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B Corp Leadership Development Conference

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This week I had the privilege of attending the B Corp Leadership Development Conference (“BLD”) at the David Brower Center in Berkeley, CA. The conference was put on by the team at B Labs with the intent of sharing best practices, key performance indicators, and other developments that are occurring within the community. B Corps… Read More

This week I had the privilege of attending the B Corp Leadership Development Conference (“BLD”) at the David Brower Center in Berkeley, CA. The conference was put on by the team at B Labs with the intent of sharing best practices, key performance indicators, and other developments that are occurring within the community.

B Corps are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. Today there are over 1,000 certified B Corps (75 in SF alone, including Bend Law Group), all who strive to redefine what it means to be a successful business.

For those who were unable to attend, here are my thoughts and takeaways from the B Corp Leadership Development Conference:

The “Why” of Your Work

People care a lot more about why you do something, as opposed to simply what you do. This is the heart of good marketing. Informing your audience why you act a certain way helps humanize the business process and creates potential lasting connections with clients.

We were challenged to answer “why do you exist as a business”? Here’s my response for BLG: To bridge the gap between entrepreneurship and legal services. Too often we look to our service providers as exterior help that perform a specialized task separate from the core factors that make a business successful. We exist to show a different path as a firm that pivots and innovates as much as its clientele. We exist to move the needle in legal services in such a way that it’s easier for our clients to feel a part of the process and not experience a break in the business strategy that got them to where they are.

B Corp Certification

We heard an inspiring story from Fireclay Tile around their journey to become a B Corp. It reminded all of us how rigorous and rewarding it can be to pass the assessment. Ryan Honeyman, the author of the The B Corp Handbook, shared a list of helpful tips including which areas of the B Corp assessment test were the most impactful. For anyone considering the certification I highly recommend his consulting services.

Blending Purpose and Profit

After an inspiring talk from Plum, and One World Play Project, I was reminded that if your number one focus is your purpose, you’re probably best suited to be a non-profit. Similarly, if your number one goal is profit, a traditional business structure such as an LLC or corporation is a great fit. However, for those looking to blend purpose with profit, a benefit corporation is a great vehicle.

Financial Benefits

This conference reiterated the financial value that comes from being part of the community. I’ve been able to save 10% on tuition for the LLM I’m seeking in tax at Golden Gate University School of Law (close to $1,000 since we joined a year ago). Other great vendors such as A to Z wines provide awesome discounts on their products. I could write a short novella on the other vendors involved, but it was a helpful reminder that there are perks that have made our wallet a little fuller over the past year.

Work/Life Balance

Every business is a family business. The work we do bleeds into our personal lives and impacts how healthy our relationships are at home. Finding an environment that supports your personal values can pay huge dividends for enhancing your work life balance.

Obtaining the B Corp certification isn’t right for everyone, but for those interested in rethinking the ways we use business to impact our community and workplace, a B Corp just may be the perfect fit.

#BtheChange

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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Should I Remain a Sole Proprietor?

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Virtually every business owner faces the question of whether to remain a sole proprietor or form a legal entity. Here are a few of the key factors to consider. Formation Costs and Business Operations A sole proprietorship is an informal ownership structure that requires very little in terms of formation or maintenance. When transacting business… Read More

Virtually every business owner faces the question of whether to remain a sole proprietor or form a legal entity. Here are a few of the key factors to consider.

Formation Costs and Business Operations

A sole proprietorship is an informal ownership structure that requires very little in terms of formation or maintenance. When transacting business as a sole proprietor you must obtain the applicable city, county, and state licenses, but it is relatively simple and straight forward to properly start and maintain a sole proprietorship.

In contrast, more sophisticated entity structures such as a Limited Liability Company (“LLC”) or corporation have more stringent registration obligations. Additionally, they require internal corporate governance documents such as an operating agreement (for an LLC) or bylaws (for a corporation).

Liability Exposure as a Sole Proprietor

As a sole proprietor, you and your business are considered one and the same. Thus, as a sole proprietor, you are exposed to unlimited personal liability for all business liabilities and obligations. This means your personal assets may be at risk to satisfy an outstanding business debt or obligation.

Properly formed and maintained LLCs or corporations provide limited liability protection, so your personal assets are considered separate from the business assets. For example, if you form a legal entity with limited liability protection and the business defaults on a loan that you have not personally guaranteed, the creditor’s sole recourse would be to look for collection of the debt from the business assets. They cannot access the personal assets of the business owner.

Combining Resources

If two parties decide to start a business the legal classification is a “general partnership”. The risk of a general partnership is that both partners are liable not only for their own actions, but also for the actions of the other partner. To limit this risk, prudent investors seek out entities with limited liability protection to avoid this exposure.

Even if you intend to remain the sole owner of your business, life happens and circumstances change. By forming a strategy to limit your personal liability early on, you are creating a vehicle that is attractive to outsiders who otherwise might not consider your project.

Taxes

A single member LLC or an S-Corp is taxed as a “pass through” entity. A pass through entity essentially means the profits, losses, and other tax attributes flow through to the owner without any federal taxation occurring at the entity level.

The challenge in California is LLCs and entities that have elected to be taxed as an S corporation are treated differently when calculating the California annual franchise tax. A California entity that has elected to be taxed as an S corporation must pay 1.5% of the net income of the business as its annual franchise tax; a California LLC’s annual franchise tax is based on the company’s gross receipts.

This distinction can be crucial depending on the revenue of the business. In particular, if a business uses a lot of inventory but has relatively small margins, it can be more tax advantages for the business to elect to be taxed as an S corporation rather than as an LLC. For example, if a car dealership has a net income of $150,000, but gross sales of $1,100,000, if it elects to be taxed as an S corporation it would owe $1,500 in California franchise taxes. However, if it were a standard LLC, it would owe $6,500 in California annual franchise tax. 

It’s always important to consult a tax professional when determining which legal entity to select for your business because, as the example above illustrates, you might owe varying amounts of taxes depending on which you select.

Other Considerations

In talking to clients we’ve found that some have really enjoyed a marketing bump by forming a legal entity. For example, if a prospective customer receives a proposal from ABC Inc., they might reasonably assume that it was produced by a shop of 5-10 people, even if it’s really one owner and occasional contractors supporting the business. In contrast, if a customer receives the same proposal from just ABC with no “LLC” or “Inc.” at the end, they might not view the business as a “real business.” Instead, they may assume it is a mom-and-pop shop or a fly by night operation that is not worth paying fair market rates.

Additionally, it should be noted that for liability protection to remain intact, it is important to follow corporate formalities when maintaining your entity. This means ensuring you always sign contracts on behalf of the company, and not in your individual capacity. It’s also crucial that you file your annual franchise taxes on time and that you send in forms such as the Statement of Information when they are due. This helps to ensure no one can claim “Well, Bob wasn’t really operating as an LLC and so we’d ask the court to not provide Bob with limited liability.”

As a sole proprietor there are a lot of factors to consider, and you’re strongly advised to seek out the opinion of a legal and tax professional before acting. Crafting a strategic plan for where you are heading is key to understanding if you’re exposing yourself to unnecessary liability, and if you’re missing out on an opportunity to best set yourself up for success down the line.

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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CA FRANCHISE TAXES ARE DUE APRIL 15TH

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Franchise taxes are due by April 15th of each year for most entities doing business in California. Corporations incorporated or doing business in California, and LLCs and Limited Partnerships electing to be treated as corporations for tax purposes, must pay this tax. Additionally, it is due regardless of whether the entity is active, operates at… Read More

Franchise taxes are due by April 15th of each year for most entities doing business in California. Corporations incorporated or doing business in California, and LLCs and Limited Partnerships electing to be treated as corporations for tax purposes, must pay this tax. Additionally, it is due regardless of whether the entity is active, operates at a loss, or does not conduct business. Some qualified corporations, including corporations in their first year of business, are exempt from this tax (for more information see this blog post).

Calculating Estimated Franchise Tax

The minimum franchise tax is $800. Corporations can calculate their estimated tax by multiplying their estimated net income by the applicable rate (i.e. C Corporations: 8.84%, S Corporations: 1.5%).

Payment of Estimated Franchise Tax

If the amount of the estimated tax does not exceed the minimum franchise tax of $800, the $800 is due by April 15th. If the amount of the estimated tax exceeds $800, the estimated tax can be paid in the following installments:

  • 30% for the first installment, due April 15th;
  • 40% for the second installment, due June 15th;
  • No estimated tax payment is required for the third installment, due September 15th;
  • 30% for the third installment, due December 15th.

The estimated tax amount can be paid online here. It can be paid by check or money order by mailing in this form (corporations) or this form (LLCs) to the California Franchise Tax Board.

Effect of Payments

The paid estimated taxes are considered a prepayment of the tax due at the end of the year, and can be claimed as a credit when filing the corporation’s state tax return. Since the taxes paid are based on estimated net income, any overpayment will be credited towards the first payment in the following year.

This article discusses general issues surrounding franchise taxes within California. You are encouraged to speak with a business attorney or CPA to discuss your specific situation. For all inquiries please contact us at info@bendlawoffice.com or (415) 633-6841.

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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California Franchise Taxes

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The amount of franchise taxes you have to pay plays a huge role in the decision of whether or not to start, or register an existing business, in California. If you own a limited liability company (LLC), corporation, or other legal entity in California, you will be subject to the minimum annual franchise tax of… Read More

The amount of franchise taxes you have to pay plays a huge role in the decision of whether or not to start, or register an existing business, in California. If you own a limited liability company (LLC), corporation, or other legal entity in California, you will be subject to the minimum annual franchise tax of $800 per year.

If you are still weighing this decision, here are a few things to consider.

15 Day Exception

You are not subject to the annual franchise tax for a specific year if both of the following apply: (1) you did not conduct any business in CA during the tax year, and (2) your tax year was 15 days or less.

Thus, if you accidentally started a company and want to immediately cancel it, you can avoid the franchise taxes (assuming you do so speedily).

First Year Exemption for Corporations

If your corporation incorporates or qualifies to do business in CA, you are not subject to the minimum franchise tax during your first year of operations. However, you are still liable for any franchise tax on your net income. This exception will also apply to an LLC treated as a corporation. Standard LLCs must pay the minimum franchise fee of $800 during their first year of operations.

Income Earned in CA and Other States

California applies the unitary method to determine your tax liability. Under this method, all of the elements comprising your trade or business are viewed as one unitary business, whether or not the activities of your business are conducted in separate corporate forms. The business income of your unitary business is then divided and assigned to CA by means of an apportionment formula.

Converting to a New Type of Business Entity

If your business entity converts to an LLC during the current year, it generally will have tax liability and filing requirements as both the previous business entity and the new entity.

Due Dates for First California Annual Franchise Tax Payment

For LLCs, you have until the 15th day of the fourth month after you file your Articles of Organization with the Secretary of State to pay the California annual franchise tax. Recall that corporations don’t owe the franchise tax the first year. In the years ahead, and for corporation’s second calendar year conducting business in California, you have until April 15th to pay your annual franchise taxes.

This article discusses general issues surrounding a legal entities franchise taxes within California. You are encouraged to speak with a business attorney or CPA to discuss your specific situation. For all inquiries please contact us at info@bendlawoffice.com, or (415) 633-6841.

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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Top 5 Reasons to Consider Converting an LLC to a Corporation

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By Tucker Cottingham and Doug Bend *This post originally appeared on Forbes We help launch dozens and dozens of startups each year.  In the vast majority of cases, we form a Delaware C-Corp. However, lately we have seen many startups that formed their own LLC and now need to convert to a corporation. Here are… Read More

By Tucker Cottingham and Doug Bend

*This post originally appeared on Forbes

We help launch dozens and dozens of startups each year.  In the vast majority of cases, we form a Delaware C-Corp. However, lately we have seen many startups that formed their own LLC and now need to convert to a corporation.

Here are the top five reasons you may want to change your company from a Limited Liability Company to a corporation:

1. You want to raise money from VCs

Venture capitalists want to invest in Delaware C-Corps. C-Corps allow investors to create “preferred shares” of stock and provide a consistent legal structure across their portfolios. Some VCs also manage public funds, which are often restricted from investing in LLCs.

2. You want to join a startup accelerator

Accelerators or incubators that take equity often require participants be incorporated as a corporation. Corporations are comprised of shares of stock, which makes it easy to calculate and distribute equity. Additionally, many accelerators view a corporation as an investment-ready vehicle and a symbol of business acumen.

3. You want to give equity to your employees

In a corporation, it is easy to place shares of stock in reserve that the company can later distribute to employees. In an LLC, the members own 100 percent of the company. In order to give equity to a new member, the members must sell a portion of their personal ownership stake to the new member. This personal sale of securities could trigger capital gains tax and create other complications.

4. You want to issue equity on a vesting schedule

It is relatively easy to issue shares from a corporation that is earned over time on a vesting schedule. In contrast, because there are no shares of stock in an LLC, members usually elect to distribute profit interests. However, defining and calculating those profit interests is an expensive endeavor that requires constant monitoring of member capital accounts.

5. You want to follow best practices

Startups should position themselves to easily accept funding and retain top employees. While it may make sense in some situations to veer off the typical path, doing so usually requires explanation. Founders who want to present themselves as in-line with industry practices seek out corporations.

The process for converting from an LLC to a corporation depends on the state in which you originally formed your LLC. Some states (like California) have a fast-track conversion statute that specifically allows for a domestic LLC to convert to a foreign (out of state) corporation. In other states, a conversion may actually require a merger. In both cases, be sure to consult with a tax expert. You want to consider all tax issues prior to drafting your conversion or merger plan.

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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What is a Registered Agent?

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A registered agent is a business or an individual designated by a business entity to receive service of process. This means in a legal action, such as a lawsuit or summons, legal service will be delivered there. Each entity in California is required to designate a registered agent. This may be an individual or a… Read More

A registered agent is a business or an individual designated by a business entity to receive service of process. This means in a legal action, such as a lawsuit or summons, legal service will be delivered there.

Each entity in California is required to designate a registered agent. This may be an individual or a corporation. Individuals must live in California, while corporations must be approved to function as a registered agent in California.

The agent’s name and address is public information. In most states this information can be accessed on the secretary of state’s website. This lets people know how to contact the business.

Many small business owners and entrepreneurs are comfortable listing themselves. For those who are not, Bend Law Group can provide you with registered agent services in California and refer you to providers in other states.

If you would like to learn more about our registered agent services, please contact 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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4 Things to Know Before Signing an Office Lease

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Office leases can be some of the most expensive contracts your business may have. Understanding how to negotiate can help your bottom line. By Doug Bend  This article was originally published in American Express Open Forum. If you’re looking for space for your new business, taking the time to educate yourself about the key terms… Read More

Office leases can be some of the most expensive contracts your business may have. Understanding how to negotiate can help your bottom line.

By Doug Bend 

This article was originally published in American Express Open Forum.

If you’re looking for space for your new business, taking the time to educate yourself about the key terms of a commercial office lease before you sign can pay enormous dividends.

Unlike residential leases, commercial leases typically carry long terms, require significant monthly payments and include extensive clauses that can increase your financial obligations, such as having to pay for building maintenance and common area expenses. In addition, most leases are drafted by the building’s landlord, which means they reflect the landlord’s interests, not yours. As a result, having basic knowledge of a few key commercial leasing concepts can greatly improve the terms of your lease.

First, you should take a practical approach to gauge your relative bargaining power. During poor economic times, property owners are less likely to expand or take risks, which makes more commercial spaces available. To avoid having vacant space, they tend to be more flexible and offer perks to attract potential tenants.

But when the commercial real estate market is hot (as it is now), the inverse occurs. This makes it even more important for you to do your homework so you don’t sign a lease you might later find unpalatable.
The following four provisions can help you determine whether the lease you’re about to sign is a great business opportunity—or one you should walk away from.

1. Security Deposit

As a business owner, it’s never advantageous to have a big chunk of your money tied up. Unfortunately, many landlords often require large security deposits because it helps them manage the risk of default on long-term leases. If your potential landlord insists on a significant deposit, try to get them to compromise by offering to pay the first three months of rent in advance in exchange for a lower security deposit. This way your money isn’t simply being held for security purposes.

If you have little to no credit, however, the landlord may be concerned your startup funds will dry up before the end of the lease term and won’t want to compromise on the amount of the deposit. (This is often the thinking behind commercial space for tech startups in the Bay Area.) Under these circumstances, a landlord is unlikely to accept advance rent in exchange for a lower deposit. However, they might consider a schedule that involves releasing some of the deposit back to you yearly after you’ve proved that you’re not at risk of default.

2. Additional Rent (Triple Net Expenses)

If a landlord hands you an office lease that doesn’t require building expenses reimbursement from you, go out and buy yourself a lottery ticket because it’s your lucky day. Nearly all leases include additional rent charges, often in the form of “triple net expenses,” which means you’re required to pay your pro-rata share of all insurance, taxes, and operating expenses for the entire building.

The key to managing your share of expenses is to get the landlord to narrow their definition of covered “operating expenses.” This also limits the potential for a landlord to disguise a rent increase as a necessary operating expense.

To limit your potential exposure, you should ensure that the expenses passed on to you are industry standard, which will even vary according to where the space is located within the building. Renting space on the first floor, for instance, may require you to pay additional operating expenses, something that’s not nearly as reasonable to pass on to someone with space on the top floor.

Additionally, if you and your landlord agree to share the cost of capital improvements, you should require that those costs be amortized over the anticipated life of the improvement rather than over the term of the lease. Otherwise, you might have to pay more than your fair share, particularly if the improvement comes toward the end of the lease.

You should also consider the possibility of your landlord selling the building to another party, which could result in increased property taxes. It’s a good idea to investigate when the last reassessment occurred and seek to limit a payment increase if there’s a reassessment after the property sells.

3. Company Use Restrictions

Many commercial leases limit the permitted uses of the leased space. Restricting the use of the premises to certain business activities, such as a day spa or marketing firm, might seem reasonable at the time of signing. However, if you later want to sublease your space, a restricted-use provision could limit your pool of potential subletters.

Ensuring that the premises may be used for “any business office purpose” will help preserve your ability to find a wide variety of subletters in case your business circumstances change.

4. Subordinate Lease

If the office lease you’re about to sign is made “subordinate to an encumbrance,” such as a mortgage, the lease may be automatically terminated if the encumbrance is foreclosed. This could be particularly difficult to swallow if you’ve put in a significant amount of work to find the perfect space or if you’re renting at a below-market rate.

If there’s already an encumbrance in place at the time of signing, you should negotiate a nondisturbance agreement with the beneficiary of the encumbrance, such as the bank, that says you can remain in the leased space as long as you comply with the terms of the lease.

Signing a lease without understanding all the different clauses can be a mistake that can eventually kill your business. Even a precursory knowledge of these key provisions—and some due diligence on your end—can help you secure a lease that’s beneficial to both you and the landlord.

For questions about a lease, or to seek legal guidance and tips surrounding a lease transaction contact us at info@bendlawoffice.com or (415) 633-6841.

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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