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Entity Options for the California Socially Conscious Entrepreneur

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Typically, a company’s actions are guided by the need to increase profits for its shareholders. That outlook will certainly contribute to financial success and longevity, but it can significantly limit the scope of a company’s social impact. As a California socially conscious entrepreneur whose business model factors in more than just profits, there are three… Read More

Typically, a company’s actions are guided by the need to increase profits for its shareholders. That outlook will certainly contribute to financial success and longevity, but it can significantly limit the scope of a company’s social impact. As a California socially conscious entrepreneur whose business model factors in more than just profits, there are three main legal entities to consider.

These entities are the California Benefit Corporation, the California Social Benefit Corporation, and the Delaware Public Benefit Corporation.

General Overview of Each Entity Type

Created in 2011, the California Benefit Corporation was designed to allow socially conscious entrepreneurs to pursue both for-profit and non-profit objectives while running their business.

Similarly, the Social Purpose Corporation (renamed January 2015, previously known as a “Flexible Purpose Corporation”) also permits entrepreneurs to consider factors other than profits. However it does not have the same teeth when it comes to reporting requirements or enforcement proceedings.

Like California, the Delaware Public Benefit Corporation (PBC) is a new legal entity (approved by the DE legislature in 2013) designed to incorporate a socially conscious purpose and mission into the fabric of the business. Like the California Social Purpose Corporation, a PBC does not require a third party assessment, but it does permit a lawsuit for monetary damages based on a directors breach of their fiduciary duties. Similar lawsuits resulting from a breach of duties are also permitted in California Benefit and California Social Purpose Corporations, but they do not allow for monetary damages.

With that as an introduction, let’s have a look at some of the key distinctions between the three choices.

Purpose, Evaluation, and Reporting

In California, a benefit corporation must provide a “general public benefit,” but is not required to list any specific benefits in its articles of incorporation. California Corporations Code defines this general public benefit as a material positive impact on society and the environment taken as a whole.

While this may seem a broad definition that leaves much undefined, it is important to bear in mind that California has strict requirements regarding the evaluation of that public benefit. A third party must assess the corporation’s overall social and environmental performance annually, and that assessment must be reported to shareholders alongside other yearly reporting. Additionally, that assessment must be published in its entirety on the company’s website minus any sensitive financial or proprietary information.

A social purpose corporation must enumerate its specific public benefit in its articles, but no other evaluation is required. It is solely up to management to make evaluations regarding performance. An annual report including discussions by management regarding its social purpose performance, as well as financial statements, must be published on the corporation’s website. However, any corporation with fewer than 100 shareholders is not required to prepare and furnish the reports if the social purpose corporation holds unrevoked waivers of such compliance executed by shareholders holding two-thirds of the outstanding shares.

In Delaware, a benefit corporation must provide both general and specific benefits in its articles of incorporation. Unlike a California Benefit Corporation, but similar to a California Social Purpose Corporation, a third party evaluation is not required and the board can make its own assessment of the public benefit. The company is however required to make a biennial report to its shareholders regarding overall benefit performance, but does not have to publish anything on its website.

As the only structure which requires a third party assessment, the California Benefit Corporation yields the strongest sword against a claim that the mission is mere marketing ploy and not fully engrained within the business model.

Directors Duties

In California, both benefit and social purpose corporations require the directors to operate in good faith and in a way that they feel is in the best interest of the corporation, its shareholders, and its purpose. Directors must consider the impacts of any action upon not only the shareholders, but also upon the community, environment, customers and the ability to accomplish its public benefit purpose.

A Delaware benefit corporation requires that the board balance their specific public benefit with both the interests of the shareholders and the interests of those affected by the company’s actions. Directors satisfy this duty if their decisions are “both informed and disinterested.”

Enforcement

California law permits the corporation itself, or a derivative suit, to bring a benefit enforcement proceeding against an officer or director for violating his or her duties regarding the corporation’s public benefit. These proceedings allow for injunctive relief, but not for monetary damages. The California Social Purpose is not given a similar statutory provision, so the corporation and its shareholders are left with no internal corporate recourse.

For a PBC, shareholders who own at least 2% of the issued shares have a right to bring a derivative suit against the directors to enforce their duties. However, no action can be brought to enforce a PBC statutory provision except for those holding 2% of the issued stock. Additionally, in contrast to many other states, including California, the Delaware statutory law does not preclude monetary damages for breaching a director’s PBC duties.

Taxes

No matter which jurisdiction, or entity type selected, the corporation may elect to be taxed as C Corporation or an S-Corporation.

Which Entity is the Right Fit for You?

As a socially conscious entrepreneur, it is important to realize that one size does not fit all. Traditionally, some structures will be a better fit than others.

The Social Purpose and Delaware Public Benefit Corporation can save time and resources because a third party assessment is not required. Additionally, both models may help an entrepreneur cast a wider net when seeking investment due to the entities natural flexibility and less rigid standards. However, by allowing monetary damages for a breach of fiduciary duties, a PBC may make it more difficult to attract talented individuals to serve on your board. A good way to mitigate this possibility would be to consider ways to protect directors when forming a PBC.

Of the three options, the California Benefit Corporation seeks to engrain the social mission with the business. The stronger reporting requirements and enforcement proceedings help to dismiss an argument that this is simply a marketing ploy to favor goodwill with a customer base. However, this comes with an added cost that should not be dismissed when forming a company.

As the article has demonstrated, when selecting a socially conscious entity to fit your mission, it’s important to consider strategic and long-term objectives before forming your company. If you have any questions, please give us a call at (415) 633-6841 or send us an e-mail 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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Requirements for a Professional Corporation for Veterinarians, Chiropractors, and Other Professional Services

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One of the first questions to ask when starting a company is what type of entity it should be. Tax implications, potential for investment, and management structure are just a few of the many factors to consider. For businesses in California that provide certain services requiring a professional license or certification, however, only one entity… Read More

One of the first questions to ask when starting a company is what type of entity it should be. Tax implications, potential for investment, and management structure are just a few of the many factors to consider. For businesses in California that provide certain services requiring a professional license or certification, however, only one entity type is permitted: a California professional corporation, or PC.

The types of professional services requiring a license or certification that necessitate a PC are wide ranging, including doctors, dentists, pharmacists, veterinarians, architects, physical therapists, nurses, and optometrists. (For a full list see Cal. Corporations Code 13401.) While most of the formation requirements for a California PC are the same as a regular California corporation, the following distinctions apply:

Corporate Purpose in the Articles of Incorporation

The “corporate purpose” for a general stock corporation in California is typically as broad as “to engage in any lawful act or activity.” In contrast, a Professional Corporation must declare in its Articles of Incorporation that the purpose of the corporation is to engage in its specific profession.

Naming Requirements

California statute dictates naming requirements for Professional Corporations, and most PCs are required to include the type of professional services they offer in their names. For example, veterinary PCs must include the words “veterinary corporation” or some other wording denoting corporate existence in their names.

Other professions have additional naming requirements, such as chiropractic PCs. The name of a chiropractic PC must include the word “chiropractic,” the name or last name of one or more of the present, prospective, or former shareholders, and the word “corporation” or some other word denoting corporate existence.

Each profession’s naming requirements are different and so the applicable statues should be reviewed before submitting the Articles of Incorporation, as they will be rejected if the name does not comply.

Licensed Directors, Officers, and Shareholders

All of the directors, officers, and shareholders of a Professional Corporation must be licensed to practice the professional services of the PC, with only two exceptions. First, if there is only one shareholder in certain PCs, the PC may be allowed to fill specific officer positions with non-licensed people.

Second, in some cases, people holding a license that is different from that designated by the Professional Corporation may serve as shareholders, officers, or directors of the PC. For example, a licensed clinical social worker may be part of the governance of a medical corporation, even though the social worker does not have a medical license, as long as people without medical licenses do not exceed the number of people with medical licenses in the PC and do not own more than 49% of the company. See Cal. Corp. Code 13401.5.

Potential Registration with a Governing Board

One other requirement that applies to some PCs, but not all, is that the governing board of the particular license may require the PC to separately register with the board. For example, the California Board of Chiropractic Examiners requires all Chiropractic Professional Corporations to submit a Certificate of Registration after the PC has been formed.

The considerations listed above apply to nearly all California Professional Corporations, but the exact details and applicability of each depends on the type of professional services offered. Therefore, it is very important to review the applicable laws and guidelines and consult a lawyer before starting a Professional Corporation.

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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How Cumulative Voting Impacts Majority Shareholders in a California Corporation

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We often hear about how majority shareholders have the power to make big decisions, including who might sit on the board of directors. And while that is true, under California law, for non-publicly traded companies, cumulative voting is required and can impact an important vote. At its basic level, cumulative voting provides that the number of votes… Read More

We often hear about how majority shareholders have the power to make big decisions, including who might sit on the board of directors. And while that is true, under California law, for non-publicly traded companies, cumulative voting is required and can impact an important vote.

At its basic level, cumulative voting provides that the number of votes available to a shareholder is equal to the number of votes owned by the shareholder multiplied by the number of positions up for a vote. Therefore, if multiple positions are up for a vote, a shareholder may cast all or most of his or her votes for a signal nominee, making a minority share a lot more powerful.

To show how this might play out, let’s assume that Alex owns 600 shares, Bill owns 250, and Catherine owns 250. Under a conventional structure, if there were three board seats available the board would be compromised of board members Alex chose, as he out-votes the other two shareholders 600 to 500 every time, even if we assume Bill and Catherine are voting together.

Now lets look at cumulative voting. Assume there are three board positions available and six candidates (Dave, Erin, Frank, George, Hilary, and Ian). Because each shareholder is able to cast his or her total number of votes (remember: number of shares x positions up for vote) towards one nominee, the result could be as follows:

Dave: 750 (all of Bill’s Votes)
Erin: 600 (one third of Alex’s votes)
Frank: 0
George: 750 (all of Catherine’s votes)
Hilary: 1200 (two third’s of Alex’s votes)
Ian: 0

Under cumulative voting, even though Alex was the majority shareholder, he would only be successful in bringing on board Hilary, as he would need to use up his votes to win one seat and then would be out-voted for the other positions. The best-case scenario for Alex would be if he strategized and casted 900 votes each towards two candidates, but even then Bill or Catherine would be successful in bringing on at least one of the board members if they decided to use all of their votes on one board seat.

Per California law, cumulative voting is a statutory right provided to shareholders in a non-publicly traded company that cannot be taken away (see Corp. Code 708(a)). However, a shareholder is only entitled to cumulate their votes if the candidate name has been placed in nomination, and the shareholder has given their intention to cumulate their shareholder votes prior to the vote. Furthermore, it only takes one shareholder to give notice to allow all shareholders to cumulate their votes in a nomination (see Corp. Code 708(b)). Another important consideration is that cumulative voting can apply to your corporation even if you are a foreign corporation conducting business in California if you are considered a “pseudo-foreign” corporation under California Corporate Law (see Corp. Code 2115).

As a founder or a minority shareholder it is important to know your rights when it comes to corporate actions. If you have questions or concerns about your setup, don’t hesitate to give us a call at (415) 633-6841, or email us 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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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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