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Starting a Non-Profit Corporation in California

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If you are thinking about starting an organization with socially-conscious goals, you may want to consider forming a non-profit corporation or benefit corporation. Forming a corporation designed to help you achieve your goals will limit the personal liability of the organization’s officers and directors and give legitimacy to the organization that most donors and investors require. To… Read More

If you are thinking about starting an organization with socially-conscious goals, you may want to consider forming a non-profit corporation or benefit corporation. Forming a corporation designed to help you achieve your goals will limit the personal liability of the organization’s officers and directors and give legitimacy to the organization that most donors and investors require.

To help you decide which entity type is best for your new organization, this article discusses non-profit corporations, which cannot keep their proceeds or distribute them to stockholders, but may be able to obtain tax-exempt status. To learn more about benefit corporations, which can make a profit while focusing on their goals, read our previous blog post here.

Types of Non-Profit Corporations in California

California allows for the formation of three types of non-profit corporations: religious corporations, mutual benefit corporations, and public benefit corporations. Religious corporations are organized primarily or exclusively for religious purposes, such as running a community church. Mutual benefit corporations are organized to provide social or economic benefits to their members, such as medical cannabis collectives. Public benefit corporations are organized instead for the benefit of the public generally to promote a social, educational, recreational, or charitable purpose.

Due to the distinct characteristics of each type of corporation, the type of non-profit corporation you organize depends entirely on the purpose of the organization and who the organization seeks to benefit. By forming any of these non-profit corporations, the directors are duty-bound to devote their primary attention to the promotion of the social mission of the corporation rather than to the production of profits, and the non-profit corporation cannot issue capital stock.

“Non-Profit” Does Not Automatically Mean Tax-Exempt

It is important to distinguish the formation of a non-profit corporation from 501(c)(3) or other tax-exempt status, because forming such a corporation does not automatically give the corporation a unique tax status. In fact, unless the corporation applies for or elects to be taxed differently with the IRS, a California non-profit corporation by default will be taxed as a normal c-corporation.

Most commonly, non-profit corporations apply for tax exempt status under IRC Section 501(c)(3) (other sections under which tax exempt status can be applied for are (c)(4) – (c)(7), but these are less common and will not be discussed in this short article). This is the most common section because it allows for tax exempt status for the type of groups one typically thinks of when they think of a non-profit organization: public charities (organizations that receive a substantial part of their income from the general public) and private foundations (organizations that receive most of their income from investments and endowments and distribute this funding as grants to other organizations) organized for “exempt purposes,” which include charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals. Thus, even if a non-profit corporation is formed, it may not be eligible for tax-exempt status if it is not expressly organized for one of these purposes.

Once federal tax exempt status is applied for and granted by the IRS, the non-profit corporation can then avoid federal income taxes on its profits generated from any activities that fall under its exempt purpose. Tax exempt status also allows the corporation’s donors to deduct the amounts of their donations given to the organization, providing additional incentive to contribute.

Other Filing Requirements for a California Non-Profit Corporation

Forming a non-profit corporation in California requires many of the same formation documents as a standard general stock corporation, with some alternative language to reflect the corporation’s non-profit purpose. However, two other filings are required that are unique to California non-profit corporations:

  1. State tax exempt status: even if a non-profit corporation applies for and is granted tax exempt status from the federal government, it must also separately apply for tax-exempt status from the California Franchise Tax Board. Until a tax determination has been made at the state level, the corporation will owe California franchise taxes each year.
  2. Registry of Charitable Trusts: within 30 days of receiving a donation, all non-profit corporations in California, regardless of whether they have tax-exempt status, must register with the California Attorney General’s Office to be on the Registry of Charitable Trusts.

Forming a non-profit corporation in California has many detailed requirements that are especially crucial if the organization plans to apply for tax-exempt status, which is its own complicated application process. We highly recommend that you speak with an attorney before starting the formation process, and Bend Law Group would be happy to assist you with this and the tax-exempt application process. If you would like to talk more about your non-profit organization or 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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Essential Elements of the Annual Shareholder Meeting

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If you are formed as a corporation, whether you are a small start-up or a larger business, you will almost certainly need to hold an annual meeting of shareholders. An annual meeting of shareholders is a statutorily required meeting to be held once a year subject to the laws of the state of incorporation. Many… Read More

If you are formed as a corporation, whether you are a small start-up or a larger business, you will almost certainly need to hold an annual meeting of shareholders. An annual meeting of shareholders is a statutorily required meeting to be held once a year subject to the laws of the state of incorporation.

Many corporations decide to incorporate in Delaware due to the various regulatory advantages. For more information on some of practical advantages of Delaware incorporation, please read our previous post: The Convenient and Practical Features of a Delaware Corporation. This article focuses solely on the Delaware General Corporations Law, but it is still a great starting point for any corporation because many states have analogous provisions.

When setting up your annual meeting of shareholders, planning will be essential. Setting up a successful annual meeting requires a firm understanding of the purpose of the meeting, an understanding of what options your state law and company bylaws allow, a proper navigation of voting rights, and a balanced approach to cost considerations.

What is an annual shareholder meeting?

An annual shareholder meeting is a meeting held for the primary purpose of electing a new board of directors. When setting up the meeting, the sources of authority that corporations need to consider are (1) the law of the state of incorporation, (2) the certificate of incorporation, and (3) the company bylaws.

Delaware General Corporation Law (hereafter referred to as DGCL) states that each corporation incorporated in Delaware shall hold an annual shareholder meeting. While the primary purpose of the meeting is to have a shareholder vote, the annual meeting of the shareholders is also a great time to review the success of the past year and to present the general vision for the upcoming year. For many corporations, this meeting will also serve as the only face-to-face interaction between shareholders, corporate officials, and investors.

The Nuts and Bolts of a Notice of Meeting

Each shareholder must be informed that the meeting is taking place. Corporations must provide this notice to shareholders so they can make an informed decision about whether or not they wish to exercise their right to appear and vote. DGCL has five key elements that each notice must include to ensure that shareholders are fully informed.

The DGCL states that, (1) a written notice of the meeting shall be given, (2) the notice shall state the place of the meeting, if any, (3) the date and hour of the meeting, (4) the means of remote communications, if any, and (5) the record date for determining the stockholders entitled to vote at the meeting. Each of the aforementioned items must be included in the notice, however, it’s important to remember that these are the minimum requirements and the company’s bylaws can provide additional notice requirements.

1. Written Notice

DGCL states that a written notice must be given to shareholders to notify them of the meeting. Traditionally, this meant that a paper version had to be mailed to each shareholder to provide proper notice. Many shareholders and corporations now prefer notice by email, therefore, the DGCL was amended to allow notice by electronic transmission. While Delaware acknowledged the need for this new option, they also did not want to force shareholders to receive notice by electronic transmission if they preferred paper copies. In order to properly send notice by email, corporations must obtain an electronic transmission consent form from a shareholder.

While sending the electronic consent waiver to each shareholder may sound like a burden, the effort invested will make subsequent notices more efficient because the waiver can be applied to future notices beyond the immediate shareholder meeting.

2. Place

Some considerations of choosing a location for the meeting include: convenience to the shareholders, cost of the location, and the amount of shareholders that will be participating. Keep in mind that if you hold an election for the board of directors during your annual shareholder meeting, the Delaware default rule for voting is voting by written ballot. Many states allow you to opt-out of voting by written ballots, so check the laws of your state of incorporation. Delaware allows for corporations to opt-out of the default written ballot rule so long as language allowing electronic voting is included in the company’s certificate of incorporation.

Delaware also allows corporations to take advantage of evolving technology by allowing meetings to be held solely through means of electronic transmission such as conference calls or Skype. These options can be used to hold your meeting thereby allowing shareholders a convenient way to participate in the meeting.

3. Date and Hour

The date and hour of the annual shareholder’s meeting shall be designated by or in the manner provided in the bylaws. When setting the date and hour of the meeting, it is best to consider a time that will allow the most participation as there is a minimum amount of shareholders that need to be present for a valid meeting. (See Quorum below).

4. Remote Communication

In the sole discretion of the current board of directors, shareholders and proxy holders not physically present at a meeting of shareholders may be deemed present in person and vote by means of remote communication in accordance with DGCL. Remote communication gives corporations the ability to conduct a hybrid meeting with some shareholders participating in person and others present by means of remote communication such as conference call, Skype, or any other service.

5. Record Date

A record date represents the cutoff date for the eligibility of voting. Shareholders who have purchased after the record date will be precluded from voting at the annual shareholder meeting. The record date may be fixed at the Board of Directors discretion, but it shall not be less than 10 days nor more than 60 days before the date of the annual shareholder meeting.

Timing of the Annual Meeting

Similar to the record date timing, the notice of the annual meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting. This allows shareholders enough time to make plans should they decide to attend, but not so much time that they forget about the meeting, resulting in low attendance.

Voting Rights and Requirements

Now that each shareholder has proper notice of the meeting, they will want to exercise their right to vote their shares for each board of director seat. We’ve put together a list of five factors to consider regarding shareholder rights and requirements.

1. How Many Votes Do Shareholders Have?

Unless otherwise provided in the certificate of incorporation and subject to DGCL Section 213 (record date shareholders), each shareholder shall be entitled to 1 vote for each share of capital stock held by such shareholder. In other words, one share, one vote.

2. Written ballot

All elections of directors shall be by written ballot unless otherwise provided in the certificate of incorporation. If it is authorized by the board of directors, such a requirement shall be satisfied by a ballot submitted by electronic transmission in compliance with the DGCL Section 211(e).

3. Proxy

Each shareholder entitled to vote at a meeting of shareholders may authorize another person or persons to act for such shareholder by an instrument in writing or by an electronic transmission permitted by DGCL and your company bylaws.

4. Quorum

In order for an election of the board of directors to take place, there must be a minimum number of shareholders entitled to vote present at the election. This is called a Quorum. The articles of incorporation or bylaws of a corporation may specify the number of members having voting power required to be present, or represented by proxy, at any meeting in order to constitute a quorum in accordance with DGCL. Note that in most instances no quorum may consist of less than 1/3 of the shares entitled to vote at the meeting, except where a separate vote by a class or series or classes or series is required. Generally, a majority of voting shares are needed to be present at a meeting to constitute a quorum, and subsequently a valid meeting and vote.

If a quorum is not present, the corporation will have to adjourn the meeting and reset it, conforming with all applicable restrictions mentioned in this post. This adds undue delay and cost to the meeting, which can affect your relationship with your shareholders.

5. Plurality

Once a quorum is present at the annual shareholder meeting, a plurality vote is required for a nominee to be elected to the board of directors. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directions according to DGCL. Note that this does not mean that the nominee has to receive a majority of the votes (i.e. 51 percent), it means that the nominee has to receive more votes than other nominees. For example, if there are three nominees for one seat of the board of directors, two of the candidates could receive 30 percent each of all votes cast, while the remaining candidate receives 40 percent of all votes cast. While the candidate that receives 40 percent did not receive a majority of all the votes cast, this nominee would prevail as they received more votes than the other nominees.

Cost Considerations

Navigating the laws of your state and the bylaws of your corporation will allow you to reduce the cost of the annual meeting of shareholders. To ensure that your meeting is effective and efficient, consider options that are convenient to your shareholders. For instance, if your shareholders are located throughout the state, you may want to consider holding the meeting through electronic communication or allowing certain shareholders to participate through remote communication.

Additionally, if your shareholder base is small, DGCL allows the shareholders to elect the board of directors, and complete other corporate actions through unanimous written consent. The key here is having unanimous consent, which gets much harder to accomplish as your company grows.

Conclusion

Setting up your corporation’s annual meeting of shareholders is a technical task that, when done correctly, can be advantageous to both the corporation and the shareholders. Make sure to check your corporate bylaws to see if there are efficient options that allow for the best meeting for you and your shareholders. If you begin planning your annual meeting of shareholders early, the corporation will be able to host a cost effective performance of official business while building strong relations with key shareholders.

If you have any questions, or need assistance as you start to plan for your annual meeting of shareholders, 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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The Top Ways to Fund Your Business

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Entrepreneurs have more options than ever to raise capital for their new business ventures. However, with an increase in options comes the difficulty of choosing the best way to fund the business. Keep in mind that this is very much a high level overview. Each capital raise has its own unique features that impact what… Read More

Entrepreneurs have more options than ever to raise capital for their new business ventures. However, with an increase in options comes the difficulty of choosing the best way to fund the business.

Keep in mind that this is very much a high level overview. Each capital raise has its own unique features that impact what it means to be compliant under state and federal laws. There are a lot of ways to have a compliant security strategy, but here are a few points to start the conversation.

Convertible Notes

A convertible note is traditionally one of the most common methods used to raise capital for new ventures. When a company funds the business through a convertible note, they are receiving immediate capital in exchange for debt. The debt will convert into equity at a later date after the company has secured a second round of financing, which is typically at a point in which the company feels it is in a better position to value its stock.

Every business raising capital is looking to obtain that capital for a fair and reasonable price. New businesses often offer equity in exchange for capital, but problems can arise when parties cannot agree upon the value of the equity. The convertible note allows both parties to delay the difficult task of business valuation to a date when the business value is more definite. Furthermore, unlike a fixed price round (more on that below), a convertible note round is much easier (read as, less expensive) to execute. When companies are just getting started, every dollar counts.

This is often why you’ll hear people refer to a convertible note round as a “bridge loan.” The company has an opportunity to establish proof-of-concept, data points, and other key metrics to properly value its business. Investors have confidence in their investment because a convertible note is a loan, therefore giving investors security. The loan will have a maturity date and can build interest during the period that both parties are attempting to determine a proper valuation when a second round of financing occurs.

This option is attractive to young businesses looking for fast capital that don’t have the history to establish a proper business valuation and need to raise capital without committing a lot of money to legal or accounting fees. Convertible notes are equally attractive to investors looking for security in their investment (maturity date and interest), while holding the potential for valuable return once the note converts into equity of the successful business.

SAFE Agreement (“Convertible Security”)

The “SAFE” agreement stands for a “simple agreement for future equity.” These agreements are very similar to the aforementioned convertible note in that the money becomes available to the new business immediately, but are distinct in how the investment is converted into equity.

A SAFE agreement (sometimes referred to as “Convertible Equity”) is an investment of capital into a venture; however, they are not debt instruments, meaning that they do not have maturity dates. The lack of a maturity date allows ventures more time to go through a round of funding or more time to accurately establish the valuation of their venture. Additionally, because SAFE agreements are not loans, interest does not accrue on the invested capital, unlike a convertible note where interest can and often does accrue. Furthermore, while a convertible note will select the definition of a “qualified financing round” which triggers conversion (such as the raise of $1,000,000), a SAFE agreement will convert on the first sale of “preferred stock” regardless of the amount raised.

Investors and businesses are attracted to SAFE agreements due to the lower cost of negotiation compared to convertible notes because the parties do not have to establish an interest rate, maturity date, or definition of qualified financing. In turn, this lowers the cost for both parties to invest the capital to get the business moving (hence the inclusion of the word “simple” within the agreement).

SAFE agreements, while primarily business-friendly, can be rejected by investors because of uncertainty. Absent a clear groundwork for when and how a conversion will take place investors may still lean towards a convertible note, as this gives them power due to the note ultimately becoming due.

Fixed Price Financing

Fixed Price Financing, or “Priced Equity Rounds,” are the most well known and most common investment method for an established startup or small business. The key difference between Fixed Price Financing and other options previously mentioned is that there is a valuation of the company and the company will typically sell “preferred shares” to investors. A fixed price round can be completed either through investment crowdfunding (provided you meet the rules of the JOBS Act Title II, and Rule 506 of Regulation D) or as a “private placement” (private=no advertising or generally soliciting of the investment).

Businesses that are willing to set a company valuation often favor Fixed Price Financing. Often, Fixed Price Financing is achieved in multiple rounds, each time adjusting the company’s valuation and equity accordingly. This strategy allows companies to mature, demonstrate proof-of-concept, get in touch with consumers, and evaluate the success of their business at various stages of funding the company.

Fixed Price Financing is one of the more expensive options to raise capital, as businesses will want to exercise due diligence in selecting the proper valuation for their business as well as carefully structure the rights granted to investors under each new class of preferred shares. Furthermore, because fixed price rounds come into play once a company is established, investors will also want to perform their own due diligence on the company. Preparing the proper disclosure packet that can survive the myriad of representations and warranties a company makes undoubtedly increases costs to complete the deal.

Fixed Price Financing provides the certainty that convertible notes and SAFE agreements do not provide because both the business and the investors have negotiated and determined the company’s valuation prior to investment. In turn, this increases the cost of this capital-raising vehicle in comparison to convertible notes and SAFE agreements. Fixed Price Financing is an option most commonly used for a business that has proven operations and can show a path of scalability with additional funds.

New Kid on the Block: “Investment Crowdfunding”

Until recently, crowdfunding efforts have been associated with donations and “pre-orders” in which people pay a fee in order to receive a product in return. Indigogo and Kickstarter are not structured to sell any securities; rather, they are set up to accept donations and create pre-orders. However, whenever the exchange for capital includes either debt or equity, the SEC gets involved and the rules are governed by Title II and Title III of the Jumpstart Our Business Startups Act (commonly referred to as the “JOBS” Act).

Pre-order crowdfunding offers a great way to test the market before taking your company to the next step. This fundraising vehicle allows you to gauge market interest and gain feedback from potential consumers, enhancing your overall service or product before you look to sell any securities. Many crowdfunding campaigns have gained valuable exposure to their core markets, thereby allowing their businesses to gain momentum that is ordinarily associated with high priced advertising efforts.

Once it becomes time to fund your business, the parameters under which a startup can raise funds for equity through crowdfunding depends heavily on whether they will take money from an unaccredited investor. Under Title II, if you take money from only accredited investors there is no cap on the amount of money you can raise, or the number of investors. However, if you take investments from an unaccredited investor per the rules of Title III, you may only raise up to $1 million dollars within a 12 month period, and investors who make less than $100,000 can only invest the greater of 5% of their annual income or $2,000. Furthermore, the offering under Title III must be made via a Broker-Dealer or Portal Intermediary, and significant disclosures are required for companies to help provide transparency (such as yearly audited financials if you raise over $500,000). The factors just discussed are not an exhaustive list, and for a deeper analysis on the distinction between Title II and Title III we encourage you to read this post: Crowdfunding: Understanding Title II and Title III of the Jobs Act.

The recent passage of Title II and Title III has made the ability to seek capital from a wide audience a reality, but the rules still must be carefully followed. Additionally, downstream implications such as a cluttered cap table could hinder your ability to seek venture capital financing after using crowdfunding for investment, and the yearly requirement for audited financials (roughly $10,000 to $20,000 per year) can be a big long-term burden for only raising between half a million and a million dollars. It’s extremely important to strategize ahead of time with an attorney and an accountant to ensure you’re not harming the long-term financial health of the company by selecting crowdfunding for fundraising.

Conclusion

From Convertible Notes to Fixed Price Financing, there have never been more ways to successfully raise capital for your business venture. We have highlighted some of the differences between your capital raising options, but there are many other variations and options to raise capital that can fit your growing business.

If you have any questions, or need assistance as you decide which type of capital raising option is for you, please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

This Article was written by Alex King and guest author Paolo Visante.

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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Crowdfunding: Understanding Title II and Title III of the JOBS Act

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In recent years, crowdfunding has been a useful tool for small businesses to raise capital because it allows entrepreneurs to solicit from a wider range of investors. In theory, this would also help alleviate funding gaps and regulatory concerns associated with raising smaller capital amounts. Websites like Kickstarter and IndieGoGo have been helping to facilitate… Read More

In recent years, crowdfunding has been a useful tool for small businesses to raise capital because it allows entrepreneurs to solicit from a wider range of investors. In theory, this would also help alleviate funding gaps and regulatory concerns associated with raising smaller capital amounts. Websites like Kickstarter and IndieGoGo have been helping to facilitate these types of investments for years.

This form of alternative financing is regulated by the JOBS (“Jumpstart Our Business Startups”) Act  first passed by Congress in 2012. The term “JOBS Act” is informally used to represent Title II, Title III, and Title IV of the legislation. Title II was officially passed in September of 2013 with the intent to make it easier for startups and small businesses to raise capital. However, unlike Title III (which took effect May 16, 2016), Title II places heavy restrictions on who can purchase the securities being offered. We focus on the key distinctions between Title II and Title III, and what this might mean for your fundraising efforts.

Title II

Companies looking to raise money through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most exemptions from registration prohibit general solicitation (such as advertising in the newspaper, on the internet, etc). However, Title II allows a company to employ “general solicitation” to market securities offerings, provided they follow the rules and guidelines of Rule 506 of Regulation D. Under this new exemption, companies can use the Internet or other mediums to advertise their security offerings. This gives the company a chance to attract a large number of new investors in a short period of time, but restricts the type of investor who can purchase those securities.

Under the Title II exemption a company can only make an offering to “accredited” investors. The act defines an accredited investor as anyone who has either a net worth of $1,000,000 (your principal residence cannot be included in this calculation), or who made greater than $200,000/year for the three years leading up to their current securities purchase. Additionally, the company must take “reasonable steps” to verify they are in fact accredited. This does narrow a company’s investment pool slightly, but the potential to reach more investors in a short period of time greatly outweighs the negative. Additionally, there is no cap to the number of investors or to the amount of money that can be raised under this exemption. If you’re a company trying to raise capital for the first time, then you likely don’t have a list of willing investors to draw from, and the ability to use the Internet could change things dramatically.

Title III

Title III, adopted May 16, 2016, gained a lot of attention because it allows a company to make securities offerings to non-accredited investors. In theory, this would allow a company to solicit a virtually infinite number of investors from the general public to meet their fundraising goals. That may be music to the ears of hungry startups eager to disrupt traditional investing, but there is some fine print to consider. If a company is soliciting non-accredited investors, then they can only raise $1,000,000 in a 12-month period. If that amount meets your needs, then this exemption provides a very fast way of crowdfunding your capital. If not, it can still be useful when implemented in conjunction with more traditional fundraising strategies.

There are also some restrictions to consider regarding the purchasers of your offering under this exemption. Investors who make less than $100,000 a year can invest the greater of 5% of their annual income or $2,000. Investors who make greater than $100,000 a year can invest up to 10% of their annual income, but they cannot invest more than $100,000 in one year. Funds, such as venture capital firms, are prohibited from investing in a Title III raise.  Additionally, transactions must be conducted through an intermediary that either is registered as a broker-dealer, or is registered as a new type of entity called a “funding portal”. A funding portal must register with the SEC, and be subject to the SEC’s examination, enforcement and rulemaking authority. Furthermore, for companies that raise over $500,000, significant disclosures in the form of audited financials are required. This can create an annual cost of $10,000+ for years down the line if you use this type of crowdfunding.

Certain companies are ineligible to use Title III. Common disqualifications include non-US companies, companies who failed to comply with the annual reporting requirements during the two years immediately preceding the filing of the offer, and companies with no specific business plan or that have indicated their business plan is to engage in a merger or acquisition with an unidentified company.

Finally, for those issuers who are conducting an offering, in addition to the offering documents, issuers are required to disclose (1) information about the officers, directors and owners of 20% or more of the company, (2) description of the issuer’s business and use of the funds, (3) the price for each security, the target offering amount and if they will accept more than the target amount, (4) any related party transactions, (5) the issuer’s current financial health and (6) either reviewed or audited financials, depending on the offering.

Even with these caps, restrictions and requirements to qualify for the exemption, the Title III exemption still has the potential to be a very powerful crowdfunding tool. However, it’s very important to consider that venture capital firms will be excluded, and a large cap table could hinder downstream investment.

Crowdfunding: Conclusion

Crowdfunding has already disrupted traditional fundraising models for small businesses and it is now set to do the same for securities offerings. Even though there are some restrictions, both the Title II and Title III exemptions greatly widen the investor pool for companies interested in crowdfunding. While the exemptions do have the potential to make raising capital less difficult, venture capitalist and angel investors will still play a role in early stage investments. A comprehensive strategy, and a complete understanding of relevant exemptions, is needed to get the biggest benefit from the JOBS Act.

If you have any questions, or need assistance as you prepare for a round of fundraising 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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Entity Options for the California Socially Conscious Entrepreneur

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

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

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

General Overview of Each Entity Type

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

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

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

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

Purpose, Evaluation, and Reporting

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

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

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

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

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

Directors Duties

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

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

Enforcement

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

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

Taxes

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

Which Entity is the Right Fit for You?

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

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

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

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

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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Requirements for a Professional Corporation for Veterinarians, Chiropractors, and Other Professional Services

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

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

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

Corporate Purpose in the Articles of Incorporation

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

Naming Requirements

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

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

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

Licensed Directors, Officers, and Shareholders

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

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

Potential Registration with a Governing Board

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

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

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How Cumulative Voting Impacts Majority Shareholders in a California Corporation

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

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

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

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

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

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

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

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

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

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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