Organizing California Corporations and Single-Member LLCs

Transcription

1 Rachael Simonoff Wexler Organizing California Corporations and Single-Member LLCs Presenters: Bill Staley, Attorney Rachael Simonoff-Wexler Alschuler Grossman Stein & Kahan LLP July 26, 2006 Woodland Hills San Fernando Valley Bar Association, Business and Tax Attorney Law Office of

2 Rachael Simonoff Wexler This presentation should be viewed only as a summary of the law and not as a substitute for tax or legal consultation in a particular case. Your comments and questions are always welcome.

3 Rachael Simonoff Wexler Preliminary Steps Perform choice of entity analysis* Or note in the cover letter or engagement letter who has performed it for the client. Use a checklist* to gather all the necessary information. Preliminary Steps Reserve the name. It might be necessary for a related corporation to authorize the use of a similar name. Pick your client. Representing the entity will leave you out if there is a shareholder dispute. It s best to stay with the person with whom you have a long relationship.

4 Rachael Simonoff Wexler Preliminary Steps Send an engagement letter and get paid. All of your work will be performed in a short period of time. Get an authorization to obtain a corporate set. Consider securities law issues Federal, California and other states Note the offer and the sale are both subject to securities laws, as is the issuance of an option to buy stock. Failing to plan often leaves only expensive exemptions available. Not complying can be devastating in later financing rounds.

5 Rachael Simonoff Wexler Articles of Incorporation If your client will be on the board of directors and there will be other shareholders, add the liability limitation and the full indemnity clause.* It is not necessary to name the class of shares. If there is only one class and it is not named in the articles, it is capital stock. Articles of Incorporation Use an attorney service to file the articles (and everything else) with the Secretary of State. In your cover letter to the attorney service, mention the name reservation number. It is good practice to tell the client in writing if a document will be available for public inspection. Do you want to use a home address?

6 Rachael Simonoff Wexler Action by Incorporator Sign it at the same time as the articles. Accidents can happen. Attorneys are easier to find after a few years than paralegals, so have attorneys sign the Action. The incorporator should not elect officers. Other documents While the articles of incorporation are in the Secretary of State s office, prepare all the other documents (except the stock certificates). Sending as many documents as possible at one time minimizes confusion, because the client can deal with it all at once. Explain the various documents in a letter or memo.*

7 Rachael Simonoff Wexler Other documents Request checks for the various filing fees, if you have not arranged for prepayment or to advance these fees. Does the new corporation need: Approval by a parent corporation? Leases for real property or equipment? License arrangements? A buy-sell agreement among the shareholders? Employment agreements? Other documents Tell the client: To open a bank account and deposit the cash for shares. Use the corporation s EIN, not any other tax ID number. To have the accountant set up the books and advise re estimated tax payments To register with the California EDD. To pay L.A. City taxes or other local taxes. To get any licenses needed for the business. To get business insurance.

8 Rachael Simonoff Wexler Other documents Consider telling the client how corporations work, when the board and shareholders must meet, the requirements for a valid meeting, about keeping minutes, what actions must have board approval, about the fiduciary duties of directors, that securities laws exist and that the corporate veil can be pierced. Many of these things are obvious to attorneys, but not to clients even clients with other business entities. Letter from Secretary of State re corporate name* Send this to the client, perhaps with your own memorandum on how to avoid violating the trademark rights of others and how the new corporation can protect its own trademarks.

9 Rachael Simonoff Wexler Bylaws The number of directors and the date of the annual meeting merit attention. Allowing notice by requires special steps that few clients take. Consider not allowing it. It is good practice to show the date of adoption on the cover page and to have a certificate of secretary attesting to the date of adoption of the bylaws. Directors Action The directors can meet, but they often act by written consent without meeting. They should adopt a principal office, elect officers, authorize opening a bank account, and authorize issuing stock. If the corporation will be an S corporation, they should authorize the election and state the intended effective date.

10 Rachael Simonoff Wexler Statement of Information It is good practice to have the client sign this and return it to you for filing. Do you want to use home addresses? This will be a public document. Application for an Employer Identification Number If you are going to file the S corporation election, you should get the EIN. Be sure no one else is getting the EIN or there will be more than one a nightmare. You will need the president s Social Security Number to get the EIN. Be sure the accountant and bank get the EIN.

11 Rachael Simonoff Wexler S Corporation Election It is good practice to send an explanatory memorandum with the election form. The shareholders need to know that they will be taxed on the corporation s income as a result of the election. The corporation has no obligation to make distributions s to cover the taxes. Do you represent a minority shareholder? Do they know that? S Corporation Election Note that spouses who have or might have a community property interest in the shares must sign the election. Note that an officer s signature is required, even if the officer also signs as a shareholder. You need to calendar the filing date of the S corporation election and ask the client to return it in time for the filing. You should file it (not the client) by certified mail, return receipt requested. Express mail is OK.

12 Rachael Simonoff Wexler Order the corporate set It is good practice to defer the order until the endorsed articles of incorporation are in hand to be sure of the filing date and name. Over time, it will be helpful to have a separate stock book. It is important to have receipt-stubs with the stock certificates. It is easier to store minute books in sleeves. Prepare the stock certificates Don t forget about securities laws! Should the certificates bear any legends? If so, not on the front of the certificate and stub that there are legends on the back. If the shareholders have living trusts, they probably should hold the shares as trustees.

13 Rachael Simonoff Wexler Prepare the stock certificates Prepare the receipt-stubs with the stock certificates and have the shareholders sign them and return them to you. Put the signed receipt-stubs in the stock book.* Follow up File the signed documents with the various government agencies. Complete the minute book and stock book. Calendar the annual meeting.

14 Rachael Simonoff Wexler Follow up Return the minute book and stock book to the client. Get a signed receipt for them. Sometimes clients can t find them. Don t keep them. You will end up with too many and then you will have to track down the clients. Get them when you need them, send a receipt to the client, use them and return them and get a receipt from the client. Tell the client that this concludes your work on the incorporation. Organizing a Single-Member California Limited Liability Comapny

15 Rachael Simonoff Wexler Organizing a CA SMLLC Collect the information that you will need* Prepare an engagement letter File the Articles of Organization Generally, select manager-managed by one manager Organizing a CA SMLLC Does the client need an operating agreement? e Yes.* State the tax classification, that it is managermanaged, the principal office, that it has an indefinite term. How are new members admitted? How is a new manager appointed (for example, when the current manager dies) Who can sign conveyance documents for the LLC?

16 Rachael Simonoff Wexler Organizing a CA SMLLC Get an EIN for the LLC An SMLLC does not technically need its own EIN, but in practice it needs the unique ID number. Organizing a CA SMLLC Other documents While the articles of organization are in the Secretary of State s office, prepare all the other documents. Sending as many documents as possible at one time minimizes confusion, because the client can deal with it all at once. Explain the various documents in a letter or memo.

17 Rachael Simonoff Wexler Organizing a CA SMLLC Other documents Request checks for the various filing fees, if you have not arranged for prepayment or to advance these fees. Does the new corporation need: Approval by a parent organization? Leases for real property or equipment? License arrangements? Employment agreements? Organizing a CA SMLLC Other documents Tell the client: To open a bank account and deposit the cash for the membership interest. Use the LLC s EIN, not any other tax ID number. To have the accountant set up the books and advise re estimated tax payments To register with the California EDD To pay L.A. City taxes or other local taxes To get any licenses needed for the business To get business insurance

18 Rachael Simonoff Wexler Organizing a CA SMLLC Other documents Consider giving the client a memorandum explaining how LLCs work, that securities laws exist, that a SMLLC is disregarded for tax purposes but not for liability purposes and that the corporate veil can be pierced. Many of these things are obvious to attorneys, but not to clients even clients with other business entities. Thank you Bill Staley Attorney Woodland Hills, California