident considering starting a company, you’ve probably heard by now why investors traditionally prefer the Delaware Corporation over a California Corporation. These reasons include, but are not limited to, a well-established legal precedent that makes disputes easier to resolve, corporate attorneys’ familiarity with Delaware corporate law, and making VC deals easier to execute. While there are many viable reasons for selecting a Delaware Corporation, there are a couple of less frequently mentioned reasons to consider.

1. A Consistent and Reliable Secretary of State

In my experience, if the Delaware Secretary of State catches a typo, has trouble reading the last four digits on your credit card, or any other matter that may slow up the process, they will email or give you a call and work to fix the problem over the phone. Additionally, the Delaware secretary of state is open until 8 PM to ensure those operating from the West Coast do not lose out due to the time difference.

California is quite the opposite. Rather than call, email or take any extra steps to simplify the process, the California Secretary of State will simply mail back the requested modifications using standard mail, and after revising, you will then need to mail everything back and play the waiting game. With business moving at the speed of light, this uncertainty can make corporate filings much harder to execute.

2. Only One Director, Despite Multiple Shareholders

Nearly all entrepreneurs who start a venture envision they will remain in control of big decisions (at least for the foreseeable future). Under California law, a corporation may only have one director if in fact there is only one shareholder. Once the shareholders expand to two, there must be at least two directors, and once the shareholders expand to three or more, there must be at least three directors (CA Corporations Code 212).

Under Delaware law, there can be multiple shareholders while maintaining a single director board. This gives entrepreneurs maximum control as things get started. It also lowers the burden of finding qualified directors to serve on your board, and removes the risk of a deadlock with two directors, or even worse, the other board members out voting you.

3. Electing the Board of Directors on Paper

I hear it all the time – “I’ve got this great idea, but I’m bootstrapping the whole thing.” The reality is that even after you incorporate you’ll likely continue to feel “bootstrapped” for the first couple of years.

Corporate law requires the shareholders to elect who will serve on the board of directors for the coming year. California permits the company to elect by paper vote only if they receive unanimous written consent from all shareholders (CA Corporations Code 603(d)). There is a big difference in time commitment and cost between holding an in-person meeting for all shareholders and obtaining a majority vote with written approval. A shareholder may simply be unavailable (finally taking that three month trip to backpack across Europe!) and therefore, the company must shoulder the burden of holding an in person meeting because it cannot obtain unanimous written approval.

Delaware, on the other hand, does not require unanimous written approval (DE Corporations Code 228(a)). If less than unanimous consent is obtained, then Delaware must provide notice to those who did not provide their consent, but this notice requirement is much easier to meet than holding an in person meeting.

4. Open Source Documents to Facilitate Financing

As your product or service begins to take shape many startups can experience exponential growth with a small round of financing. The goal here is to use the money you’ve raised as judiciously as possible to ensure it goes towards what makes you great.

Open source material from Y Combinator and Series Seed Documents help facilitate raising money in a Delaware Corporation and have made the financing process much, much easier. This allows lawyers to focus on the necessary vetting of investors, securities exemptions and increases the likelihood of quick legal advice due to familiarity with the documents at hand.

Unfortunately, California has no such open source documents. Furthermore, because the California Secretary of State is much harder to deal with, actually filing the documents successfully the first time, and with any kind of speed, is hard to predict.

There is no one-size-fits-all when it comes to selecting the proper entity for your business, but when making the decision be sure to consider some of the convenience, flexibility and certainty a Delaware Corporation can provide.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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