Small Businesses

The Corporate Transparency Act: A Guide For Small-Business Owners

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This article was originally published on Forbes. By: Doug Bend The road to onerous corporate compliance is paved with good intentions. I believe there is no better example than the Corporate Transparency Act (CTA), which took effect on January 1, 2024. The goal of the CTA is to combat money laundering by requiring business entities… Read More

This article was originally published on Forbes.

By: Doug Bend

The road to onerous corporate compliance is paved with good intentions. I believe there is no better example than the Corporate Transparency Act (CTA), which took effect on January 1, 2024. The goal of the CTA is to combat money laundering by requiring business entities to report their beneficial owners. However, there are strict deadlines and steep penalties for noncompliance, so owners must understand the CTA and how it might affect their businesses.

Explaining The Corporate Transparency Act

Under the CTA, certain businesses are required to submit a Beneficial Ownership Information report to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The report must include the names of each beneficial owner who either owns at least 25% of the business or exercises “substantial control,” according to FinCEN’s FAQ page about the act.

“Substantial control” can be direct or indirect, such as serving as a senior officer; having authority over the hiring and removal of senior officers or the majority of the board; having substantial influence over important decisions or “any other form of substantial control over the reporting company,” FinCEN’s FAQ page also said. You are required to disclose each beneficial owner’s name, date of birth and address and upload an image of either their driver’s license or passport.

Businesses formed after January 1, 2024, are required to file their first report within 90 days of creation or registration. Those formed before January 1, 2024, will have until January 1, 2025. Additionally, you are required to file an updated report within 30 days of any change in your company’s beneficial ownership information, according to FinCEN.

If you would like to file the report for your business entity, I suggest first obtaining a FinCEN ID for the report. You can obtain one here and file the report here.

Exemptions

There are 23 types of entities that are exempt. I recommend reviewing FinCEN’s Small Entity Compliance Guide checklist to see whether your company qualifies for any of these exemptions.

Fraudulent Solicitations

FinCEN has put out an alert to be careful of “fraudulent attempts to solicit information from individuals and entities who may be subject to [CTA] reporting requirements.” Be particularly cautious of e-mails with the subject line “Important Compliance Notice” and that ask you “to click on a URL or to scan a QR code.”

Penalties

If a report is not timely filed, FinCEN can impose civil penalties of $500 per day per entity, a $10,000 criminal penalty per entity and imprisonment for up to two years. To say the least, the consequences of not being in compliance are enormous.

An Ounce Of Prevention Is Worth A Pound Of Cure

Many small-business owners will likely either spend several hours navigating the details of these requirements each year or choose to hire an attorney to make sure each report is properly submitted. For owners who already have too much on their plates, this might feel like one more headache with very stiff penalties for noncompliance.

To make navigating changing compliance requirements more manageable and stay informed of regulatory changes, business owners can consider working with a reputable business attorney and a CPA. Have an annual check-in meeting with your business attorney to discuss any regulatory changes and to make sure you are completing the legal requirements for your business. I believe it is a good idea to meet with your CPA at least twice a year: once in the fall before the books have closed for the year and again early the next year to discuss your corporate tax return.

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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Major Factors To Consider When Selling Your Business

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Doug was recently quoted in an article on Forbes and about how you need to be wary of potential bad actors when you sell your business “[c]ompetitors often express an interest in purchasing a business merely to gain as much information about that business as possible with no intent of actually completing the purchase. Be… Read More

Doug was recently quoted in an article on Forbes and about how you need to be wary of potential bad actors when you sell your business “[c]ompetitors often express an interest in purchasing a business merely to gain as much information about that business as possible with no intent of actually completing the purchase. Be sure to have a solid mutual non-disclosure agreement in place before you share any of your confidential information, and trust your gut before you share too much of your company’s secret sauce.”

If you are interested in reading the remaining factors to consider when selling your business, feel free to check out the full article on Forbes!

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 Importance of Stock Purchase Agreements for Founders

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By: Alyssa Ziegenhorn You had a great idea, and you’ve just started your company – congratulations! At this early stage, the company is most likely just you and a few close friends or relatives. Without a large roster of executives, employees, and investors to keep track of, you might think that it isn’t necessary to… Read More

By: Alyssa Ziegenhorn

You had a great idea, and you’ve just started your company – congratulations! At this early stage, the company is most likely just you and a few close friends or relatives. Without a large roster of executives, employees, and investors to keep track of, you might think that it isn’t necessary to document your company’s stock ownership with a stock purchase agreement. After all, you and your sibling/college roommate/spouse are the only owners of the business. It’s obvious who owns the shares.

Or is it? Often founders of early-stage companies don’t feel it necessary to execute stock purchase agreements between themselves and the company. As sensible as this may feel at the time – you’re saving time and legal expenses, and reducing unnecessary documentation! – it can cause significant issues later on.

Ambiguity on ownership and decision-making

If the company has multiple founders or owners, not executing stock purchase agreements can make it unclear who has decision-making power. Is the ownership 50/50, or 49/51? If there is a disagreement down the road, it can be difficult to prove decisively what the ownership split was at the beginning of the company, especially if significant time has passed.  

Issues with future investors

If things are going well, your company might attract investors. That’s great! But part of landing an investor is due diligence – they’re going to want to see all the company’s records. If there is no documented stock purchase for the founders, investor confidence in your project may decrease. Having proper documentation from the beginning makes your company look more professional and increases confidence in your future success.

Significantly increased legal costs

Say you end up in the scenario from #2, and you need to get your documents in order for potential investors – fast! You can hire a law firm to help with that, but diving into old documents and records takes time. It might also involve tracking down old founders or employees who are no longer with the company and getting them to execute documents retroactively. This can be time-consuming and difficult, especially if the relationship with former co-founders or advisors has become negative. All of this means you are looking at significant legal costs; much higher than they would be to execute the agreements at the start.    

Increased tax burden on future shares (no backdating)

If you do need to execute stock agreements later on, it can also increase the tax burden for whoever receives the shares. Backdating stock agreements is strictly against the law. If you execute agreements for your company that was formed five years ago, the effective date has to be the date they are signed. That means if the value of your company shares has gone up, perhaps due to investor interest or successful revenue years, you are going to be responsible for the value of the shares at the time of the agreement – not the time of the company formation.

For all of these reasons, executing stock agreements at the time of formation is a crucial step to set your company up for success, whether you are a small business or an early-stage startup. For more information or help with your company formation, please contact us at info@bendlawoffice.com.

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

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The Six Factors For Determining A Fair Valuation Cap For Your Startup

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This article was originally published in Forbes. By: Doug Bend We have helped dozens of startups raise their seed round of financing. Most of these companies have used the template Simple Agreement for Future Equity (better known as a SAFE) with a valuation cap that Y Combinator has open-sourced here. One of the best attributes of… Read More

This article was originally published in Forbes.

By: Doug Bend

We have helped dozens of startups raise their seed round of financing. Most of these companies have used the template Simple Agreement for Future Equity (better known as a SAFE) with a valuation cap that Y Combinator has open-sourced here.

One of the best attributes of the SAFE is the S, which stands for “simple” because only a few terms typically need to be negotiated with an investor. This helps to decrease the amount of time that the founders and the company’s attorney need to spend on negotiating terms.

The most important of these is often the valuation cap, which provides the investor with a ceiling valuation for calculating the number of shares the investor will own if the SAFE converts. The valuation cap, therefore, provides the investor with the peace of mind of knowing that even if the company is valued at a much higher amount, the investor will still have a floor ownership percentage in the company if the SAFE converts.

Determining the amount of the valuation cap is more of an art than a science, but there are typically six key factors—let’s take a look at them.

1. The Overall Fundraising Market

The first factor is the overall fundraising environment for early-stage startups.

For example, the current market for raising capital for startups has cooled off in recent months and is more pro-investor than it was in 2021.

2. Traction

The second factor is how much traction the company has. Investors are more likely to invest with a higher valuation cap if the startup can demonstrate that it has product-market fit. For example, does the company have any contracts that generate revenue? If so, how much revenue and who are those contracts with?

Another indicator of product market fit is the amount of user and revenue growth. For example, investors are more likely to invest in an early-stage startup if it has at least 20% in month-over-month revenue growth or steady, significant increases in the number of users.

3. The Prior Financial Returns Of The Founders

If the founders have a proven track record of prior exits, they are more likely to have a higher valuation cap.

Investors are more likely to invest with a higher valuation cap if the founder has previously provided the investor with a solid return. If the founder has done it before, they are more likely to do it again.

4. The Experience Of The Founders

Founders are likely to have a higher valuation cap if they have experience that is relevant to the startup, particularly if that experience is helping to grow and scale other startups in the same industry.

Investors are more likely to invest with a higher valuation cap not only if it is a great idea, but also if the right team is implementing that idea.

5. Industry

The industry the startup is in can also impact the valuation cap for the SAFE. For example, software companies often have a higher valuation cap because they can quickly grow and scale.

6. Leverage

Lastly, the valuation cap will likely be higher the more leverage the startup has. For example, the more interest there is in the investment round, the higher the valuation cap the startup will likely negotiate.

In contrast, if the startup has a short financial runway, the investor might use that as leverage to negotiate a lower valuation cap or not invest at all if they believe the startup is not as likely to be financially solvent.

As you can see, the valuation cap for a startup’s seed round is based on several variables. Founders are best served working with their company’s CPA and attorney to gauge what valuation cap amount is market and fair for both their company and its investors.

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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Should You Convert Your Startup From A California LLC To A Delaware Corporation?

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This article was originally published on Forbes. By: Doug Bend Most California LLCs that are small businesses never convert to a Delaware corporation for five reasons. 1. In addition to paying the California annual franchise tax you would also need to pay the Delaware annual franchise tax. 2. You would also need to have a… Read More

This article was originally published on Forbes.

By: Doug Bend

Most California LLCs that are small businesses never convert to a Delaware corporation for five reasons.

1. In addition to paying the California annual franchise tax you would also need to pay the Delaware annual franchise tax.

2. You would also need to have a registered agent for service of process in Delaware.

3. It often costs more to have a CPA prepare a corporate tax return than a partnership tax return for a multiple member LLC that has not made a tax election. A single member LLC that has not made a tax election does not need to file a tax return at all.

4. It costs several thousand dollars in legal and government filing fees to convert a California LLC to a Delaware corporation.

5. There are additional basic requirements for maintaining a Delaware corporation. For example, Delaware corporations are required to have annual Board and shareholder meetings or written consents in lieu of a meeting whereas this is not the case for California LLCs. Also, if you convert your California LLC to a Delaware corporation you would also have to file the Delaware annual report by March 1st of each year. The annual consents and reports do not take long to complete, but they are not fun and are items you do not have to worry about as a California LLC.

These additional costs and compliance headaches are why most small business owners never convert their California LLC to a Delaware corporation.

But startups are not like most small business owners.

Instead, the conversion is often a necessity if you plan to raise outside third-party financing for your startup; the drawbacks are outweighed by the benefit of the investment round costing less in legal expenses if it is a Delaware corporation instead of an LLC. This is because most of the seed stage financing documents that have been open sourced were drafted for corporations and not for LLCs. For example, many early-stage financing rounds use Y Combinator’s SAFE template, which was intended to be used by corporations.

Also, your investors will most likely require that your company be a Delaware corporation for three reasons.

1. Many investors are more familiar and comfortable with Delaware corporations as more than half of publicly traded companies were formed in Delaware.

2. Corporations are taxed differently than LLCs that have not made any tax elections. If an investor invests in an LLC that not has made any tax elections and the LLC has net profits, the investor might get a K-1 for each tax year and need to pay income taxes on their proportionate share of those profits even if the investor might not have received any distribution payments from the company. In contrast, with a Delaware corporation, the profits and losses from the company stay locked up at the entity level unless there are any distribution payments to the shareholders.

3. Startups that are raising capital are usually looking to grow and scale. It is easier to issue equity to employees, advisors and service providers from a corporation with a stock plan than it is from an LLC.

For all of these reasons, while it is very rare to see a Mom and Pop shop, such as a restaurant or a consulting company, convert from a California LLC to a Delaware corporation, it is why you often see startups make the conversion if they are not already a Delaware corporation before raising investment capital from investors.

As you can see, the cost-benefit analysis for whether to convert your California LLC to a Delaware corporation gets complicated quickly. If you are thinking of making the jump, you would be well served to first check in with your corporation’s CPA and business attorney to help make sure that the transition would be the best decision for you and your company.

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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Here’s a Tip: Tipping Rules for Restaurants in California

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By: Alyssa Ziegenhorn Tipping is a hot topic in the restaurant industry, especially with the recent rise in online and to-go ordering. We’ve gathered answers to some of the most common tipping questions for restaurant owners, managers, and employees. Who Owns Tips? Under both federal and California state law, tips belong to the employee, not… Read More

By: Alyssa Ziegenhorn

Tipping is a hot topic in the restaurant industry, especially with the recent rise in online and to-go ordering. We’ve gathered answers to some of the most common tipping questions for restaurant owners, managers, and employees.

Who Owns Tips?

Under both federal and California state law, tips belong to the employee, not the employer. Tips are a gift from the customer to the employee and so the employer cannot keep any portion of the tip.

Can Restaurant Owners Take a “Tip Credit”?

Federal law allows a restaurant to count tips toward employees’ minimum wage. This means restaurant owners can pay employees as little as $2.13/hour as long as the employee’s tips make up the rest of the difference to the federal minimum wage of $7.25/hour.

California law does not allow this practice. In California, employers must pay the full state minimum wage regardless of the amount of tips an employee receives. As of Jan. 1, 2022, state minimum wage for employers with less than 26 employees is $14 and $15 for employers with 26 or more employees. Some cities have their own minimum wage higher than the state requirement.

What is Tip Pooling?

Employers can mandate tips be shared between a pool of eligible employees. This practice is known as “tip pooling.” Although employees are the rightful owners of tips, both California and federal law allow owners to mandate tip pooling as long as owners, managers, and supervisors do not receive any tips from the pool.

Who Can Participate in a Tip Pool?  

The Department of Labor implemented a rule in 2011 prohibiting employees who don’t usually receive tips, such as cooks and dishwashers, from being included in tip pools. In 2018, Congress passed a law forbidding employers from taking employee tips. The DOL provided guidance that non-tipped employees could be included in tip pools in certain circumstances, and formalized this position in 2020 with revised regulations. These regulations took effect on March 1, 2021.

Federal: Under the DOL regulations, employers can include employees who don’t usually receive tips (nontraditional employees) in a tip pool provided they (i) pay at least federal minimum wage and (ii) do not take a tip credit.

California: Because California does not recognize a tip credit toward minimum wage, the requirement is a bit different from the federal rule. In California, mandatory tip pooling is allowed as long as the employees in the pool are part of the “chain of service.” This just means employees must have some relationship to the customer experience, but aren’t necessarily serving the customer directly.

Under both rules, it is important to remember that owners, employers, managers, and supervisors cannot participate in the tip pool.

Are There Any Exceptions?

If a manager or supervisor also performs the same duties as a regular employee (for example, working a shift as a server or host) they can participate in the tip pool for purposes of that shift. Owners, however, can never participate in a tip pool. If an owner receives a tip directly from a customer while performing serving or other regular employee duties, they may keep it.

How Should Tips Be Distributed?

The rules are a little fuzzy on this subject, but most sources agree that it’s best to set up a “fair and reasonable distribution” of the tips.⁠ This simply means the employer has an impartial system for deciding how much is paid to each employee. The distribution % of tips from the pool must be based on a fair system, generally in proportion to the amount of service the employee provided to the customer. Usually this means the majority should go to the server and smaller portions to the busser, bartender, or host. The California Department of Labor Standards Enforcement has found 80% to wait staff, 15% to bussers, and 5% to bartenders to be legal in a traditional restaurant setting. However whether something is “fair” depends on the particulars of each business—so this isn’t the only possible split.

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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10 Steps For Changing The Legal Name Of A California LLC

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This article was originally published in Forbes. By: Doug Bend Business owners sometimes would like to change the full legal name of their California limited liability company (LLCs). The three most common reasons for changing the name of an LLC include: the products or services the LLC offers have changed, there has been a legal challenge… Read More

This article was originally published in Forbes.

By: Doug Bend

Business owners sometimes would like to change the full legal name of their California limited liability company (LLCs). The three most common reasons for changing the name of an LLC include: the products or services the LLC offers have changed, there has been a legal challenge to the name or the owners have thought of a better name.

There are typically 10 steps to changing the legal name of an LLC in California. 

1. Member Resolutions

First, you should review your operating agreement to see what the voting requirements are to change the legal name of the LLC. Most likely you will need written resolutions that are signed by the members who own a majority ownership interest in the LLC to document that a sufficient number of the members approve of the name change.

2. Amendment To The Articles Of Organization

When you formed the LLC, you filed articles of organization with the California Secretary of State’s Office. Those articles included the full legal name of your LLC. You will now need to file an amendment to the articles to change that name.

3. Statement Of Information

Once the amendment to the articles of organization has been approved, you will need to file an updated statement of information with the California Secretary Of State’s Office. This is a one-page filing that can be submitted on the Secretary of State’s website.

4. City Business Registration Certificate

You will also have to update the city business license to change the legal name of the entity.

5. Fictitious Business Name Statement

If you are conducting business under a name other than the full legal name of the LLC, you will need to file an updated fictitious business name statement with the county.

6. Publication Of The Fictitious Business Name Statement

Once you get the endorsed fictitious business name statement back from the county, you will need to have it published in a legally adjudicated newspaper.

7. California Employment Development Office

If your LLC is running payroll for its employees, you will need to update the Employment Development Office (EDD) of the name change.

8. Seller’s Permit

If the LLC collects sales tax, you will need to update the company’s account with the California Board Of Equalization. If you have any trouble, you can call the Board Of Equalization at 1-800-400-7115 and they will walk you through the process step-by-step.

9. IRS

You will need to work with your CPA to update the IRS of the LLC’s new legal name.

10. Vendors

Lastly, you will need to update all of the LLC’s third-party vendors. For example, you will need to update the LLC’s bank account and insurance policies to include the new legal name of the LLC.

You should consult with your attorney as your LLC might have different requirements, but this checklist is a good starting point for strategizing on how to change the legal name of your company. As you can see, numerous government agencies and vendors would need to be updated and so you should make sure that the new name is one you love much more than your LLC’s current name.

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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