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Top 5 Reasons to Consider Changing from an LLC to a Corporation

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. Here are the top five… 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.
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 their 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 that the company can later distribute to employees in reserve. 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 Calif.) 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, but it does not constitute legal advice. 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?

A registered agent is a business or an individual that is designated by a business entity to receive service or process in the event of a legal action, such as a lawsuit or summons. California requires each entity to designate a registered agent, which may be an individual provided they are live in California or… Read More

A registered agent is a business or an individual that is designated by a business entity to receive service or process in the event of a legal action, such as a lawsuit or summons.

California requires each entity to designate a registered agent, which may be an individual provided they are live in California or a corporation which has been approved to function as a registered agent in California.

The registered agent’s name and address is public information that can be accessed on most state’s secretary of state website to allow others to know how to get in contact with the business.

Many small business owners and entrepreneurs are comfortable listing themselves as the registered agent. For those who are not, Bend Law Group can provide you with registered agent services in California and refer you to registered agent service 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, but it does not constitute legal advice.  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 To Dissolve A California Corporation

So your company’s life has come to an end. What now? Merely closing your doors is not enough to officially dissolve your company.  You should consult with your attorney and tax professional as it varies from company to company, but there are typically twelve steps to dissolve a California corporation. 1.  Approval Of The Board… Read More

So your company’s life has come to an end. What now? Merely closing your doors is not enough to officially dissolve your company.  You should consult with your attorney and tax professional as it varies from company to company, but there are typically twelve steps to dissolve a California corporation.

1.  Approval Of The Board Of Directors.

A majority of the board of directors needs to pass a written resolution approving the dissolution of the corporation.

2.  Approval Of The Shareholders.

If shares have been issued, a majority of the outstanding shares will also need to approve the company’s dissolution.

3.  Notice of Dissolution To Creditors.

If the company has any creditors, it should provide them with notice of when claims must be submitted for payment to be considered.

4. File Declaration Of Closed Business With The City.

If the corporation is registered with a city, most cities require that the business registration be inactivated.  For example, if the corporation was registered to do business in San Francisco, a Declaration of Closed Business would need to be filed.

5.  File An Abandonment Form For Your Fictitious Business Name Statement.

In addition, most jurisdictions require you to file a form notifying the government that you will no longer be using the fictitious business name. For example, in San Francisco a company would need to file a Statement Of Abandonment Of Use Of Fictitious Business Name Statement.

6.  Cancel Any Other Licenses And Permits.

Cancel any additional licenses or permits, such as your California Seller’s Permit.

7.  California Certificate Of Dissolution.

You will need to be file a California Certificate Of Dissolution.

8.  Discontinued Registered Agent For Service Of Process Services.

If you hired a third party service provider to serve as your company’s registered agent for service of process, you should notify that company of the dissolution so you do not continue to get charged for the service.

9.  IRS Form 966.

Within 30 days of the board of directors approving the dissolution, IRS Form 966 must also be filed.

10.  IRS Forms 8594 and 4797.

If the dissolution involves the sale or exchange of corporate assets, IRS Forms 8594 and 4797 may also be necessary.

11.  Final State Tax Return.

You will need to work with your CPA or other tax professional to file a final state tax return.  You will also need to file any delinquent tax returns and pay any owed taxes.

In California, the Franchise Tax Board will continue to assess an annual franchise tax until the corporation has filed a final tax return with the FTB.  You should indicate it is the final return by checking the box that it is the final return and writing “final” on the top of the return.

12.  Final Federal Tax Returns.

Lastly, a final federal tax return needs to be filed for the corporation.  Like the state tax return, you should indicate on the form that it is the final return for the company.

For many companies these are the steps to officially close down a California corporation registered to do business in California, but please contact us at (415) 633-6841 or info@bendlawoffice.com to make sure no additional steps are required as each situation is unique.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice in any respect.  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

By Doug Bend & Alex King 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… Read More

By Doug Bend & Alex King

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’re 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 a 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. For instance, renting space on the first floor 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. And while 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, 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 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 part—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 Alex King at alex@bendlawoffice.com or 415 322 0762.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice. 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 to Select the Right Entity for Your Business

Forbes recently published an article we wrote about factors to consider when starting a business. By Alex King and Doug Bend Entrepreneurs can generally 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… Read More

Forbes recently published an article we wrote about factors to consider when starting a business.

By Alex King and Doug Bend

Entrepreneurs can generally 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. The tax default for 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 (and 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 415 322 0762, or feel free to reach out to Alex King directly at alex@bendlawoffice.com

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice.  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 S Corporation One Class of Stock Requirement

For many people starting or owning a small business the legal requirements and restrictions of ownership play a key factor in deciding what entity to form, and how the business might be run. Before electing S Corporation status a business must first analyze whether it meets the eligibility requirements. The eligibility requirements for an S… Read More

For many people starting or owning a small business the legal requirements and restrictions of ownership play a key factor in deciding what entity to form, and how the business might be run. 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.

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) 322-0762 or send us an e-mail at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues, but it does not constitute legal advice.  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 the 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 specifically for our firm. 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. You can also view our profile page, and while you’re there you can see what companies in the B corp community are up to.

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 415 322 0762 or send us a note at info@bendlawoffice.com.

#BtheChange

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