Even Business Partners Need a Prenup

Published on 5/20/151/5/24 by Doug

What is a buy-sell agreement, and why is it so important? By Doug Bend This post first appeared on Nerd Wallet’s Advisor Voices. Many entrepreneurs decide to launch a small business because of the vision and passion they share with a longtime friend or colleague who becomes their business partner. But as with virtually any… Read More

What is a buy-sell agreement, and why is it so important?

By Doug Bend

This post first appeared on Nerd Wallet’s Advisor Voices.

Many entrepreneurs decide to launch a small business because of the vision and passion they share with a longtime friend or colleague who becomes their business partner.

But as with virtually any marriage or relationship, things can change, and you need to be prepared for that possibility – before the honeymoon is over.

A buy-sell agreement is a legal contract between the co-owners of a company that addresses a variety of business-changing events, such as if an owner dies, retires, becomes disabled, or is booted out of the company.

When Things Get Rocky

Just like a prenuptial agreement, a buy-sell agreement is a roadmap that can be used if one or more partner decides to change course. Often, the agreement is drafted at a time when all parties are on friendly terms and in sync on the business’s direction. This lessens the chance of a dispute if things turn sour or tragedy strikes.

When putting together a buy-sell agreement, the parties must decide which events will fall within the scope of the agreement and how each event will be handled.

Two of the more common triggering events include the death or permanent disability of a partner. Even a successful business may lack the cash necessary to buy out an owner’s interest after an unexpected death or disability.

In an effort to plan ahead, owners will often take out life and disability insurance policies on business partners. This way, if one becomes disabled or dies, the remaining owner or owners will have the necessary funds to buy out the partner’s interest.

An effective buy-sell agreement outlines how this will take place. In the absence of a buy-sell pact, a deceased partner’s ownership interest would pass to his or her estate, and the remaining owner could face a long and complicated legal process.

Other important provisions in a buy-sell agreement include how each owner’s interest will be valued and what procedures will be in place if one owner decides to sell voluntarily.

What Needs To Be Spelled Out in the Buy-Sell Agreement

An ownership interest in an LLC or a corporation is considered personal property, which means it can be transferred freely as long as there are no provisions to the contrary in the company’s charter documents or imposed by law.

Having restrictions that force the departing owner to first offer his or her interest to the remaining owners provides a mechanism to ensure the ownership of the company stays in the hands of a select few.

For the agreement to achieve its basic objectives, the percentage of the company that each person owns—and the purchase price of each partner’s share—should be clear and unambiguous.

An effective valuation procedure should provide a means for determining the purchase price of a departing owner, whether the value is defined as an agreed-upon amount by the owners, a formula or through a method using a third party.

There are some factors to consider when drafting a buy-sell agreement. Here are a few key points for your company’s attorney, accountant, and business partners to consider.

What are the potential sources of funding for purchasing an ownership interest?
Which partners will be included in the buy-sell agreement?
Will installment payments be considered for the purchase of an ownership stake?
How will the valuation process for each ownership stake be determined?

The final terms can vary depending on a number of factors, including the size and financial condition of the company, the health of the owners and the individual preferences of the partners.

Taking the time to plan now can help you avoid major headaches and disputes down the road. For more information on how you can plan ahead for your business, 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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California Franchise Taxes

Published on 2/28/151/5/24 by Doug

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

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.

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What is a Registered Agent?

Published on 11/15/1410/23/23 by Doug

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

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.

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How to Select the Right Entity for Your Business

Published on 8/21/141/5/24 by Doug

Forbes recently published an article we wrote about factors to consider when starting a business and choosing what type of entity it will be. By Doug Bend Entrepreneurs can typically choose from a number of different entities when incorporating their business. However, due to the fluid nature of businesses, the advantages and disadvantages are not… Read More

Forbes recently published an article we wrote about factors to consider when starting a business and choosing what type of entity it will be.

By Doug Bend

Entrepreneurs can typically choose from a number of different entities when incorporating their business. However, due to the fluid nature of businesses, the advantages and disadvantages are not always clear at the time of formation.

Limited liability companies and corporations are the two most typically attractive options for small businesses considering incorporation. Unlike sole proprietorships and general partnerships, members of LLCs and shareholders of corporations have limited liability and greater protection for their personal assets. Members and shareholders can limit their liability and protect their personal assets from creditors.

But if both options offer owners liability protection, why do some business owners choose to form an LLC instead of a corporation, and vice versa? Below are some considerations to help you decide what type of entity might be the best fit for your business.

1. Corporate Formalities

Unlike a corporation, an LLC does not have to hold regular meetings and keep corporate minutes, which reduces the paperwork of maintaining your entity.

2. Taxation

The tax default for an LLC is treated as a pass-through entity, meaning the profits or losses from the entity pass through directly to the owners. An LLC can instead elect to be taxed as a C or S corporation so the owners can take advantage of certain tax advantages based the company’s income and expenses. By default, a corporation is subject to taxation at both the entity and the owner level. A corporation can also elect to be taxed as an S corporation which, like LLCs, allows for pass-through taxation. However, additional restrictions regarding who can be a shareholder of the corporation exist if you elect to be taxed as an S corporation. For example, S corporations can have no more than 100 shareholders and can have only one class of stock.

3. Inclusion of Debt

Early on, a startup or small business will often operate at a loss. Corporation shareholders may not deduct losses beyond their basis in their stock or debt obligations. In contrast, LLC owners can include their proportionate share of the debt from the LLC, so they can deduct a larger share of the losses.

4. Management

An LLC’s members or managers can manage the company. In contrast, a board of directors and its chief executive officer are in charge of managing corporations.

5. Distributions

A corporation must allocate its distributions in proportion to each shareholder’s ownership share. An LLC, on the other hand, does not necessarily have to allocate its profits or losses in proportion to each owner’s membership interest. Instead, the distributive share of gains, losses, deductions, or credits can be determined in the LLC’s operating agreement (subject to certain IRS restrictions against negative capital accounts). Additionally, members of an LLC can transfer and withdraw property into the LLC without the recognition of taxable gain by the LLC or the member with whom the property has been distributed. In the case of corporations, property distributions can result in taxable gain.

6. Investment

Entrepreneurs hoping to achieve venture seed funding typically choose the Delaware C Corporation. Venture capital firms won’t automatically screen out businesses that are not incorporated in Delaware, but they prefer Delaware due to friendly corporate governance benefits and predictable corporate law.

Selecting an entity that is appropriate for your business will depend greatly on how you plan to run the business and where you hope to take it. One size does not fit all. Crafting a strategic entity can mean a world of difference as your business begins to take off.

Bend Law Group, PC, a law firm focused on small businesses and startups. For questions or comments please contact us at (415) 633-6841, or feel free to reach out to us at info@bendlawoffice.com.

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Why Consider A Benefit Corporation?

Published on 5/30/1410/23/23 by Doug Bend

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.

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Buying or Selling a Small Business? Here Are 5 Ways to Assess the Value

Published on 12/17/1310/18/23 by Doug Bend

When buying or selling a small business, you want to make sure to assess the value accurately. There are five ways to determine a fair purchase price: 1. Look At Similar Businesses The least accurate option is to look at similar businesses that are for sale on the Internet. The advantage to this option is… Read More

When buying or selling a small business, you want to make sure to assess the value accurately. There are five ways to determine a fair purchase price:

1. Look At Similar Businesses

The least accurate option is to look at similar businesses that are for sale on the Internet. The advantage to this option is you can look at similar listings from the convenience of your home whenever you would like.

This is, however, the least accurate option as there can be a wide variety of factors that might make the fair market value of the business you are buying or selling more or less than other listings online.

In addition, the asking price of an Internet listing is often not the ultimate selling price. If you work with a business broker or appraiser, they will have access to comps of the sale of similar businesses both in California and across the country.

2. Back Of The Napkin Calculation

You can also use a multiplier times the revenue of the business. While this option is also free, it is often not accurate as it does not take into account a variety of factors, such as the projection that the future revenues of the business are moving in or net profits. For example, two businesses in the same industry could have the same sales but one business could net $200,000 a year whereas another business could net $59,000 a year because it has more expenses.

3. Hire A Business Appraiser to Assess the Value

You can have a certified business appraiser do a very extensive valuation. This is often the most accurate valuation of the business because the business appraiser digs deep on your particular industry, market forces, anticipated future returns and other factors. The drawback is it is also the most expensive option and takes several weeks for the business appraiser to complete. However, at the end of the process you have a detailed report of the fair market value of the business.

4. Hire A CPA

You can also hire a CPA who specializes in valuation work to review the financials of the business and provide a valuation. This is a less expensive and intrusive option than hiring a business appraiser, but the valuation is also not as detailed. You should ask the CPA how much experience they have doing valuation work and whether they have been certified by the AICPA or the CBV as most have no formal business valuation experience and are not certified to provide valuations.

5. Work With A Business Broker to Assess the Value

If you are selling a business, you can have a business broker review your business and provide a suggested listing price.

If you are buying a business, a business broker can advise you on whether the listing price is fair or if there are better opportunities on the market.

The advantage: initially, working with a business broker is often free because they are typically only compensated if the sale of the business is completed.

The drawback: if you do not work with a trustworthy business broker who keeps your best interests in mind, they might suggest a listing price that is less than the full fair market value to encourage a quick sale and therefore a quick commission payment.

It is fair to ask the business broker how many sales they have completed and hire one who has completed at least fifty transactions. They are more likely to have the necessary experience and competency to set the value appropriately.

If the broker provides you with a suggested valuation, you should request that they provide you with comparable sales to make sure it is a logical sales price.

Some business brokers are willing to credit the cost of a business valuation by a certified appraiser from their commission if the seller agrees to list the business at the valuation price. For many business owners, this is the best of both worlds as you get a detailed, accurate valuation by a certified business appraiser, but the cost is paid by your business broker.

If you have any questions about buying, selling, or setting the value of a small business, or would like an introduction to a great CPA or business broker to help you value a business, please contact us at (415) 633-6841 or info@bendlawoffice.com.

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The Top Six Reasons Your Company Should Have Strategic Bylaws

Published on 5/30/1110/2/23 by Doug Bend

Why should your company have strategic bylaws? California does not require a company to have written bylaws. However, every business should have a set of strategic, written bylaws to optimize company operations and legal protections. Here are 6 reasons why: 1. They are the Company’s Legal Backbone A company’s bylaws provide the legal framework for… Read More

1. They are the Company’s Legal Backbone

A company’s bylaws provide the legal framework for how it operates. This includes the number of people who serve on the board of directors, how to call a board meeting, and the officer positions for the company.

2. What if Your Company Does Not Have Bylaws?

If your company does not have bylaws in place, the laws of California will control how the company is run. It is much better for the owners to determine how the company should operate than to rely on the state’s default.

This is similar to an individual not having a will or trust. If they die, the state’s statutes determine how the individual’s assets are distributed. Instead, each individual should thoughtfully think through how they would like their assets distributed and to set up the legal mechanism to enforce their plan.

Similarly, it is much better for business owners to think strategically about how they would like their company to operate. Relying on state statutes might not always be the best fit for the company. The bylaws then serve as the legal framework that supports the business strategy.

3. They Provide Owners With Piece of Mind

Every company runs into challenges eventually. It is better to consider some of the potential turning points in your company and provide for them in your bylaws. This preemptive approach allows you to determine how you would like the outcomes of these situations to be determined, rather than waiting to make tough decisions when interested parties and passions may create the perfect storm for litigation.

For example, what will happen if there is a legal dispute between the owners? Do you want the company to be tied up in the expense and distraction of litigation or would you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants out of the company?

The bylaws present an opportunity to calmly and objectively reflect on these issues before they occur. It is wiser to answer these types of questions ahead of time and determine what might be the best solutions for your company than to rely on the default rules in the state’s statutes or to try to resolve them when clear heads are less likely to prevail.

4. Bylaws Help Protect Your Company’s Limited Liability

One of the primary reasons to form a corporate entity is to possibly have personal limited liability from the potential business debts and judgments against your company.

If a company does not have bylaws and is sued, a plaintiff could try to “pierce the corporate veil” by claiming the company should not be provided with the shield of limited liability protection because its owners did not follow corporate formalities.

In determining whether to pierce the corporate veil, the court would evaluate a number of factors to determine whether your company is legitimate, including whether you have the proper corporate documents and records. By not having bylaws, a business owner is risking not being provided limited liability protection if sued.

5. They Prevent Misunderstandings Among Owners

Communication and clear expectations are key to any successful relationship including the relationship between business owners. Bylaws clearly lay out how the company will be run which can be crucial in preventing misunderstandings over how the owners expect the company to be managed.

6. You May Need Bylaws To Get a Bank Account, Loans, and Insurance

Finally, if you would like to open a business account or apply for loans most banks will require you to provide a copy of your bylaws. In addition, insurance companies may require you to provide a copy of your company’s bylaws before providing certain types of polices.

As a business owner, it is often tempting to cut corners to lower costs. A strategic, thought out set of bylaws should not be one of these corners. Instead, bylaws should be recognized for what they are – one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.

If you have any questions regarding bylaws or any other business legal issue, please contact us at (415) 633-6841 or info@bendlawoffice.com.

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