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The S Corporation “One Class of Stock” Requirement

When starting a small business, the legal requirements and restrictions of ownership play a key part in deciding what entity to form and how the business might be run. Many companies elect to form an S Corporation, but it is important to first understand the requirements. S Corporation Eligibility Requirements Before electing S Corporation status,… Read More

When starting a small business, the legal requirements and restrictions of ownership play a key part in deciding what entity to form and how the business might be run. Many companies elect to form an S Corporation, but it is important to first understand the requirements.

S Corporation Eligibility Requirements

Before electing S Corporation status, a business must first analyze whether it meets the eligibility requirements. The eligibility requirements for an S Corporation include: (1) not operating an “ineligible corporation”, which primarily consists of banks and insurance companies; (2) having no more than 100 shareholders (for purposes of this limitation a husband and wife and their estates are counted as one); (3) shareholders must be US citizens or resident aliens (certain types of trust and charitable organizations may also qualify with certain limitations) and (5) S corporations are required to have only one class of stock.

“One Class of Stock”

When analyzing the one class of stock requirement closely, it provides that the outstanding shares confer identical rights to distributions and liquidation proceeds as the restriction is intended to simplify the allocation of income and deductions among shareholders. Left out of the equation is voting rights. Therefore, significant differences in voting rights among the one class of stock are permitted allowing an S corporation to issue both voting and nonvoting common stock (see IRC section 1361(c)(4); Reg Section 1.361-1(l)(1)). In determining whether one class of stock is present the regulations look to the corporate charter, articles of incorporation, bylaws, applicable state law and binding shareholder agreements.

Entity formation and operation is not a one-size-fits-all equation. Understanding the limitations of your corporate structure is key to a successful and healthy business. 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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Bend Law Group is Now B Corp Certified!

We are proud to announce that BLG is officially B Corp certified! We are one of ten law firms in California to achieve the certification. B Corps are companies that measure and report their environmental and social impact against a transparent 3rd party standard. You can read more about the assessment, or even try it for… Read More

We are proud to announce that BLG is officially B Corp certified! We are one of ten law firms in California to achieve the certification.

B Corps are companies that measure and report their environmental and social impact against a transparent 3rd party standard. You can read more about the assessment, or even try it for free, here.

Becoming certified was really a no-brainer, especially after we started advising clients on benefit corporation status (to understand the difference between B Corp Certification and benefit corporations you can read this article). We don’t look at this as the end of the road, but just the beginning. We hope to one day be a prominent ambassador for the cause by sharing with others a refreshing new way to look at business.

This is an exciting time in law, and for our firm specifically. We’re proud to join a movement that’s using the power of business to solve social and environmental problems. Being great doesn’t mean sacrificing the future, and the benefit corporation movement has shown a tremendous appetite by both consumers and business owners to find creative ways to make a profit while also considering society as a whole.

For those interested in learning more, we highly recommend you check out Tim Masson’s open letter  to fellow business owners discussing the real value of the certification.

If you have any questions about the process we went through to get certified, or would like to consider the benefit corporation legal status, please give us a call at (415) 633-6841 or send us a note at info@bendlawoffice.com.

#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.

B Corp stamp circle

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Why Consider A Benefit Corporation?

Forbes published the article we wrote below on factors to consider when deciding whether to form a Benefit Corporation. By Doug Bend and Alex King We have advised hundreds of companies and have found that certain preconceptions about business affect the way they are set up and run. The historical belief that corporations exist solely… Read More

Forbes published the article we wrote below on factors to consider when deciding whether to form a Benefit Corporation.

By Doug Bend and Alex King

We have advised hundreds of companies and have found that certain preconceptions about business affect the way they are set up and run. The historical belief that corporations exist solely to maximize profit for shareholders has had a profound impact on how companies operate. However, when analyzed closely, profit mandates give those in charge much less choice than they might prefer, and the sustainable business movement has felt the constraints of this legal model.

This has caused many to ask: what if a corporation was able to seek profits while also considering potential benefits to society? The answer in many states is the addition of the “benefit corporation.” A benefit corporation is the term used when a company is created under corporate law and should not be confused with a “B Corp,” which refers to a company that is certified by B Lab to meet specific standards for social and environmental performance.

What Are the Benefits of Being a Benefit Corporation?

Incorporating as a benefit corporation legally protects an entrepreneur’s social goals by mandating considerations other than just profit. By giving directors the secured legal protection necessary to consider the interest of all stakeholders, rather than just the shareholders who elected them, benefit corporations can help meet the needs of those interested in having their business help solve social and environmental challenges.

Additionally, the demand for corporate accountability is at an all-time high, with many consumers already aligning their purchases with their values. The benefit corporation status is a great way to differentiate your company from the competition and capitalize on these customers.

What Are the Drawbacks of Being a Benefit Corporation?

One of the major drawbacks is expanded reporting requirements. This is to provide shareholders with adequate information to determine if your business is achieving its stated purpose. Each year a benefit corporation must give each shareholder an annual report.

Key to this report is the requirement of a “third party standard” for assessing overall performance, and the process for selecting this third party standard must be explained within the report. The report must also indicate the efforts made to achieve a general public benefit or the circumstances that hindered that achievement. Finally, if the benefit corporation has a website, it must post this annual report on its site.

Another potential drawback is uncertainty. Benefit corporations are fairly new legal entities. It is unclear how courts will interpret their mandates to not only seek profits, but also to consider potential benefits to society. Furthermore, the impact on raising capital and how angel investors and venture capitalists will react remains uncertain.

How Do You Form a Benefit Corporation?

There are a few legal requirements to consider when forming a benefit corporation. The benefit corporation legal requirements vary between states, and this discussion is limited to California law.

Firstly, your company name. A benefit corporation does not need to make any reference to its benefit status within its corporate name. Therefore, those considering a benefit corporation don’t need to alter the name they’ve chosen, nor tailor their brainstorming any differently than if they were considering a standard C Corporation.

However, a benefit corporation must state that it is a benefit corporation within its articles of incorporation. Additionally, the benefit corporation may contain within its articles a specific purpose (such as to further the arts, improve public health, etc.), but it is not required to do so.

Finally, the share certificates of a benefit corporation must specifically state the benefit nature of the corporation. Generally, all other provisions relating to the shares and their transfer are provided within the state’s general corporate law.

Conclusion

For entrepreneurs, business owners, workers and consumers, the introduction of the benefit corporation is an exciting development. Community and environmentally minded business owners can preserve their social goals without sacrificing the ability to make a profit.

For all inquiries about benefit corporations please call (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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The Top Four Pitfalls Of Buying Into A Franchise

Forbes published the article we wrote below on the top pitfalls of buying into a franchise and good questions to ask before you take the leap. By Doug Bend and Tucker Cottingham. Buying into a franchise can be an incredible opportunity for the right kind of entrepreneur — but if you are not careful, you could fall… Read More

Forbes published the article we wrote below on the top pitfalls of buying into a franchise and good questions to ask before you take the leap.

By Doug Bend and Tucker Cottingham.

Buying into a franchise can be an incredible opportunity for the right kind of entrepreneur — but if you are not careful, you could fall into one of the following traps. Below are four common pitfalls and some steps you can take to avoid each:

1. Hidden Fees: In addition to receiving a percentage of the revenue, a franchise may have additional costs, such as fees for entry, training and marketing. You should carefully review the franchise disclosure documents to make sure you understand all of the fees you will be expected to pay as a franchisee.

2. Lofty Average Income and Revenue Figures: You should be careful when relying on average figures. For example, a few very successful franchisees can make average income figures misleading. Some franchisees have much better skill sets, relevant backgrounds and quality locations. In addition, earnings may vary significantly with geography. Instead, calculate the median income of the franchise owners from your geographic region.

Similarly, gross sales figures may only tell part of the story. Even if the gross sales are high, if costs are also high, the actual profits could be disappointing. A better measure of profitability is net profits. Even then, be sure to ask whether the net profits include company owned locations as those often have lower costs.

3. A Strict Boss: One of the advantages of having your own business is the independence you have in running it. However, some franchises have strict rules on how you run your franchise, such as the prices you charge and how you can decorate your location. An advantage to buying into a franchise is they give you a playbook that is more likely to be successful than if you start an independent business, but the playbook can include restrictions as well.

4. Difficulty Leaving: It can be difficult to leave a franchise, as many franchise agreements include a non-compete provision prohibiting you from conducting similar business for a certain period of time and within a certain number of miles from your franchise location. The franchise agreement may also contain very stringent confidentiality provisions and restrictions on contacting clients of the franchise. You should ask if there is anything in the franchise agreement that would prohibit you from setting up a similar business if the franchise does not work out.

How can you avoid these franchise pitfalls and others?

The best thing to do is to reach out to at least 10 current and former franchise owners to learn about their experience. Their contact information should be disclosed in the franchise agreement. Some good questions to ask include:

  1. In hindsight, would they still make the investment?
  2. How much management and industry experience did they have prior to opening the franchise?
  3. How much working capital do they recommend you keep in reserve to make sure you have enough financial cushion for the franchise location?
  4. Have they been subject to any litigation or bankruptcy as a result of the franchise?
  5. What is the unique value proposition of the franchise for the customer?
  6. Are there similar, successful businesses in the area?
  7. How long did it take them to earn a reasonable income?
  8. What was their total investment, including unexpected costs?
  9. Was the franchise training adequate?
  10. Has the franchisor provided adequate ongoing support?

The answers to these questions can help you develop your own best- and worst-case scenarios for entering into the franchise. Also, review franchisee message boards, such as unhappyfranchisee.com, to see complaints and positive feedback posted by other franchisees.

This article was co-written by Doug Bend and Tucker Cottingham. Doug Bend is the principal of Bend Law Group, PC, a law firm focused on small businesses and startups. He is also the General Counsel for Modify Industries, Inc. and tIFc LLC and a Legal Mentor in The Hub Ventures Program. If you have any questions about investing in a franchise, you can contact the authors at (415) 633-6841 or 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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We Now Accept Bitcoin!

This month we accepted our first retainer paid for entirely with Bitcoin. As a law firm that is passionate about providing exceptional legal services to small businesses and startups, we are thrilled to expand our accepted payment methods to include Bitcoin. We hope that doing so further demonstrates our commitment to technology and innovation, and… Read More

This month we accepted our first retainer paid for entirely with Bitcoin. As a law firm that is passionate about providing exceptional legal services to small businesses and startups, we are thrilled to expand our accepted payment methods to include Bitcoin. We hope that doing so further demonstrates our commitment to technology and innovation, and most importantly, to meeting the changing needs of our clients.

We represent a wide range of businesses around the Bay Area including tech startups, food trucks, breweries, hair salons, film production companies, artists, consultants, and international clients.  We take time to understand each of our clients’ legal needs and tailor our services to meet those needs in an efficient and cost effective manner.

One of our core principles is to provide the greatest value possible to each of our clients.  In practice that means we only accept clients and projects for which we feel we are the very best fit.  We also embrace change and use technology to reduce overhead costs to keep our billable rates reasonable.

We are excited to join the Bitcoin community and would especially like to thank the kind folks at Coinbase who patiently answered all of our questions and were able to get us up and running in a flash.

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Essential Legal Resources for California Small Businesses & Startups

Our list of the essential legal resources every small business and startup in California should have. This is great information to start and grow your business. These legal resources can help with establishing, growing, and closing out a business. California Requirements For Forming Your Business California Secretary of State’s Guide to Starting a Business in… Read More

Our list of the essential legal resources every small business and startup in California should have. This is great information to start and grow your business. These legal resources can help with establishing, growing, and closing out a business.

California Requirements For Forming Your Business

California Permits for Your Business

  • CalGOLD. Helps you determine what business permits, licenses and registration requirements are required for your business.
  • California Seller’s Permit. You can read more here, but you need a California seller’s permit if you “[i]ntend to sell or lease tangible personal property that would ordinarily be subject to sales tax if sold at retail.” If you do need a California seller’s permit, you can obtain a permit here.
  • California Resale Certificate. Information on why a business might need a California resale certificate can be found here. A form resale certificate can be found here.

SF Requirements For Registering Your Business

  • San Francisco Business Registration Certificate. If you are doing business in San Francisco for more than 7 days a year, you are required to complete an application to obtain a San Francisco Business Registration Certificate within 15 days.
  • San Francisco Fictitious Business Name Statement. If you will conduct business in San Francisco under a name other than your full legal name, the full legal name of a legal entity (such as a corporation), or any name that suggests additional owners, you must file a Fictitious Business Name Statement with the San Francisco County Clerk’s Office. Frequently asked questions about San Francisco Fictitious Business Name Statements can be found here.
  • License 123. License 123 is a free online tool that helps businesses navigate San Francisco’s permitting and licensing requirements.

California Tax Obligations For Your Business

Federal Tax Obligations For Your Business

  • EIN. The online application to obtain an Employer Identification Number (EIN) can be accessed here.

Planning Your Business

ADA Compliance

  • The San Francisco Office Of Small Business has some legal resources available here on ways to bring your business into compliance and to mitigate your risk of a lawsuit.

Financing Resources

Converting Your California Company

  • The California Secretary of State Office’s guide to convert from one type of entity to a different type of entity.

Obligations for Dissolving Your California Businesses

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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