See what's new at BLG!

Subscribe For Updates

There's always something going on here at Bend Law Group. Be sure to check back often to read about our personal and professional endeavors.

Search Blogs

California Franchise Taxes

Published on

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

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

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

15 Day Exception

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

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

First Year Exemption for Corporations

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

Income Earned in CA and Other States

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

Converting to a New Type of Business Entity

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

Due Dates for First California Annual Franchise Tax Payment

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

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

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

Read Less

Top 5 Reasons to Consider Converting an LLC to a Corporation

Published on

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

By Tucker Cottingham and Doug Bend

*This post originally appeared on Forbes

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

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

1. You want to raise money from VCs

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

2. You want to join a startup accelerator

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

3. You want to give equity to your employees

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

4. You want to issue equity on a vesting schedule

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

5. You want to follow best practices

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

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

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

Read Less

What is a Registered Agent?

Published on

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

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

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

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

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

If you would like to learn more about our registered agent services, please contact us at info@bendlawoffice.com.

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

Read Less

4 Things to Know Before Signing an Office Lease

Published on

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

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

By Doug Bend 

This article was originally published in American Express Open Forum.

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

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

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

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

1. Security Deposit

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

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

2. Additional Rent (Triple Net Expenses)

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

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

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

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

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

3. Company Use Restrictions

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

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

4. Subordinate Lease

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

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

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

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

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

Read Less

How to Select the Right Entity for Your Business

Published on

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.

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.

Read Less

The S Corporation “One Class of Stock” Requirement

Published on

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

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

S Corporation Eligibility Requirements

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

“One Class of Stock”

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

Entity formation and operation is not a one-size-fits-all equation. Understanding the limitations of your corporate structure is key to a successful and healthy business. If you have any questions,  please give us a call at (415) 633-6841 or send us an e-mail at info@bendlawoffice.com.

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

Read Less

Bend Law Group is Now B Corp Certified!

Published on

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 third 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 third party standard. You can read more about the assessment, or even try it for free, here.

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

This is an exciting time in law, and for our firm specifically. We are 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.

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

#BtheChange

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

B Corp stamp circle

Read Less