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Organizing Corporations in California

Help your clients make decisions about the form, location, and structure of their businesses—and when a corporation is the right choice.

Help your clients make decisions about the form, location, and structure of their businesses—and when a corporation is the right choice.

  • Considerations before incorporating
  • Alter ego and adequate capitalization
  • Formation requirements
  • Postincorporation checklist
  • Offering, selling, and issuing securities
  • Foreign corporations in California
  • Professional corporations
  • Close corporations
  • Comparison of California, Delaware, and Nevada corporation laws
  • Guidance on California social purpose and benefit corporations
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Help your clients make decisions about the form, location, and structure of their businesses—and when a corporation is the right choice.

  • Considerations before incorporating
  • Alter ego and adequate capitalization
  • Formation requirements
  • Postincorporation checklist
  • Offering, selling, and issuing securities
  • Foreign corporations in California
  • Professional corporations
  • Close corporations
  • Comparison of California, Delaware, and Nevada corporation laws
  • Guidance on California social purpose and benefit corporations

1

Considerations Before Incorporation

Keith W. McBride

Mark E. Peterson

  • I.  THE LAWYER’S ROLE
    • A.  Scope of Lawyer’s Work  1.1
    • B.  Professional Responsibility Considerations
      • 1.  Competence  1.2
      • 2.  Conflicts of Interest
        • a.  Representing Multiple Parties  1.3
        • b.  Representing an Organization  1.4
        • c.  Lawyer as Shareholder  1.5
        • d.  Lawyer as Director or Officer  1.6
          • (1)  Insurance Issues  1.7
          • (2)  Deputization Issues  1.8
          • (3)  Agency Issues  1.9
  • II.  COLLECTING AND ANALYZING INFORMATION
    • A.  Preliminary Information Needed  1.10
    • B.  Initial Interview  1.11
      • 1.  Form: Interview Sheet  1.12
      • 2.  Explaining Cost and Time Requirements to the Client
        • a.  Preparing Basic Documents  1.13
        • b.  Analysis and Consultation  1.14
        • c.  Complying With Securities Laws  1.15
        • d.  Offering Circular or Private Placement Memorandum  1.16
        • e.  Fees and Other Out-of-Pocket Expenses  1.17
        • f.  Collateral Work to Be Performed by Lawyer  1.18
      • 3.  Written Fee Agreements  1.19
      • 4.  Form: Sample Letter Detailing Fees Based on Hourly Rate for Services  1.20
      • 5.  Form: Follow-Up Letter After Initial Client Consultation  1.21
  • III.  DECIDING WHETHER TO INCORPORATE
    • A.  Alternatives to Incorporation  1.22
      • 1.  Sole Proprietorship  1.23
      • 2.  General Partnership; Joint Venture  1.24
      • 3.  Limited Partnership  1.25
      • 4.  Limited Liability Company  1.26
      • 5.  Limited Liability Partnership  1.27
      • 6.  Other Forms of Business
        • a.  Business Trust or Massachusetts Trust  1.28
        • b.  Real Estate Investment Trust  1.29
        • c.  Condominium  1.30
        • d.  Stock Cooperative  1.31
        • e.  Cooperative Corporations  1.32
        • f.  Unincorporated Associations  1.33
    • B.  Considerations in Deciding Whether to Incorporate  1.34
      • 1.  Federal Income Tax Considerations
        • a.  Classification of Entities for Tax Purposes
          • (1)  Fundamental Distinctions Between Entities; Check-the-Box Regulations  1.35
          • (2)  Electing Tax Classifications Using Check-the-Box Regulations  1.36
        • b.  Tax Consequences of Formation  1.37
          • (1)  Contributions of Cash  1.38
          • (2)  Contributions of Property  1.39
          • (3)  Contributions of Services  1.40
        • c.  Taxation of the Entity and Its Owners
          • (1)  C Corporation
            • (a)  Entity-Level Tax; Double Taxation  1.41
            • (b)  Avoiding Double Taxation  1.42
            • (c)  Inability to Utilize Losses  1.43
            • (d)  Passive Loss Rules; At-Risk Rules  1.44
            • (e)  Method of Accounting  1.45
            • (f)  Taxable Year  1.46
            • (g)  Exception to Taxable Year for S Corporations or Personal Service Corporations  1.47
          • (2)  S Corporation  1.48
            • (a)  Pass-Through Entity  1.49
            • (b)  Requirements to Qualify as an S Corporation  1.50
            • (c)  Distributions to Shareholders  1.51
            • (d)  At-Risk Rules; Passive Loss Rules  1.52
            • (e)  Method of Accounting  1.53
            • (f)  Taxable Year  1.54
            • (g)  Differing Tax Treatment Between S Corporation and Other Pass-Through Entities  1.55
            • (h)  When Is S Corporation Status Desirable?  1.56
          • (3)  Partnership
            • (a)  Pass-Through Entity  1.57
            • (b)  Distributions  1.58
            • (c)  Special Allocations  1.59
            • (d)  Debt Increases Basis  1.60
            • (e)  Section 754 Election  1.61
            • (f)  At-Risk Rules  1.62
            • (g)  Passive Loss Rules  1.63
            • (h)  Termination of Partnership for Tax Purposes  1.64
            • (i)  Method of Accounting  1.65
            • (j)  Taxable Year  1.66
          • (4)  Limited Liability Companies and Limited Liability Partnerships
            • (a)  Pass-Through Entities  1.67
            • (b)  Distributions  1.68
            • (c)  Application of Partnership Tax Rules to LLCs and LLPs  1.69
        • d.  Taxation on Disposition of Interests and Liquidation
          • (1)  Corporation  1.70
          • (2)  Partnership  1.71
          • (3)  Limited Liability Company and Limited Liability Partnership  1.72
      • 2.  State Tax Considerations
        • a.  Corporation  1.73
        • b.  S Corporation  1.74
        • c.  Partnership  1.75
        • d.  Limited Liability Company and Limited Liability Partnership  1.76
      • 3.  Other Tax Considerations
        • a.  Self-Employment Income  1.77
        • b.  Fringe Benefits
          • (1)  Corporation  1.78
          • (2)  S Corporation  1.79
          • (3)  Partnership  1.80
          • (4)  Limited Liability Company and Limited Liability Partnership  1.81
      • 4.  Management and Control
        • a.  Corporation  1.82
        • b.  General Partnership  1.83
        • c.  Limited Partnership  1.84
        • d.  Limited Liability Company  1.85
        • e.  Limited Liability Partnership  1.86
      • 5.  Liability of Owners for Business Obligations
        • a.  Corporation  1.87
        • b.  General Partnership  1.88
        • c.  Limited Partnership  1.89
        • d.  Limited Liability Company  1.90
        • e.  Limited Liability Partnership  1.91
      • 6.  Transferability of Interests; Liquidity  1.92
        • a.  Corporation  1.93
        • b.  General Partnership  1.94
        • c.  Limited Partnership  1.95
        • d.  Limited Liability Company  1.96
        • e.  Limited Liability Partnership  1.97
      • 7.  Ability to Raise Capital
        • a.  Corporation  1.98
        • b.  General Partnership  1.99
        • c.  Limited Partnership  1.100
        • d.  Limited Liability Company  1.101
        • e.  Limited Liability Partnership  1.102
      • 8.  Necessity of Complying With Securities Laws  1.103
      • 9.  Formation Requirements and Costs
        • a.  Corporation  1.104
        • b.  General Partnership  1.105
        • c.  Limited Partnership  1.106
        • d.  Limited Liability Company  1.107
        • e.  Limited Liability Partnership
          • (1)  Registration With Secretary of State  1.108
          • (2)  Foreign Limited Liability Partnerships  1.109
          • (3)  Security Requirement  1.110
          • (4)  Registration With State Governing Body  1.111
            • (a)  Law LLPs  1.112
            • (b)  Accountancy LLPs  1.113
            • (c)  Architecture LLPs  1.114
            • (d)  Engineering or Land Surveying LLPs  1.114A
      • 10.  Continuity of Business  1.115
        • a.  Corporation  1.116
        • b.  General Partnership  1.117
        • c.  Limited Partnership  1.118
        • d.  Limited Liability Company  1.119
        • e.  Limited Liability Partnership  1.120
      • 11.  Anonymity of Owners  1.121
      • 12.  Estate Planning for Families  1.122
      • 13.  Prohibited Activities  1.123
  • IV.  WHEN TO USE AN LLC; WHEN NOT TO USE AN LLC
    • A.  Comparative Advantages
      • 1.  C Corporation Versus LLC  1.124
      • 2.  S Corporation Versus LLC  1.125
      • 3.  Partnership Versus LLC  1.126
      • 4.  Limited Partnership Versus LLC  1.127
    • B.  Real Estate Investments, Joint Ventures, Venture Capital  1.128
  • V.  DECIDING WHERE TO INCORPORATE  1.129
    • A.  Application of California Law
      • 1.  Foreign Corporations and “Pseudoforeign” Corporations  1.130
      • 2.  Resident Foreign Corporations  1.131
    • B.  Foreign Corporations Transacting Business in California  1.132
      • 1.  Safe Harbor Activities  1.132A
      • 2.  Foreign Corporations That Fail to Qualify  1.132B
    • C.  Common Reasons Given for Incorporating in Nevada  1.132C
      • 1.  Fees  1.132D
      • 2.  No Corporate Income Tax  1.132E
      • 3.  No Franchise Tax  1.132F
      • 4.  No Taxes on Corporate Shares  1.132G
      • 5.  No Personal Income Tax  1.132H
      • 6.  No IRS Information Sharing Agreement  1.132I
      • 7.  Minimal Reporting and Disclosure Requirements  1.132J
      • 8.  Privacy Concepts  1.132K
      • 9.  Qualifications of Shareholders and Directors  1.132L
      • 10.  Liability Protection  1.132M
      • 11.  Liability of Shareholders Following Corporate Dissolution  1.132N
      • 12.  Ability to Limit Liability of Directors and Officers  1.133
      • 13.  Removal of Corporate Directors  1.134
      • 14.  Corporation’s Ability to Purchase, Hold, Sell, or Transfer Shares of Its Own Stock  1.135
      • 15.  Issuing of Stock  1.136
      • 16.  Table: Popular Myths About Incorporating in Nevada  1.137
    • D.  Other Costs  1.137A
    • E.  Jurisdictional Problems  1.138
    • F.  When Incorporation in Another State May Be Appropriate  1.139
    • G.  Form: Client Questionnaire: California Versus Foreign Incorporation  1.140
  • VI.  PLANNING A CALIFORNIA CORPORATION
    • A.  Information Needed for Structuring Decisions  1.141
      • 1.  Checklist: Typical Structuring Issues  1.142
      • 2.  Obtaining Follow-Up Information  1.143
    • B.  Capital Structure
      • 1.  Initial Capitalization  1.144
        • a.  Debt Versus Equity
          • (1)  Advantages of Debt  1.145
          • (2)  Pitfalls of Debt Contributions  1.146
          • (3)  Advantages of Equity Contributions  1.147
        • b.  Noncash Assets  1.148
      • 2.  Classes of Stock  1.149
      • 3.  Par Value  1.150
      • 4.  Preemptive Rights  1.151
      • 5.  Other Future Rights  1.152
      • 6.  Losses on Small Business Stock: IRC §1244  1.153
      • 7.  Gain on Small Business Stock: IRC §1202  1.154
      • 8.  Securities Regulation Considerations  1.155
    • C.  Particular Tax Problems of Corporations  1.156
      • 1.  IRC §351  1.157
      • 2.  Taxation of Distributions and Other Payments to Shareholders  1.158
      • 3.  Personal Holding Company Penalty  1.159
      • 4.  Accumulated Earnings Tax  1.160
      • 5.  Collapsible Corporation [Deleted]  1.161
      • 6.  California Sales Tax  1.162
      • 7.  Property Tax Reassessment  1.163
    • D.  Management and Control Structure
      • 1.  Shareholders, Debtholders, Directors, Officers  1.164
        • a.  Control Rights of Debtholders  1.165
        • b.  Varying the Statutory Rules  1.166
      • 2.  Buy-Sell Agreements  1.167
      • 3.  Avoiding Personal Liability  1.168
        • a.  Adequacy of Capital  1.169
        • b.  Insurance  1.170
      • 4.  Statutory Close Corporation [Deleted]  1.171
        • a.  Advantages of Close Corporation [Deleted]  1.172
        • b.  Disadvantages of Close Corporation
          • (1)  Personal Liability Problems [Deleted]  1.173
          • (2)  Risks of Dissolution [Deleted]  1.174
          • (3)  Tax Problems [Deleted]  1.175
          • (4)  Securities Law Problems [Deleted]  1.176
    • E.  Other Considerations
      • 1.  Preincorporation Subscription Agreement  1.177
      • 2.  Employment Agreements  1.178
    • F.  Checklist: Incorporating a Going Business  1.179
  • VII.  CHARTS: COMPARISON OF ENTITIES
    • A.  Business Factors  1.180
    • B.  Tax Factors  1.181
  • VIII.  CHART: SUMMARY OF IRC §199A  1.181A
  • IX.  FORM: BUSINESS ENTITIES FEE SCHEDULE (SECRETARY OF STATE)  1.182

1A

Alter Ego and Adequate Capitalization

Timothy J. Reimers

Steven H. Zidell

  • I.  INTRODUCTION  1A.1
  • II.  ALTER EGO LIABILITY
    • A.  Two-Part Test  1A.2
    • B.  Presumption of Corporation’s Separate Existence  1A.3
    • C.  Who Can Be Held Liable  1A.4
      • 1.  Ownership or Control  1A.5
      • 2.  Participation Required for Liability; Amendment of Judgment  1A.6
      • 3.  Parent/Subsidiary and Sister Corporations  1A.7
    • D.  Alter Ego Is an Equitable Doctrine  1A.8
    • E.  Factors Considered in Piercing Corporate Veil  1A.9
    • F.  Tort Versus Contract Claims  1A.10
    • G.  Tax Claims  1A.10A
    • H.  Use of Corporation to Evade Statute  1A.11
    • I.  Effect of Finding Alter Ego Liability  1A.12
  • III.  INADEQUATE CAPITALIZATION  1A.13
    • A.  Automotriz Case  1A.14
    • B.  Minton Case  1A.15
    • C.  Wheeler and Harris Cases  1A.16
    • D.  Measuring Adequacy of Capital  1A.17
      • 1.  Analysis of Assets  1A.18
      • 2.  Initial or Ongoing Concern  1A.19
      • 3.  Statistics  1A.20
    • E.  Tax Risks of Undercapitalization  1A.21
    • F.  Subordination of Shareholder Loans  1A.22
    • G.  Recommendations  1A.23
  • IV.  ALTER EGO AND TRANSFERS IN DEFRAUD OF CREDITORS  1A.24
  • V.  REVERSE ALTER EGO  1A.25

2

Formation

Keith W. McBride

Mark E. Peterson

  • I.  PREPARING TO INCORPORATE
    • A.  Chapter coverage  2.1
    • B.  Preincorporation Planning
      • 1.  Advising Client  2.2
      • 2.  Documents to Prepare  2.3
      • 3.  Attorney as Corporate Officer or Director  2.4
    • C.  Preincorporation Actions
      • 1.  Subscription Agreements  2.5
      • 2.  Shareholders’ Agreement  2.6
      • 3.  Preincorporation Contracts  2.7
      • 4.  Choosing a Corporate Name
        • a.  Name Restrictions  2.8
        • b.  Checking Availability of and Reserving Corporate Name  2.9
          • (1)  Form: Secretary of State’s Name Availability Inquiry Letter  2.10
          • (2)  Form: Secretary of State’s Name Reservation Request  2.11
        • c.  Potential Use of Fictitious Business Name  2.11A
      • 5.  Choosing Initial Agent for Service of Process  2.12
      • 6.  Deciding Whether to Elect Close Corporation Status  2.13
  • II.  ARTICLES OF INCORPORATION  2.14
    • A.  Minimum Required Information  2.15
    • B.  Checklist: Information Needed for Incorporation  2.16
    • C.  Form: Articles of Incorporation (Short Form)  2.17
    • D.  Articles of Incorporation (Long Form)
      • 1.  Name, Purpose, and Agent for Service of Process
        • a.  Purpose of Corporation  2.18
        • b.  Form: Heading; Name of Corporation  2.19
        • c.  Form: Purpose of Corporation  2.20
        • d.  Form: Initial Agent for Service of Process  2.21
        • e.  Form: Initial Addresses for Corporation  2.21A
      • 2.  Capitalization (Share Structure)
        • a.  Requirement That Articles Specify Share Structure  2.22
        • b.  Classes of Shares  2.23
        • c.  Amending Number of Shares of a Class  2.24
        • d.  Making Rights and Restrictions on Shares Dependent on Facts Outside Articles  2.25
        • e.  Form: Capitalization (Share Structure)  2.26
        • f.  Form: Restriction on Stock Ownership  2.27
      • 3.  Signatures of Incorporators or Directors
        • a.  Difference Between Incorporators and Directors  2.28
        • b.  Date of Signing  2.29
        • c.  Attorney as Incorporator  2.30
        • d.  Form: Signatures  2.31
      • 4.  Acknowledgment or Declaration
        • a.  When Required  2.32
        • b.  Form: Acknowledgments or Declarations  2.33
    • E.  Optional Provisions for Articles
      • 1.  Matters Requiring Article Provision to Be Effective  2.34
      • 2.  Other Optional Article Provisions  2.35
      • 3.  Making Optional Provisions Dependent on Facts Outside Articles  2.36
      • 4.  Reciting or Varying Statutory Rules  2.37
      • 5.  Table: Permissible Variations or Changes from Statutory Rules  2.38
      • 6.  Forms for Common Optional Article Provisions  2.39
        • a.  Number of Directors
          • (1)  Fixed Number of Directors  2.40
          • (2)  Variable Number of Directors  2.41
          • (3)  Changing the Number of Directors  2.42
          • (4)  Form: Number of Directors; Change in Number or Range  2.43
        • b.  Names and Addresses of Directors
          • (1)  Including Names and Addresses in Articles  2.44
          • (2)  Form: Names and Addresses of Initial Directors  2.45
        • c.  Preferences, Privileges, and Restrictions on Shares
          • (1)  Form: General Stock Attributes  2.46
          • (2)  Dividend Rights
            • (a)  Restrictions on Dividend Rights  2.47
            • (b)  Form: Dividend Preferences (Two-Class Share Structure)  2.48
          • (3)  Voting Rights
            • (a)  Voting Rights for Common Shares and Electing Directors  2.49
            • (b)  Variations in Standard Voting Rules  2.50
            • (c)  Voting Rights for Preferred Shares  2.51
            • (d)  Form: Voting Rights  2.52
          • (4)  Liquidation Preferences
            • (a)  Restrictions on Liquidation Rights  2.53
            • (b)  Form: Liquidation Preferences  2.54
          • (5)  Preemptive Rights
            • (a)  Including Preemptive Rights in Articles  2.55
            • (b)  Form: Preemptive Rights  2.56
          • (6)  Redeemable Shares
            • (a)  Shares Redeemable at Option of Corporation  2.57
            • (b)  Shares Redeemable on Happening of Specific Event  2.58
            • (c)  Form: Redeemable Shares  2.59
          • (7)  Conversion Rights
            • (a)  Including Conversion Rights in Articles  2.60
            • (b)  Form: Conversion Rights  2.61
          • (8)  Transfer Restrictions
            • (a)  Including Transfer Restrictions in Articles  2.62
            • (b)  Form: Transfer Restrictions; Right of First Refusal  2.63
        • d.  Limits on Directors’ Liability
          • (1)  Extent of Liability Limits  2.64
          • (2)  Form: Limit on Directors’ Liability  2.65
        • e.  Indemnification of Officers and Directors
          • (1)  Scope of Indemnity  2.66
          • (2)  Actions by or on Behalf of Corporation; Derivative Suits  2.67
          • (3)  Conflict With Labor Code  2.68
          • (4)  Independent Contractors  2.69
          • (5)  Form: Indemnification of Officers and Directors  2.70
        • f.  Close Corporations
          • (1)  Article Provisions for Close Corporations [Deleted]  2.71
          • (2)  Form: Election to Be Statutory Close Corporation (Optional) [Deleted]  2.72
    • F.  Prohibited Article Provisions  2.73
    • G.  Certificate of Determination of Preferences
      • 1.  Certificate Requirement  2.74
      • 2.  Contents of Certificate  2.75
      • 3.  Form: Certificate of Determination  2.76
    • H.  Filing the Articles
      • 1.  Preclearance Procedure  2.77
      • 2.  Expedited Filing Procedures  2.77A
      • 3.  Preparing Articles for Submission to Secretary of State  2.78
      • 4.  Filing Procedures  2.79
      • 5.  Form: Letter Transmitting Articles, Fees, and Tax Payments to Secretary of State  2.80
      • 6.  Postfiling Procedures Involving Secretary of State  2.81
      • 7.  Procedure for Resubmitting Rejected Articles  2.82
  • III.  BYLAWS
    • A.  Matters Covered in Bylaws  2.83
      • 1.  Matters Reserved to Articles of Incorporation  2.84
      • 2.  Matters Subject to Variation by Bylaw  2.85
      • 3.  Statutory Rules That Cannot Be Changed by Bylaw  2.86
      • 4.  Corporate Communications; Definitions  2.86A
      • 5.   Electronic Communication by Corporation  2.86B
      • 6.  Electronic Communication to Corporation  2.86C
    • B.  Adoption, Amendment, and Repeal of Bylaws  2.87
    • C.  Location and Inspection of Bylaws  2.88
    • D.  Bylaw Provisions  2.89
      • 1.  Form: Heading  2.90
      • 2.  Location of Offices
        • a.  Required Locations  2.91
        • b.  Form: Location of Principal Office; Branch Offices  2.92
      • 3.  Shareholders’ Meetings
        • a.  Place and Conduct of Meetings
          • (1)  Physical Meetings and Meetings by Electronic Means  2.92A
          • (2)  Form: Place and Conduct of Meetings  2.93
        • b.  Annual Meeting of Shareholders
          • (1)  Annual Meeting Requirement  2.94
          • (2)  Form: Annual Meeting of Shareholders  2.95
        • c.  Special Meetings
          • (1)  Call and Notice of Special Meetings  2.96
          • (2)  Form: Special Meetings  2.97
        • d.  Annual Meetings
          • (1)  Notice of Annual Meetings  2.98
          • (2)  Form: Notice of Shareholders’ Meetings  2.99
        • e.  Quorum for Shareholders’ Meetings
          • (1)  Quorum Requirements  2.100
          • (2)  Form: Quorum Required for Shareholders’ Meetings  2.101
        • f.  Voting and Waiver of Notice
          • (1)  Voting, Cumulative Voting, and Waiver of Notice Requirements  2.102
          • (2)  Form: Adjourned Meetings, Voting Procedures, and Waiver of Notice  2.103
        • g.  Shareholder Action by Written Consent
          • (1)  When Authorized  2.104
          • (2)  Form: Shareholder Action Without Meeting  2.105
        • h.  Record Date for Notice and Voting
          • (1)  Necessity of Record Date  2.106
          • (2)  Form: Record Date for Notice and Voting  2.107
        • i.  Proxies
          • (1)  Format Requirements for Proxies  2.108
          • (2)  Form: Proxies  2.109
        • j.  Form: Inspectors of Election  2.110
      • 4.  Board of Directors
        • a.  Form: Powers of Directors  2.111
        • b.  Number of Directors
          • (1)  Establishing Number by Bylaw Rather Than Articles  2.112
          • (2)  Form: Number of Directors  2.113
        • c.  Diversity of Board  2.113A
        • d.  Election of Directors
          • (1)  Terms of Office  2.114
          • (2)  Form: Election of Directors; Term of Office  2.115
        • e.  Vacancies on Board
          • (1)  Causes of Vacancies  2.116
          • (2)  Form: Vacancies on Board  2.117
        • f.  Meetings of Board
          • (1)  Time and Place of Meetings  2.118
          • (2)  Telephone, Video, and Electronic Meetings  2.119
          • (3)  Notice of Meetings  2.120
          • (4)  Form: Meetings of Board of Directors  2.121
        • g.  Quorum for Directors’ Meetings
          • (1)  What Constitutes Quorum  2.122
          • (2)  Form: Quorum Required for Directors’ Meetings  2.123
        • h.  Form: Waiver of Notice  2.124
        • i.  Form: Adjourned Meetings  2.125
        • j.  Action Without a Meeting
          • (1)  When Permitted  2.126
          • (2)  Form: Board Action Without Meeting  2.127
        • k.  Directors’ Compensation
          • (1)  Fixing Compensation  2.128
          • (2)  Form: Directors’ Compensation  2.129
        • l.  Committees of the Board
          • (1)  Establishing Committees  2.130
          • (2)  Form: Committees of the Board  2.131
      • 5.  Corporate Officers
        • a.  Required Officers  2.132
        • b.  Form: Designation of Corporate Officers  2.133
        • c.  Form: Appointment of Officers  2.134
        • d.  Form: Appointment of Subordinate Officers  2.135
        • e.  Removal and Resignation of Officers
          • (1)  Right to Terminate as Officer  2.136
          • (2)  Form: Removal and Resignation  2.137
        • f.  Form: Filling Vacancies in Offices  2.138
        • g.  Duties of Particular Officers
          • (1)  Form: Chairperson of the Board  2.139
          • (2)  Form: President or Chief Executive Officer  2.140
          • (3)  Form: Vice Presidents  2.141
          • (4)  Secretary
            • (a)  Duty to Keep Written Records  2.142
            • (b)  Form: Secretary  2.143
          • (5)  Form: Chief Financial Officer  2.144
      • 6.  Indemnification of Officers and Directors
        • a.  Form: Indemnification (Short Form)  2.145
        • b.  Indemnification (Long Form)
          • (1)  Form: Definitions; Actions Other Than by Corporation  2.146
          • (2)  Form: Actions by Corporation; Successful Defense; Required Approval  2.147
          • (3)  Form: Expenses; Contractual Rights; Limitations; Insurance  2.148
          • (4)  Form: No Indemnification for Fiduciaries of Benefit Plans  2.149
          • (5)  Form: Optional Provisions  2.150
      • 7.  Records, Reports, and Inspection Rights
        • a.  Shareholder Records
          • (1)  Duty to Maintain Records  2.151
          • (2)  Form: Shareholder Records and Inspection by Shareholders  2.152
        • b.  Form: Maintenance and Inspection of Bylaws  2.153
        • c.  Minutes and Accounting Records
          • (1)  Duty to Maintain Minutes and Accounts  2.154
          • (2)  Form: Minutes and Accounting Records  2.155
        • d.  Inspection by Directors
          • (1)  Directors’ Right to Inspect  2.156
          • (2)  Form: Inspection by Directors  2.157
        • e.  Annual Report to Shareholders
          • (1)  Annual Report Requirement  2.158
          • (2)  Form: Annual Report to Shareholders  2.159
        • f.  Financial Statements
          • (1)  Right to Obtain Financial Statements  2.160
          • (2)  Form: Financial Statements  2.161
        • g.  Annual Information Statement
          • (1)  Duty to File  2.162
          • (2)  Form: Annual Information Statement  2.163
      • 8.  General Corporate Matters
        • a.  Form: Record Date for Dividends  2.164
        • b.  Authorized Signatories
          • (1)  Authority of Agents to Act for Corporation  2.165
          • (2)  Form: Authorized Signatories  2.166
        • c.  Issuing Share Certificates
          • (1)  Contents of Share Certificates  2.167
          • (2)  Electronic Share Certificates  2.168
          • (3)  Form: Issuing Share Certificates; Lost Certificates  2.169
        • d.  Voting Shares of Other Corporations
          • (1)  Corporation as Shareholder  2.170
          • (2)  Form: Voting of Shares Held in Other Corporations  2.171
      • 9.  Reimbursing Corporation for Excessive Payments
        • a.  Excessive Salary or Expense Payments to Shareholder  2.172
        • b.  Form: Reimbursing Corporation for Excessive Payments  2.173
      • 10.  Form: Construction and Definitions  2.174
      • 11.  Amending the Bylaws
        • a.  Power to Amend  2.175
        • b.  Form: Amending the Bylaws  2.176
  • IV.  COMPLETING CORPORATE ORGANIZATION  2.177
    • A.  Adoption of Bylaws
      • 1.  Who May Adopt Bylaws  2.178
      • 2.  Form: Adoption of Bylaws and Election of Directors by Incorporator  2.179
    • B.  Waiver of Notice of First Meeting
      • 1.  When Waiver Is Appropriate  2.180
      • 2.  Form: Waiver of Notice and Consent to First Meeting of Directors  2.181
    • C.  First Meeting of Board of Directors
      • 1.  Importance of Initial Meeting  2.182
      • 2.  Resolutions in Minutes of First Meeting  2.183
        • a.  Form: Heading and Opening Sentence  2.184
        • b.  Form: Directors Present; Officers of the Meeting  2.185
        • c.  Form: Waiver of Notice Presented  2.186
        • d.  Form: Report of Articles Filed  2.187
        • e.  Form: Approval or Appointment of Agent for Service of Process  2.188
        • f.  Form: Approval of Bylaws  2.189
        • g.  Form: Appointment of Officers  2.190
        • h.  Form: Adoption of Corporate Seal  2.191
        • i.  Form: Adoption of Share Certificate  2.192
        • j.  Annual Accounting Period
          • (1)  Importance of Selecting Accounting Period  2.193
          • (2)  Form: Selection of Annual Accounting Period  2.194
        • k.  Form: Establishing Principal Executive Office  2.195
        • l.  Form: Filing of Annual Statement  2.196
        • m.  Bank Accounts
          • (1)  Procedures for Opening Bank Accounts  2.197
          • (2)  Form: Establishing Bank Accounts  2.198
        • n.  Form: Payment of Incorporation Expenses  2.199
        • o.  Section 1244 Stock
          • (1)  How to Qualify  2.200
          • (2)  Form: Optional Qualification of Stock Under IRC §1244  2.201
        • p.  Issuance of Shares
          • (1)  Considerations Before Board Authorizes Shares  2.202
          • (2)  Form: Authorization of Issuance of Shares  2.203
        • q.  Form: Optional Election of S Corporation Status  2.204
        • r.  Form: Adjournment  2.205
  • V.  CHECKLIST: PROVISIONS IN SHAREHOLDERS’ AGREEMENT FOR STATUTORY CLOSE CORPORATION [Deleted]  2.206
  • VI.  FORM: INDEMNIFICATION AGREEMENT  2.207

2A

Conversions and Mergers

April Frisby

Layton L. Pace

  • I.  SCOPE OF CHAPTER  2A.1
  • II.  PRELIMINARY CONSIDERATIONS FOR CONVERSIONS AND MERGERS
    • A.  Why Convert?  2A.2
      • 1.  Limited Liability  2A.3
      • 2.  Free Transferability of Interests  2A.4
      • 3.  Familiarity With Corporate Form  2A.5
      • 4.  Ease of Capital Raising; Future IPO  2A.6
      • 5.  No Restrictions on Type of Business  2A.7
      • 6.  Less Need for Private Contract  2A.8
      • 7.  Continuity of Business  2A.9
      • 8.  Employee Benefits  2A.10
      • 9.  Income Tax Considerations  2A.11
    • B.  Types of Conversions  2A.12
      • 1.  Statutory Conversion Provisions  2A.13
        • a.  Converting Partnerships  2A.14
        • b.  Converting LLCs  2A.15
      • 2.  Using Corporations Code Merger Provisions for Conversion  2A.16
      • 3.  Conversion Outside the Corporation Code’s Conversion and Merger Provisions  2A.17
    • C.  Why Merge?  2A.18
    • D.  Federal Income Tax Treatment of Conversions  2A.19
      • 1.  “Check the Box” Rules  2A.20
      • 2.  Tax Treatment of Conversion Transactions Generally  2A.21
      • 3.  Tax Treatment Under IRC §351; Liabilities; Basis Rules  2A.22
      • 4.  If Converting Entity Is a Partnership for Tax Purposes  2A.23
        • a.  Assets-Over Conversions  2A.24
        • b.   Assets-Up Conversions  2A.25
        • c.  Interests-Over Conversions  2A.26
        • d.  Termination of Converting Entity  2A.27
      • 5.  If Converting Entity Is a Corporation  2A.28
      • 6.  C Corporation Tax Treatment Generally  2A.29
        • a.  Subchapter S Election  2A.30
        • b.  When C Corporation Status May Be Preferred  2A.31
    • E.  Contractual Restrictions  2A.32
    • F.  Securities Laws
      • 1.  Corporations  2A.33
      • 2.  General Partnerships  2A.34
      • 3.  Limited Partnerships  2A.35
      • 4.  Limited Liability Companies  2A.36
    • G.  Sales and Use Taxes  2A.37
    • H.  Real Property Transfer Taxes  2A.38
    • I.  Property Tax Reassessment
      • 1.  When Real Property Is Reassessed  2A.39
      • 2.  More-Than-50-Percent Exception  2A.40
    • J.  Franchise Tax Considerations  2A.41
  • III.  STATUTORY CONVERSIONS
    • A.  Corporations Code Permits Conversion  2A.42
      • 1.  Conversion Entities  2A.43
      • 2.  Conversion Prerequisites  2A.44
    • B.  Rights and Obligations on Conversion  2A.45
    • C.  Plan of Conversion  2A.46
      • 1.  Approval of Plan  2A.47
      • 2.  Dissenters’ Rights  2A.48
      • 3.  Form: Plan of Conversion for Converting Entity to Corporation  2A.49
    • D.  Articles of Incorporation With Statement of Conversion  2A.50
      • 1.  Form: Articles of Incorporation With Statement of Conversion (LLC)  2A.51
      • 2.  Effect of Filing Statement or Certificate of Conversion  2A.52
      • 3.  Converted Entity Retains Tax Liabilities of Converting Entity  2A.53
      • 4.  Recording Certified Evidence of Conversion When Converted Entity Owns California Real Estate  2A.54
      • 5.  Notifying Creditors of Conversion  2A.55
    • E.  Effective Date of Conversion  2A.56
    • F.  California Securities Law Compliance  2A.57
    • G.  Abandonment of Conversion  2A.58
  • IV.  STATUTORY MERGERS
    • A.  Acts Permit Merger  2A.59
    • B.  Documenting the Merger  2A.60
    • C.  Rights and Obligations on Merger  2A.61
    • D.  Diagram: Structure of Statutory Merger  2A.62
    • E.  Agreement of Merger
      • 1.  Required Contents of Agreement  2A.63
      • 2.  Form: Short-Form Agreement of Merger  2A.64
      • 3.  Form: Long-Form Agreement of Merger Between General Partnership and Corporation  2A.65
      • 4.  Form: Long-Form Agreement of Merger Between Limited Partnership and Corporation  2A.66
      • 5.  Form: Long-Form Agreement of Merger Between Limited Liability Company and Corporation  2A.67
      • 6.  Amendment of Agreement of Merger  2A.68
    • F.  Approval of Merger
      • 1.  By Corporation  2A.69
      • 2.  By Limited Partnership  2A.70
      • 3.  By General Partnership  2A.71
      • 4.  By Limited Liability Company  2A.72
    • G.  Certificate of Merger
      • 1.  Contents of Certificate  2A.73
      • 2.  Execution of Certificate  2A.74
      • 3.  Form: Certificate of Merger (Secretary of State Form OBE MERGER-1)  2A.75
    • H.  Effective Date of Merger  2A.76
    • I.  Surviving Entity Assumes Tax Liabilities of Merging Entities  2A.77
    • J.  County Recording of Evidence of Merger  2A.78
    • K.  Dissenters’ Rights  2A.79
    • L.  Abandonment of Merger  2A.80
  • V.  CONVERTING PARTNERSHIPS TO CORPORATIONS OUTSIDE CONVERSION AND MERGER STATUTES  2A.81
    • A.  Alternative 1 (Interests-Over): Exchanging Partnership Interests for Capital Stock  2A.82
      • 1.  Diagram: Exchanging Partnership Interests for Capital Stock  2A.83
      • 2.  Documentation for Alternative 1 Conversion  2A.84
    • B.  Alternative 2 (Assets Up): Liquidating Partnership and Contributing Partnership Assets  2A.85
      • 1.  Diagram: Liquidating Partnership and Contributing Partnership Assets  2A.86
      • 2.  Documentation for Alternative 2 Conversion  2A.87
    • C.  Alternative 3 (Assets Over): Exchanging Partnership Assets for Corporate Stock  2A.88
      • 1.  Diagram: Exchanging Partnership Assets for Corporate Stock  2A.89
      • 2.  Documentation for Alternative 3 Conversion  2A.90
  • VI.  CONVERTING LIMITED LIABILITY COMPANIES TO CORPORATIONS OUTSIDE CONVERSION AND MERGER STATUTES  2A.91
    • A.  Alternative 1 (Interests Over): Exchanging LLC Membership Interests for Capital Stock  2A.92
      • 1.  Diagram: Exchanging LLC Membership Interests for Capital Stock  2A.93
      • 2.  Documentation for Alternative 1 Conversion  2A.94
    • B.  Alternative 2 (Assets Up): Liquidating LLC and Contributing LLC Assets  2A.95
      • 1.  Diagram: Liquidating LLC and Contributing LLC Assets  2A.96
      • 2.  Documentation for Alternative 2 Conversion  2A.97
    • C.  Alternative 3 (Assets Over): Exchanging LLC Assets for Capital Stock  2A.98
      • 1.  Diagram: Exchanging LLC Assets for Capital Stock  2A.99
      • 2.  Documentation for Alternative 3 Conversion  2A.100

3

Postincorporation Checklist

Keith W. McBride

Mark E. Peterson

  • I.  INTRODUCTION  3.1
  • II.  TABLE OF REQUIREMENTS  3.2
  • III.  BUSINESS LICENSES
    • A.  California State Requirements  3.3
    • B.  Local Licenses and Taxes  3.4
    • C.  Doing Business in Other Jurisdictions  3.5
  • IV.  TAX MATTERS
    • A.  Employer Identification Number  3.6
    • B.  Form: Application for Employer Identification Number (IRS Form SS-4)  3.7
    • C.  S Corporation Election
      • 1.  When to File Election; Who May File  3.8
      • 2.  Consent to Election  3.9
      • 3.  Revoking Election  3.10
    • D.  Accounting Elections
      • 1.  Accounting Period  3.11
      • 2.  Accounting Method  3.12
    • E.  Estimated Tax Installments
      • 1.  Estimated Federal Income Tax  3.13
      • 2.  Estimated California Franchise Tax  3.14
    • F.  Income and Franchise Tax Returns  3.15
    • G.  Personal Property Taxes
      • 1.  Property Statement  3.16
      • 2.  Payment  3.17
    • H.  Sales and Use Taxes
      • 1.  Seller’s Permit  3.18
      • 2.  Collection and Payment  3.19
    • I.  Local Taxes  3.20
    • J.  Other Taxes  3.21
  • V.  INFORMATION STATEMENT FILED WITH CALIFORNIA SECRETARY OF STATE
    • A.  When to File Statement; Procedure for Filing  3.22
    • B.  Contents of Statement of Information  3.23
    • C.  Updating Statement  3.24
    • D.  Form: Statement of Information (Secretary of State Form SI-550)  3.24A
    • E.  Form: Statement of No Change (Secretary of State Form SI-550 NC)   3.24B
    • F.  Contents of Corporate Disclosure Statement  3.24C
    • G.  Form: Corporate Disclosure Statement (Secretary of State Form SI-PT)   3.24D
  • VI.  EMPLOYEE MATTERS
    • A.  Payroll Withholding
      • 1.  Federal  3.25
      • 2.  California  3.26
    • B.  Unemployment
      • 1.  Federal Unemployment Tax  3.27
      • 2.  California Unemployment Compensation Insurance  3.28
    • C.  Workers’ Compensation  3.29
    • D.  Other Labor Laws  3.30
  • VII.  FORM: MEMORANDUM TO CLIENT ABOUT CORPORATE OPERATIONS  3.31

4

Offering, Selling, and Issuing Securities

Keith W. McBride

Mark E. Peterson

  • I.  INTRODUCTION  4.1
  • II.  OVERVIEW OF FEDERAL SECURITIES LAWS
    • A.  Registration Requirement  4.2
    • B.  Exemptions From Registration  4.3
      • 1.  Intrastate Offering Exemption
        • a.  Requirements  4.4
        • b.  Residency of Issuer  4.5
        • c.  Residency of Offerees and Purchasers  4.6
        • d.  The “Integration” Concept  4.7
        • e.  Limitations on Resales  4.8
        • f.  Rule 147A  4.8A
        • g.  Availability of Amended Rule 147 and New Rule 147A Exemptions  4.8B
      • 2.  Private, Limited, and Restricted Offering Exemptions
        • a.  Statutory Private Offering Exemption—Securities Act §4(a)(2)
          • (1)  Requirements  4.9
          • (2)  Investment Intent and Statutory Underwriters  4.10
            • (a)  Form: Investment Certificate for Private Offerings  4.11
            • (b)  Form: Certificate of Professional Advisor  4.12
            • (c)  Legends and Stop-Transfer Instructions  4.13
            • (d)  Form: Legend for Certificates  4.14
          • (3)  Resale of Securities
            • (a)  Resale Under Statutory Provisions  4.15
            • (b)  Resale Under Regulatory Provisions  4.16
        • b.  Regulation D  4.17
          • (1)  Exemptions Under Regulation D
            • (a)  Limited Offerings Up to $5 Million (Rule 504)  4.18
            • (b)  Limited Offerings Up to $5 Million (Rule 505) [Deleted]  4.19
            • (c)  Private Offerings With No Monetary Limit (Rule 506)  4.20
          • (2)  SEC Notice Under Regulation D: Form D  4.20A
          • (3)  Safe Harbor for Electronic Filings  4.20B
          • (4)  Accredited Investors  4.21
          • (5)  Calculating Number of Purchasers  4.22
          • (6)  Integration  4.23
          • (7)  Information for Investors  4.24
          • (8)  Resales of Securities  4.25
          • (9)  Chart: Comparison of Regulation D and California Exemptions  4.26
        • c.  Exemption for Offers and Sales to Accredited Investors  4.27
        • d.  Exemption for Crowdfunding  4.27A
        • e.  Exemption for Offers and Sales Outside the United States  4.28
  • III.  CALIFORNIA SECURITIES LAW REGULATORY STRUCTURE
    • A.  Department of Business Oversight  4.29
    • B.  Statutes and Administrative Materials
      • 1.  Statutes  4.30
      • 2.  Rules  4.31
      • 3.  Releases  4.32
      • 4.  Commissioner’s Interpretive Opinions  4.33
      • 5.  Forms and Mailing Lists  4.34
      • 6.  Documents Filed With Department  4.35
    • C.  Responsibilities and Liabilities of Attorneys and Other Professionals
      • 1.  General Provisions  4.36
      • 2.  Special Rules for Attorneys  4.37
  • IV.  IS CALIFORNIA QUALIFICATION NECESSARY?  4.38
    • A.  Basic Requirement  4.39
      • 1.  What Is a Security?  4.40
      • 2.  Issuer and Nonissuer Transactions  4.41
    • B.  Securities Not Subject to Qualification  4.42
      • 1.  Listed Securities  4.43
      • 2.  Securities of Particular Issuers  4.44
      • 3.  Pension and Profit-Sharing Plans  4.45
      • 4.  Commercial Paper  4.46
      • 5.  Securities of “Quality Corporations”  4.47
      • 6.  Other Securities  4.48
      • 7.  Real Estate Offerings Under Corp C §25102.2  4.48A
    • C.  Issuer Transactions Not Subject to Qualification  4.49
      • 1.  “Sales” and “Offers to Sell” Defined  4.50
      • 2.  “In This State” Defined  4.51
      • 3.  Small Offering, Limited Offering, and Qualified Purchaser Exemptions
        • a.  Choosing the Appropriate Exemption  4.52
        • b.  Limited Offering Exemption (Corp C §25102(f))  4.53
          • (1)  Number of Purchasers  4.54
          • (2)  Purchaser’s Sophistication or Relationship to Issuer  4.55
          • (3)  Investment Representation  4.56
          • (4)  Limitation on Advertising  4.57
          • (5)  Integration With Other Offerings  4.58
          • (6)  Notice
            • (a)  Form: Notice of Transaction Under Corporations Code §25102(f) (Department of Business Oversight)  4.59
            • (b)  Time for Filing  4.60
        • c.  Small Offering Exemption (Corp C §25102(h))  4.61
          • (1)  One Class of Stock  4.62
          • (2)  Number of Shareholders  4.63
          • (3)  Limitation on Advertising  4.64
          • (4)  Limitation on Selling Expenses  4.65
          • (5)  Consideration for Shares  4.66
          • (6)  Notice and Filing Requirements
            • (a)  Form: Department of Business Oversight Notice of Issuance of Shares (Under Corp C §25102(h) or Rule 260.103)  4.67
            • (b)  Form: Consent to Service of Process  4.68
            • (c)  Form: Officer’s Certificate  4.69
            • (d)  Filing Notice, Opinion, and Consent
            • (e)  Time Requirements  4.70
              • (i)  Filing Procedure  4.71
              • (ii)  Form: Declaration of Mailing  4.72
          • (7)  Legend Regarding Restrictions on Transfer  4.73
        • d.  Qualified Purchaser Exemption (Corp C §25102(n))  4.74
          • (1)  Nature of Issuer  4.75
          • (2)  Purchaser’s Qualifications  4.76
          • (3)  Investment Representation  4.77
          • (4)  Disclosure Document  4.78
          • (5)  General Announcement of Offering  4.79
          • (6)  Notices and Filing Requirements  4.80
          • (7)  Form: First Notice of Transaction Pursuant to Corporations Code §25102(n) (Department of Business Oversight)  4.81
          • (8)  Form: Second Notice of Transaction Pursuant to Corporations Code §25102(n) (Department of Business Oversight)   4.82
      • 4.  Offers and Sales to Particular Types of Investors  4.83
      • 5.  Offers and Sales to Pension and Profit-Sharing Plans; Phantom Stock Plans  4.84
        • a.  Limitations  4.85
          • (1)  Stock Purchase Plans  4.86
          • (2)  Stock Option Plan  4.87
        • b.  Form: Notice of Issuance of Securities Under Corporations Code §25102(o) (Department of Business Oversight)   4.88
      • 6.  Offers and Sales of Debt Securities  4.89
      • 7.  Exemptions for Certain Offers But Not Sales
        • a.  Nonpublic Offers and Agreements  4.90
        • b.  Internet Offers  4.91
        • c.  Offers of Securities in Federal Registration  4.92
        • d.  Offers of Securities in Federal Regulation A Offerings  4.93
        • e.  Agreements Between Issuers and Underwriters  4.94
        • f.  Negotiating Permits  4.95
      • 8.  Other Transactions  4.96
  • V.  QUALIFYING ISSUER TRANSACTIONS
    • A.  Effect of Qualification  4.97
    • B.  Determining Qualification Method  4.98
    • C.  Qualification by Permit  4.99
      • 1.  Preparing the Application
        • a.  General Instructions  4.100
        • b.  SCOR Procedure  4.101
        • c.  Form: Facing Page (Department of Business Oversight Form 260.110)  4.102
          • (1)  Fee Calculation  4.103
          • (2)  Introductory Information  4.104
          • (3)  Open or Limited Offering  4.105
          • (4)  Identification of Applicant  4.106
          • (5)  Description of Securities  4.107
          • (6)  Offering Price  4.108
          • (7)  Consideration to Be Paid  4.109
        • d.  Continuation Pages
          • (1)  General Requirements  4.110
          • (2)  Form: State of California Instructions for Application for Qualification by Permit (Section 260.113)  4.111
        • e.  Form: Customer Authorization of Disclosure of Financial Records (Department of Business Oversight)  4.112
      • 2.  Filing the Application  4.113
      • 3.  Amending the Application  4.114
      • 4.  Action by Commissioner
        • a.  Processing Procedure  4.115
        • b.  Standards Applied  4.116
          • (1)  Capital Structure  4.117
            • (a)  Equity Securities  4.118
            • (b)  Debt Securities  4.119
            • (c)  Convertible Senior Securities  4.120
            • (d)  Rights, Warrants, and Options  4.121
            • (e)  Options to Shareholders  4.122
              • (i)  Warrants to Creditors  4.123
              • (ii)  Options to Employees, Directors, and Consultants  4.124
              • (iii)  Options to Underwriters  4.125
          • (2)  Selling Expenses  4.126
          • (3)  Promotional Shares  4.127
          • (4)  Offering Price  4.128
        • c.  Conditions Imposed
          • (1)  Transfer Restrictions
            • (a)  Legend Requirement  4.129
            • (b)  Transfers That Do Not Require Commissioner’s Consent  4.130
            • (c)  Transfers With Commissioner’s Consent  4.131
          • (2)  Promotional Shares  4.132
          • (3)  Impound Condition  4.133
          • (4)  Prospectus Requirement  4.134
          • (5)  Suitability of Investors and Other Conditions  4.135
        • d.  Removing Conditions  4.136
      • 5.  Effective Date  4.137
      • 6.  Location of Share Records  4.138
    • D.  Qualification by Coordination  4.139
      • 1.  Preparing the Application  4.140
      • 2.  Filing the Application  4.141
      • 3.  Procedure After Filing
        • a.  Processing Procedure  4.142
        • b.  Amendments to Application or to Federal Registration Statement  4.143
        • c.  Pricing Amendment  4.144
        • d.  Effective Date  4.145
      • 4.  Procedure After Effective Date
        • a.  Reporting Federal Registration Data  4.146
        • b.  Advertising  4.147
        • c.  Semiannual Report  4.148
    • E.  Qualification by Notification  4.149
      • 1.  Preparing the Application  4.150
      • 2.  Filing the Application  4.151
      • 3.  Procedure After Filing
        • a.  Processing Procedure  4.152
        • b.  Amendments  4.153
        • c.  Effective Date  4.154
      • 4.  Procedure After Effective Date
        • a.  Advertising  4.155
        • b.  Semiannual Reports  4.156
  • VI.  POSTQUALIFICATION COMPLIANCE  4.157
    • A.  Satisfaction of Conditions to Qualification  4.158
    • B.  Consents to Transfer  4.159
    • C.  Removing Conditions  4.160
    • D.  Advertising  4.161
    • E.  Semiannual Reports  4.162
    • F.  Form: Semi-Annual Report Pursuant to Corporations Code §25146 (Department of Business Oversight)  4.163
  • VII.  EFFECT OF NONCOMPLIANCE  4.164
    • A.  Action by Commissioner
      • 1.  Investigation and Publicity  4.165
      • 2.  Stop Orders  4.166
      • 3.  Cease and Desist Orders  4.167
      • 4.  Legend Requirements  4.168
      • 5.  Injunction, Receivership, Restitution, and Damages  4.169
    • B.  Criminal Proceedings  4.170
    • C.  Action by Buyers
      • 1.  Right to Rescission or Damages  4.171
      • 2.  Measure of Recovery  4.172
      • 3.  Limitations on Buyers’ Remedies
        • a.  Qualification Before Payment  4.173
        • b.  Reliance on Commissioner’s Interpretations  4.174
        • c.  Time Limits and Repurchase Offers  4.175
    • D.  Civil Liabilities for Fraud  4.176
  • VIII.  ISSUING SHARES
    • A.  Introduction  4.177
    • B.  Authorizing the Issue  4.178
    • C.  Share Certificates  4.179
      • 1.  Required Contents  4.180
      • 2.  Form: Share Certificate  4.181
      • 3.  Legends  4.182
      • 4.  Signatures  4.183
    • D.  Record of Issue
      • 1.  Share Certificate Stubs  4.184
      • 2.  Record of Shareholders  4.185
    • E.  Transfer Agent  4.186
    • F.  Registrar  4.187

5

Foreign Corporations in California

Keith W. McBride

Mark E. Peterson

  • I.  INTRODUCTION  5.1
  • II.  FOREIGN AND PSEUDOFOREIGN CORPORATIONS
    • A.  Definitions  5.2
    • B.  Foreign Nonprofit Corporations  5.3
    • C.  Federally Owned or Chartered Entities  5.4
    • D.  Foreign Associations  5.5
  • III.  BASES OF CALIFORNIA REGULATION
    • A.  Areas of Regulation  5.6
    • B.  Sources of Regulation
      • 1.  Common Law  5.7
      • 2.  United States Constitution  5.8
      • 3.  California Constitution and Statutes  5.9
      • 4.  Conducting Business in California  5.10
  • IV.  PROTECTING CORPORATE NAME WITHOUT QUALIFYING  5.11
  • V.  QUALIFICATION TO TRANSACT INTRASTATE BUSINESS IN CALIFORNIA
    • A.  When Qualification Required  5.12
    • B.  Definition of “Transacting Intrastate Business”  5.13
    • C.  Exemptions From Qualification
      • 1.  Interstate or Foreign Commerce in California  5.14
      • 2.  Other Activities Not Requiring Qualification  5.15
    • D.  Effect of Failure to Qualify
      • 1.  Penalties  5.16
      • 2.  Status of Deeds  5.17
      • 3.  Jurisdiction  5.18
    • E.  Client Questionnaire  5.19
    • F.  Procedure for Qualification
      • 1.  Corporate Name
        • a.  Name Availability  5.20
        • b.  Name Conflicts  5.21
        • c.  Assumed Name  5.22
        • d.  Effect of Qualification on Corporate Name  5.23
        • e.  Forms: Foreign Name Registration (Secretary of State)  5.24
      • 2.  Franchise Tax  5.25
      • 3.  Statement and Designation  5.26
        • a.  Form: Statement and Designation by Foreign Corporation (Secretary of State)  5.27
        • b.  Certificate of Public Officer  5.28
      • 4.  Fees  5.29
      • 5.  Issuance of Certificate of Qualification  5.30
    • G.  Contingent Qualification  5.31
      • 1.  Filing Requirement  5.32
      • 2.  Form: Statement of Information (Foreign) (Secretary of State Form SI-550)  5.33
    • H.  Corporate Disclosure Statement  5.33A
  • VI.  AMENDED STATEMENT
    • A.  When Required  5.34
    • B.  Form: Amended Statement by Foreign Corporation (Secretary of State)   5.35
  • VII.  WITHDRAWAL AND FORFEITURE OF QUALIFICATION  5.36
    • A.  Tax Clearance Certificate No Longer Required  5.37
      • 1.  Form: Request for Tax Clearance Certificate—Corporations (FTB Form 3555 C1) [Deleted]  5.38
      • 2.  Individual Assumption of Tax Liability [Deleted]  5.39
      • 3.  Computation of Final Tax of Withdrawing Corporation  5.40
    • B.  Form: Certificate of Surrender of Right to Transact Intrastate Business (Secretary of State)  5.41
    • C.  Service of Process on Withdrawn or Forfeited Foreign Corporations  5.42
  • VIII.  CALIFORNIA REGULATION OF CORPORATE AFFAIRS OF FOREIGN CORPORATIONS  5.43
    • A.  Formation and Existence  5.44
    • B.  Amendments to Articles or Bylaws  5.45
    • C.  Directors, Officers, and Shareholders  5.46
    • D.  Diversity of Board  5.46A
    • E.  Dissolution  5.47
    • F.  Mergers and Other Reorganizations  5.48
      • 1.  Definitions  5.49
      • 2.  Securities Regulation
        • a.  Requirements and Procedure  5.50
        • b.  Form: Application for Qualification of Recapitalizations and Reorganizations  5.51
      • 3.  Succession to California Real Property Interests  5.52
      • 4.  No California Corporation a Party  5.53
      • 5.  At Least One California Corporation a Party  5.54
        • a.  Consolidation  5.55
        • b.  Short-Form Merger  5.56
        • c.  Law Governing Merger Survivor  5.57
        • d.  When California Corporation Is Survivor  5.58
        • e.  Foreign Corporation the Survivor  5.59
        • f.  Reorganizations and Sales of Assets  5.60
    • G.  Takeovers, Tender Offers, and Exchange Offers  5.61
    • H.  Going-Private Transactions  5.62
    • I.  California Securities Regulation  5.63
    • J.  Internal Affairs Doctrine; Pseudoforeign Corporations  5.64
      • 1.  Application of Pseudoforeign Corporation Statute  5.65
        • a.  Tax-Factor Test  5.66
        • b.  Shareholder Residence Test  5.67
      • 2.  When Pseudoforeign Corporation Status Begins  5.68
      • 3.  When Pseudoforeign Corporation Status Terminates  5.69
      • 4.  California Law Applicable to Pseudoforeign Corporations  5.70
      • 5.  Statutory Exclusions  5.71
      • 6.  Conflict of Laws  5.72
    • K.  Resident Foreign Corporations  5.73
  • IX.  CALIFORNIA JUDICIAL JURISDICTION  5.74
    • A.  Service on Foreign Corporation  5.75
    • B.  Agent for Service of Process  5.76
    • C.  Consent  5.77
    • D.  Appearance  5.78
    • E.  Business Activities in California  5.79
    • F.  Unlawful Offer or Sale of Securities in California  5.80
    • G.  Property in California  5.81
    • H.  California Subsidiary  5.82
    • I.  Long-Arm Statute  5.83
    • J.  Effect of Bylaw With Foreign-State Forum Selection Provision  5.83A
  • X.  CALIFORNIA TAXATION  5.84
    • A.  Table: Major California Taxes Applicable to Foreign Corporations  5.85
    • B.  Sales and Use Tax Obligations of Out-of-State Retailers  5.85A
    • C.  Other Important California Taxes
      • 1.  Unemployment Insurance Tax  5.86
      • 2.  Motor Vehicle Taxes  5.87
      • 3.  Personal Income Tax Withholding  5.88
  • XI.  OTHER CALIFORNIA REGULATIONS  5.89

6

Professional Corporations

Thomas A. Maier

Debra Nicholson

Mark E. Peterson

  • I.  OVERVIEW OF GOVERNING LAW
    • A.  Purpose and Eligibility  6.1
    • B.  Applicability of Corporate Law  6.2
    • C.  Permissible Business  6.3
    • D.  Permissible Shareholders and Directors  6.4
  • II.  DECIDING WHETHER TO INCORPORATE  6.5
    • A.  Nontax Considerations
      • 1.  Limited Liability  6.6
      • 2.  Malpractice Insurance  6.7
      • 3.  Covenants Not to Compete  6.8
    • B.  Tax Considerations
      • 1.  Tax Disadvantages
        • a.  Treatment as Personal Service Corporation
          • (1)  Definition of Personal Service Corporation  6.9
          • (2)  Consequences of Treatment as Personal Service Corporation
            • (a)  Flat Tax Rate  6.10
            • (b)  No Capitalization of “Creative” Expenses  6.11
            • (c)  Possible Reallocation of Income  6.12
            • (d)  Single Employer  6.13
            • (e)  Calendar Year as Taxable Year  6.14
            • (f)  Cash Accounting  6.15
            • (g)  Limited Passive Losses  6.16
            • (h)  Limited Accumulated Earnings Credit  6.17
            • (i)  No 50 Percent Exclusion for Gain  6.18
            • (j)  No Net Operating Loss Carryback  6.19
        • b.  No Unreasonable Compensation  6.20
        • c.  Possible Disregarding of Corporate Entity  6.21
        • d.  Double Tax  6.22
        • e.  Unemployment Taxes  6.23
        • f.  Start-Up Costs  6.24
      • 2.  Tax Advantages
        • a.  Advantages of Qualified Retirement Plans  6.25
          • (1)  Current Income Tax Deduction  6.26
          • (2)  Exemption From Creditors’ Claims  6.27
        • b.  Advantages of Retirement Plans Available to Corporations Over Plans Available to Self-Employed Persons  6.28
          • (1)  Ability to Borrow From Plan  6.29
          • (2)  Higher Maximum Contribution  6.30
          • (3)  No Limit on Contributions  6.31
          • (4)  Deductibility of Contributions Used to Purchase Insurance  6.32
          • (5)  Eligibility for Net Operating Loss Carryover  6.33
          • (6)  Basis in Plan Life Insurance  6.34
          • (7)  Interest in Forfeitures  6.35
          • (8)  No Entitlement to Minimum Funding  6.36
        • c.  Other Fringe Benefits  6.37
        • d.  IRC §303 Stock Redemptions  6.38
        • e.  Dividend Received Deduction  6.39
        • f.  Qualified Transportation Fringe  6.40
      • 3.  Tax Ramifications of S Corporation Election  6.41
      • 4.  California Tax Considerations  6.42
      • 5.  Dissolving Corporation  6.43
    • C.  Chart: Comparison of Corporate and Noncorporate Practice  6.44
  • III.  FORMATION REQUIREMENTS
    • A.  Naming the Professional Corporation  6.45
      • 1.  Law Corporation  6.46
      • 2.  Medical or Podiatric Corporation  6.47
      • 3.  Dental Corporation  6.48
    • B.  Filing Articles of Incorporation  6.49
    • C.  Registration With Licensing Boards  6.50
    • D.  Drafting Bylaws  6.51
    • E.  Other Filings  6.52
  • IV.  CHECKLISTS
    • A.  Checklist: Client Questionnaire  6.53
    • B.  Checklist: Preincorporation  6.54
  • V.  ARTICLES OF INCORPORATION: SELECTED PROVISIONS
    • A.  Form: Heading; Name of Corporation  6.55
    • B.  Form: Limited Purpose of Professional Corporation  6.56
    • C.  Form: Initial Agent for Service of Process  6.57
    • D.  Form: Corporate Addresses  6.57A
    • E.  Form: One-Class Share Structure  6.58
    • F.  Shareholder Restrictions
      • 1.  Form: Dental Corporations  6.59
      • 2.  Form: Law Corporations  6.60
      • 3.  Form: Medical Corporations  6.61
    • G.  Form: Date; Signatures  6.62
    • H.  Form: Declaration  6.63
  • VI.  SAMPLE BYLAWS FOR DENTAL, LAW, AND MEDICAL CORPORATIONS
    • A.  Dental Corporation Bylaws
      • 1.  Offices
        • a.  Form: Principal Office  6.64
        • b.  Form: Additional Offices  6.65
      • 2.  Voting
        • a.  Form: Counting of Votes  6.66
        • b.  Form: Manner of Voting  6.67
        • c.  Form: Majority Vote  6.68
        • d.  Form: Disqualification From Voting  6.69
        • e.  Form: Limited Use of Proxies  6.70
      • 3.  Board of Directors
        • a.  Form: Powers of Board of Directors; Qualifications of Directors  6.71
        • b.  Form: Election and Term of Directors  6.72
        • c.  Form: Events Causing Vacancies on Board  6.73
        • d.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)  6.74
        • e.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)  6.75
        • f.  Form: Procedure for Electing Directors to Fill Vacancy  6.76
        • g.  Form: Resignation of Directors  6.77
        • h.  Form: Compensation of Board Members  6.78
        • i.  Form: Compensation for Disqualified Directors  6.79
      • 4.  Officers
        • a.  Form: Required Officers  6.80
        • b.  Form: Appointment of Officers; Term of Office  6.81
        • c.  Form: Appointment of Subordinate Officers  6.82
        • d.  Form: Removal of Officers  6.83
        • e.  Form: Resignation of Officers  6.84
        • f.  Form: Vacancies in Offices  6.85
        • g.  Form: Compensation of Officers and Other Shareholders  6.86
        • h.  Form: Limitation on Compensation of Disqualified Officers  6.87
      • 5.  Record Date for Dividends and Distributions
        • a.  Form: Fixed Record Date for Purposes Other Than Notice and Voting  6.88
        • b.  Form: No Fixed Record Date for Purposes Other Than Notice and Voting  6.89
      • 6.  Shareholder Restrictions
        • a.  Form: Shareholder Restrictions  6.90
        • b.  Form: Disqualified Shareholder Not Entitled to Benefit  6.91
        • c.  Form: Legends Required for Share Certificates  6.92
        • d.  Form: Restrictions on Transfer to Nonlicensed Persons  6.93
        • e.  Form: Restrictions on Transfer Following Death or Disqualification  6.94
      • 7.  Form: Malpractice Insurance or Other Security for Claims Against Corporation  6.95
      • 8.  Form: Construction and Definitions  6.96
      • 9.  Form: Procedure for Amending Articles of Incorporation  6.97
      • 10.  Form: Procedure for Amending Bylaws  6.98
    • B.  Law Corporation Bylaws
      • 1.  Form: Principal Office  6.99
      • 2.  Voting
        • a.  Form: Counting of Votes  6.100
        • b.  Form: Manner of Voting  6.101
        • c.  Form: Majority Vote  6.102
        • d.  Form: Disqualification From Voting  6.103
        • e.  Form: Limited Use of Proxies  6.104
      • 3.  Board of Directors
        • a.  Form: Powers of Board of Directors; Qualifications of Directors  6.105
        • b.  Form: Election and Term of Directors  6.106
        • c.  Form: Events Causing Vacancies on Board  6.107
        • d.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)  6.108
        • e.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)  6.109
        • f.  Form: Procedure for Electing Directors to Fill Vacancy  6.110
        • g.  Form: Resignation of Directors  6.111
        • h.  Form: Compensation in General  6.112
        • i.  Form: Compensation for Disqualified Directors  6.113
      • 4.  Officers
        • a.  Form: Required Officers  6.114
        • b.  Form: Appointment of Officers; Term of Office  6.115
        • c.  Form: Appointment of Subordinate Officers  6.116
        • d.  Form: Removal of Officers  6.117
        • e.  Form: Resignation of Officers  6.118
        • f.  Form: Vacancies in Offices  6.119
        • g.  Form: Compensation of Officers and Other Shareholders  6.120
        • h.  Form: Limitation on Compensation of Disqualified Officers  6.121
      • 5.  Reporting Requirements
        • a.  Form: Annual Reports to State Bar  6.122
        • b.  Form: Special Reports to State Bar  6.123
      • 6.  Record Date for Dividends and Distributions
        • a.  Form: Fixed Record Date for Purposes Other Than Notice and Voting  6.124
        • b.  Form: No Fixed Record Date for Purposes Other Than Notice and Voting  6.125
      • 7.  Shareholder Restrictions
        • a.  Form: Shareholder Restrictions  6.126
        • b.  Form: Disqualified Shareholder Not Entitled to Benefit  6.127
        • c.  Form: Legends Required for Share Certificates  6.128
        • d.  Form: Restrictions on Transfer to Nonlicensed Persons and on Death or Disqualification of Shareholder  6.129
      • 8.  Form: Malpractice Insurance or Other Security for Claims Against Corporation  6.130
      • 9.  Form: Construction and Definitions  6.131
      • 10.  Amendment of Articles of Incorporation
        • a.  Form: Procedure for Amending Articles of Incorporation  6.132
        • b.  Form: Reporting Amendments to State Bar  6.133
      • 11.  Amendment of Bylaws
        • a.  Form: Procedure for Amending Bylaws  6.134
        • b.  Form: Reporting Amendments to State Bar  6.135
    • C.  Medical Corporation Bylaws
      • 1.  Form: Principal Office  6.136
      • 2.  Voting
        • a.  Form: Counting of Votes  6.137
        • b.  Form: Manner of Voting  6.138
        • c.  Form: Majority Vote  6.139
        • d.  Form: Disqualification From Voting  6.140
        • e.  Form: Limited Use of Proxies  6.141
      • 3.  Board of Directors
        • a.  Form: Powers of Board of Directors; Qualifications of Directors  6.142
        • b.  Form: Election and Term of Directors  6.143
        • c.  Form: Events Causing Vacancies on Board  6.144
        • d.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)  6.145
        • e.  Form: Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)  6.146
        • f.  Form: Procedure for Electing Directors to Fill Vacancy  6.147
        • g.  Form: Resignation of Directors  6.148
        • h.  Form: Compensation in General  6.149
        • i.  Form: Compensation for Disqualified Directors  6.150
      • 4.  Officers
        • a.  Form: Required Officers  6.151
        • b.  Form: Appointment of Officers; Term of Office  6.152
        • c.  Form: Appointment of Subordinate Officers  6.153
        • d.  Form: Removal of Officers  6.154
        • e.  Form: Resignation of Officers  6.155
        • f.  Form: Vacancies in Offices  6.156
        • g.  Form: Compensation of Officers and Other Shareholders  6.157
        • h.  Form: Limitation on Compensation of Disqualified Officers  6.158
      • 5.  Record Date for Dividends and Distributions
        • a.  Form: Fixed Record Date for Purposes Other Than Notice and Voting  6.159
        • b.  Form: No Fixed Record Date for Purposes Other Than Notice and Voting  6.160
      • 6.  Shareholder Restrictions
        • a.  Form: Shareholder Restrictions  6.161
        • b.  Form: Disqualified Shareholder Not Entitled to Benefit  6.162
        • c.  Form: Legends Required for Share Certificates  6.163
        • d.  Form: Restrictions on Transfer to Nonlicensed Persons  6.164
        • e.  Form: Restrictions on Transfer Following Death or Disqualification  6.165
      • 7.  Form: Malpractice Insurance or Other Security for Claims Against Corporation  6.166
      • 8.  Form: Construction and Definitions  6.167
      • 9.  Form: Procedure for Amending Articles of Incorporation; Effective Date  6.168
      • 10.  Form: Procedure for Amending Bylaws  6.169
  • VII.  MINUTES OF FIRST MEETING OF BOARD: SELECTED PROVISIONS
    • A.  Form: Introduction to Resolutions  6.170
    • B.  Form: Resolutions Regarding Application for Certificate of Registration  6.171
    • C.  Form: Resolutions Regarding Approval of Employment Agreement  6.172
    • D.  Form: Resolutions Adopting a Tax-Qualified Pension or Profit-Sharing Plan  6.173
    • E.  Form: Resolutions Regarding Election of Limitation Year  6.174
    • F.  Form: Resolutions Designating Process Agent and Investment Committee  6.175
    • G.  Form: Adjournment  6.176
  • VIII.  REGISTRATION REQUIREMENTS FOR LAW CORPORATIONS
    • A.  Form: Application for Issuance of a Certificate of Registration as a Law Corporation  6.177
    • B.  Form: Attachment A: Shareholder Information  6.177A
    • C.  Form: Attachment B: Declaration of Compliance With Rules 7.1–7.5, Rules of Professional Conduct of the State Bar of California  6.178
    • D.  Form: Attachment C-1: Standard Law Corporation Guarantee  6.179
    • E.  Form: Attachment C-2: Standard Law Corporation Guarantee for Law Corporations Practicing in Partnership With Other Law Corporations  6.180
    • F.  Form: Law Corporation Guarantee Worksheet  6.181
  • IX.  STOCK PURCHASE AGREEMENT
    • A.  Introduction  6.182
    • B.  Form: Intent to Comply With Law and Regulations  6.183
    • C.  Form: Purchase Agreement  6.184
    • D.  Form: Purchase Price  6.185
    • E.  Form: Time for Completion of Sale or Transfer  6.186
    • F.  Form: Repurchase by Reinstated Employee  6.187
    • G.  Form: Sale of Shares to Eligible Employee of Medical Corporation  6.188
    • H.  Form: Change of Corporation’s Name  6.189
    • I.  Form: Restrictions on Certificate  6.190
  • X.  SAMPLE EMPLOYMENT AGREEMENT
    • A.  Form: Heading; Parties  6.191
    • B.  Form: Recitals: Effective Date, Preamble  6.192
    • C.  Form: Term of Agreement  6.193
    • D.  Form: Services to Be Provided  6.194
    • E.  Form: Employer’s Authority and Professional’s Duties  6.195
    • F.  Form: Basic Annual Salary  6.196
    • G.  Form: Bonuses  6.197
    • H.  Form: Additional Benefits  6.198
    • I.  Form: Expenses  6.199
    • J.  Form: Vacation  6.200
    • K.  Form: Malpractice Insurance  6.201
    • L.  Form: Disability Insurance  6.202
    • M.  Form: Life Insurance  6.203
    • N.  Form: Termination of Agreement  6.204
    • O.  Form: Signatures  6.205

7

Close Corporations

James K. Dyer, Jr.

James F. Fotenos

Suzanne L. Weakley

  • I.  INTRODUCTION  7.1
  • II.  ORGANIZING A CLOSE CORPORATION
    • A.  Must Be California For-Profit Corporation  7.2
    • B.  Name Requirements  7.3
    • C.  Contents of Articles of Incorporation  7.4
    • D.  Number of Shareholders  7.5
    • E.  Legend on Share Certificates  7.6
  • III.  TERMINATION OF CLOSE CORPORATION STATUS  7.7
  • IV.  SHAREHOLDER AGREEMENTS
    • A.  As Vehicle for Corporate Governance  7.8
    • B.  Form and Contents
      • 1.  Requirement of Writing  7.9
      • 2.  Optional Provisions From Corp C §204  7.10
      • 3.  Corporate Governance Provisions That Shareholders’ Agreement May Not Vary  7.11
      • 4.  Corporate Governance Provisions That May Be Varied  7.12
  • V.  COMPARISON: SHAREHOLDERS’ AGREEMENTS OUTSIDE THE CONTEXT OF STATUTORY CLOSE CORPORATIONS
    • A.  Historical Treatment  7.13
    • B.  Corp C §204 Restrictions  7.14
    • C.  Issues in Nonstatutory Shareholders’ Agreements  7.15
    • D.  Voting Agreements  7.16
  • VI.  PIERCING THE VEIL OF CLOSE CORPORATIONS  7.17
  • VII.  RESTRICTIONS ON TRANSFER OF SHARES OF CLOSE CORPORATION  7.18
  • VIII.  INVOLUNTARY DISSOLUTION OF CLOSE CORPORATION
    • A.  Only One Shareholder May Initiate  7.19
    • B.  Grounds for Involuntary Dissolution Petition  7.20
    • C.  Right to Initiate Not Waivable  7.21
    • D.  Burden of Proof on Petitioning Shareholder  7.22
    • E.  Alternative Dispute Resolution as Alternative  7.23
  • IX.  VOLUNTARY DISSOLUTION OF CLOSE CORPORATION
    • A.  Procedure  7.24
    • B.  Is Corp C §1904 Waivable?  7.25
  • X.  CLOSE CORPORATIONS AND S CORPORATION STATUS
    • A.  Close Corporation Can Make an S Corporation Election  7.26
    • B.  Number of Shareholders  7.27
    • C.  Type of Shareholders  7.28
    • D.  One Class of Stock  7.29
      • 1.  Different Voting Rights Permitted  7.30
      • 2.  Differences in Economic Rights Not Permitted  7.31
    • E.  One Class of Stock Rule as Impediment to Close Corporation Election  7.32
    • F.  California Taxation of S Corporations  7.33
  • XI.  CLOSE CORPORATIONS AND PROFESSIONAL CORPORATIONS
    • A.  Professional Corporations Can Elect Close Corporation Status  7.34
    • B.  Professional Corporation Use Eclipsed by LLP Form  7.35
    • C.  Share Transfer Restrictions  7.36
    • D.  S Corporation Election  7.37
  • XII.  CLOSE CORPORATIONS VERSUS LLCs
    • A.  Advantages of LLC Form  7.38
    • B.  Disadvantages of LLC Form
      • 1.  Need to Draft Operating Agreement  7.39
      • 2.  California Taxation of LLCs  7.40
      • 3.  Not Available for Rendition of Professional Services  7.41
  • XIII.  DRAFTING SHAREHOLDERS’ AGREEMENT FOR CLOSE CORPORATION  7.42
    • A.  Statutory Requirements  7.43
    • B.  Management and Control  7.44
    • C.  Distributions  7.45
    • D.  Dissolution  7.46
    • E.  Certain Voting Requirements  7.47
    • F.  Transfer Restrictions; Rights of First Refusal  7.48
    • G.  Buy-Sell Provisions  7.49
    • H.  Alternative Dispute Resolution  7.50
    • I.  Noncompetition; Trade Secrets  7.51
    • J.  Legends on Share Certificates  7.52
    • K.  Termination; Amendment  7.53
    • L.  Miscellaneous Provisions  7.54
  • XIV.  CHECKLIST: PROVISIONS IN SHAREHOLDERS’ AGREEMENT FOR STATUTORY CLOSE CORPORATION  7.55

8

Social Purpose Corporations and Benefit Corporations

David A. Levitt

Steven R. Chiodini

  • I.   SCOPE OF CHAPTER  8.1
    • A.  Why Consider a Hybrid Corporation Instead of a Conventional For-Profit Corporation?  8.2
    • B.  Are There Tax Differences Between Hybrid Corporations and Conventional Corporations?  8.3
    • C.  Comparing Hybrid Corporate Forms  8.4
    • D.  Issues Regarding Untested Nature of Hybrid Forms  8.5
  • II.  SOCIAL PURPOSE CORPORATIONS
    • A.  Social Purpose Corporations Act  8.6
    • B.  Corporate Powers  8.7
    • C.  Articles of Incorporation  8.8
      • 1.  Checklist: Required and Optional Articles Provisions  8.9
      • 2.  Form: General Statutory Purpose Statement  8.10
      • 3.  Special Purpose Statement  8.11
      • 4.  Form: Sample Special Purpose Statement  8.12
      • 5.  Special Purpose Statements Required for Professional Corporations, Close Corporations, and Corporations Engaged in Banking or Insurance  8.13
      • 6.  Authorized Shares  8.14
      • 7.  Limits on Director Liability  8.15
      • 8.  Indemnification of Officers and Directors  8.16
      • 9.  Amendment of Articles  8.17
    • D.  Incorporation by Existing Business Association Organized as Trust  8.18
    • E.  Director Duties  8.19
    • F.  Role of the Attorney General  8.20
    • G.  Derivative Actions  8.21
    • H.  Required Reports  8.22
      • 1.  Annual Reports  8.23
      • 2.  Special Purpose Current Reports  8.24
    • I.  Shares and Share Certificates  8.25
    • J.  Sales of Assets  8.26
    • K.  Merger  8.27
    • L.  Change of Status  8.28
    • M.  Reorganization  8.29
  • III.  BENEFIT CORPORATIONS  8.30
    • A.  Forming a New Benefit Corporation  8.31
    • B.  Converting Existing Entity to Benefit Corporation  8.32
    • C.  Purposes  8.33
    • D.  Third Party Standard  8.34
    • E.  Director Duties  8.35
    • F.  Form: Indemnification for Directors  8.36
    • G.  Officer Duties  8.37
    • H.  Annual Benefit Report  8.38
    • I.  Benefit Enforcement Proceeding  8.39
    • J.  Attorney General Supervision  8.40
    • K.  Change of Status  8.41
    • L.  Form: Restrictions on Amendments to Articles of Incorporation  8.42
  • IV.  TABLES COMPARING CORPORATE FORMS
    • A.  Table 1: The Spectrum of Public and Private Enterprise  8.43
    • B.  Table 2: Comparison of Traditional Corporations and California Hybrid Corporations  8.44

9

Comparisons of California, Delaware, and Nevada Law

CEB Staff

  • I.  INTRODUCTION
    • A.  California and Delaware Law  9.1
    • B.  California and Nevada  9.2

ORGANIZING CORPORATIONS IN CALIFORNIA

(3d Edition)

January 2020

TABLE OF CONTENTS

 

File Name

Book Section

Title

CH01

Chapter 1

Considerations Before Incorporation

01-012

§1.12

Interview Sheet

01-020

§1.20

Sample Letter Detailing Fees Based on Hourly Rate for Services

01-021

§1.21

Follow-Up Letter After Initial Client Consultation

01-140

§1.140

Client Questionnaire: California Versus Foreign Incorporation

01-142

§1.142

Checklist: Typical Structuring Issues

01-179

§1.179

Checklist: Incorporating a Going Business

CH02

Chapter 2

Formation

02-016

§2.16

Checklist: Information Needed for Incorporation

02-017

§2.17

Articles of Incorporation (Short Form)

02-019

§§2.19-2.33

Heading; Name of Corporation

 

§2.20

Purpose of Corporation

 

§2.21

Initial Agent for Service of Process

 

§2.21A

Initial Addresses for Corporation

 

§2.26

Capitalization (Share Structure)

 

§2.27

Restriction on Stock Ownership

 

§2.31

Signatures

 

§2.33

Acknowledgments or Declarations

02-043

§§2.43-2.76

Number of Directors; Change in Number or Range

 

§2.45

Names and Addresses of Initial Directors

 

§2.46

General Stock Attributes

 

§2.48

Dividend Preferences (Two-Class Share Structure)

 

§2.52

Voting Rights

 

§2.54

Liquidation Preferences

 

§2.56

Preemptive Rights

 

§2.59

Redeemable Shares

 

§2.61

Conversion Rights

 

§2.63

Transfer Restrictions; Right of First Refusal

 

§2.65

Limit on Directors’ Liability

 

§2.70

Indemnification of Officers and Directors

 

§2.76

Certificate of Determination

02-080

§2.80

Letter Transmitting Articles, Fees, and Tax Payments to Secretary of State

02-090

§§2.90-2.176

Heading

 

§2.92

Location of Principal Office; Branch Offices

 

§2.93

Place and Conduct of Meetings

 

§2.95

Annual Meeting of Shareholders

 

§2.97

Special Meetings

 

§2.99

Notice of Shareholders’ Meetings

 

§2.101

Quorum Required for Shareholders’ Meetings

 

§2.103

Adjourned Meetings, Voting Procedures, and Waiver of Notice

 

§2.105

Shareholder Action Without Meeting

 

§2.107

Record Date for Notice and Voting

 

§2.109

Proxies

 

§2.110

Inspectors of Election

 

§2.111

Powers of Directors

 

§2.113

Number of Directors

 

§2.115

Election of Directors; Term of Office

 

§2.117

Vacancies on Board

 

§2.121

Meetings of Board of Directors

 

§2.123

Quorum Required for Directors’ Meetings

 

§2.124

Waiver of Notice

 

§2.125

Adjourned Meetings

 

§2.127

Board Action Without Meeting

 

§2.129

Directors’ Compensation

 

§2.131

Committees of the Board

 

§2.133

Designation of Corporate Officers

 

§2.134

Appointment of Officers

 

§2.135

Appointment of Subordinate Officers

 

§2.137

Removal and Resignation

 

§2.138

Filling Vacancies in Offices

 

§2.139

Chairperson of the Board

 

§2.140

President or Chief Executive Officer

 

§2.141

Vice Presidents

 

§2.143

Secretary

 

§2.144

Chief Financial Officer

 

§2.145

Indemnification (Short Form)

 

§2.146

Definitions; Actions Other Than by Corporation

 

§2.147

Actions by Corporation; Successful Defense; Required Approval

 

§2.148

Expenses; Contractual Rights; Limitations; Insurance

 

§2.149

No Indemnification for Fiduciaries of Benefit Plans

 

§2.150

Optional Provisions

 

§2.152

Shareholder Records and Inspection by Shareholders

 

§2.153

Maintenance and Inspection of Bylaws

 

§2.155

Minutes and Accounting Records

 

§2.157

Inspection by Directors

 

§2.159

Annual Report to Shareholders

 

§2.161

Financial Statements

 

§2.163

Annual Information Statement

 

§2.164

Record Date for Dividends

 

§2.166

Authorized Signatories

 

§2.169

Issuing Share Certificates; Lost Certificates

 

§2.171

Voting of Shares Held in Other Corporations

 

§2.173

Reimbursing Corporation for Excessive Payments

 

§2.174

Construction and Definitions

 

§2.176

Amending the Bylaws

02-179

§2.179

Adoption of Bylaws and Election of Directors by Incorporator

02-181

§§2.181-2.205

Waiver of Notice and Consent to First Meeting of Directors

 

§2.184

Heading and Opening Sentence

 

§2.185

Directors Present; Officers of the Meeting

 

§2.186

Waiver of Notice Presented

 

§2.187

Report of Articles Filed

 

§2.188

Approval or Appointment of Agent for Service of Process

 

§2.189

Approval of Bylaws

 

§2.190

Appointment of Officers

 

§2.191

Adoption of Corporate Seal

 

§2.192

Adoption of Share Certificate

 

§2.194

Selection of Annual Accounting Period

 

§2.195

Establishing Principal Executive Office

 

§2.196

Filing of Annual Statement

 

§2.198

Establishing Bank Accounts

 

§2.199

Payment of Incorporation Expenses

 

§2.201

Optional Qualification of Stock Under IRC §1244

 

§2.203

Authorization of Issuance of Shares

 

§2.204

Optional Election of S Corporation Status

 

§2.205

Adjournment

02-207

§2.207

Form: Indemnification Agreement

CH02A

Chapter 2A

Conversions and Mergers

02A-049

§2A.49

Plan of Conversion for Converting Entity to Corporation

02A-064

§2A.64

Short-Form Agreement of Merger

02A-065

§2A.65

Long-Form Agreement of Merger Between General Partnership and Corporation

02A-066

§2A.66

Long-Form Agreement of Merger Between Limited Partnership and Corporation

02A-067

§2A.67

Long-Form Agreement of Merger Between Limited Liability Company and Corporation

CH03

Chapter 3

Postincorporation Checklist

03-031

§3.31

Form: Memorandum to Client About Corporate Operations

CH04

Chapter 4

Offering, Selling, and Issuing Securities

04-011

§4.11

Investment Certificate for Private Offerings

04-012

§4.12

Certificate of Professional Advisor

04-014

§4.14

Legend for Certificates

04-069

§4.69

Officer’s Certificate

04-072

§4.72

Declaration of Mailing

04-111

§4.111

State of California Instructions for Application for Qualification by Permit (Section 260.113)

04-129

§4.129

Legend Requirement

04-132

§4.132

Promotional Shares

04-181

§4.181

Share Certificate

CH05

Chapter 5

Foreign Corporations in California

05-019

§5.19

Client Questionnaire

05-051

§5.51

Application for Qualification of Recapitalizations and Reorganizations

CH06

Chapter 6

Professional Corporations

06-053

§6.53

Checklist: Client Questionnaire

06-054

§6.54

Checklist: Preincorporation

06-055

§§6.55-6.63

Heading; Name of Corporation

 

§6.56

Limited Purpose of Professional Corporation

 

§6.57

Initial Agent for Service of Process

 

§6.57A

Corporate Addresses

 

§6.58

One-Class Share Structure

 

§6.59

Dental Corporations

 

§6.60

Law Corporations

 

§6.61

Medical Corporations

 

§6.62

Date; Signatures

 

§6.63

Declaration

06-064

§§6.64-6.98

Principal Office

 

§6.65

Additional Offices

 

§6.66

Counting of Votes

 

§6.67

Manner of Voting

 

§6.68

Majority Vote

 

§6.69

Disqualification From Voting

 

§6.70

Limited Use of Proxies

 

§6.71

Powers of Board of Directors; Qualifications of Directors

 

§6.72

Election and Term of Directors

 

§6.73

Events Causing Vacancies on Board

 

§6.74

Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)

 

§6.75

Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)

 

§6.76

Procedure for Electing Directors to Fill Vacancy

 

§6.77

Resignation of Directors

 

§6.78

Compensation of Board Members

 

§6.79

Compensation for Disqualified Directors

 

§6.80

Required Officers

 

§6.81

Appointment of Officers; Term of Office

 

§6.82

Appointment of Subordinate Officers

 

§6.83

Removal of Officers

 

§6.84

Resignation of Officers

 

§6.85

Vacancies in Offices

 

§6.86

Compensation of Officers and Other Shareholders

 

§6.87

Limitation on Compensation of Disqualified Officers

 

§6.88

Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.89

No Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.90

Shareholder Restrictions

 

§6.91

Disqualified Shareholder Not Entitled to Benefit

 

§6.92

Legends Required for Share Certificates

 

§6.93

Restrictions on Transfer to Nonlicensed Persons

 

§6.94

Restrictions on Transfer Following Death or Disqualification

 

§6.95

Malpractice Insurance or Other Security for Claims Against Corporation

 

§6.96

Construction and Definitions

 

§6.97

Procedure for Amending Articles of Incorporation

 

§6.98

Procedure for Amending Bylaws

06-099

§§6.99-6.135

Principal Office

 

§6.100

Counting of Votes

 

§6.101

Manner of Voting

 

§6.102

Majority Vote

 

§6.103

Disqualification From Voting

 

§6.104

Limited Use of Proxies

 

§6.105

Powers of Board of Directors; Qualifications of Directors

 

§6.106

Election and Term of Directors

 

§6.107

Events Causing Vacancies on Board

 

§6.108

Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)

 

§6.109

Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)

 

§6.110

Procedure for Electing Directors to Fill Vacancy

 

§6.111

Resignation of Directors

 

§6.112

Compensation in General

 

§6.113

Compensation for Disqualified Directors

 

§6.114

Required Officers

 

§6.115

Appointment of Officers; Term of Office

 

§6.116

Appointment of Subordinate Officers

 

§6.117

Removal of Officers

 

§6.118

Resignation of Officers

 

§6.119

Vacancies in Offices

 

§6.120

Compensation of Officers and Other Shareholders

 

§6.121

Limitation on Compensation of Disqualified Officers

 

§6.122

Annual Reports to State Bar

 

§6.123

Special Reports to State Bar

 

§6.124

Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.125

No Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.126

Shareholder Restrictions

 

§6.127

Disqualified Shareholder Not Entitled to Benefit

 

§6.128

Legends Required for Share Certificates

 

§6.129

Restrictions on Transfer to Nonlicensed Persons and on Death or Disqualification of Shareholder

 

§6.130

Malpractice Insurance or Other Security for Claims Against Corporation

 

§6.131

Construction and Definitions

 

§6.132

Procedure for Amending Articles of Incorporation

 

§6.133

Reporting Amendments to State Bar

 

§6.134

Procedure for Amending Bylaws

 

§6.135

Reporting Amendments to State Bar

06-136

§§6.136-6.169

Principal Office

 

§6.137

Counting of Votes

 

§6.138

Manner of Voting

 

§6.139

Majority Vote

 

§6.140

Disqualification From Voting

 

§6.141

Limited Use of Proxies

 

§6.142

Powers of Board of Directors; Qualifications of Directors

 

§6.143

Election and Term of Directors

 

§6.144

Events Causing Vacancies on Board

 

§6.145

Procedure for Filling Vacancies on Board of Directors (Vacancy Not Caused by Removal)

 

§6.146

Procedure for Filling Vacancies on Board of Directors (Vacancy Caused by Removal)

 

§6.147

Procedure for Electing Directors to Fill Vacancy

 

§6.148

Resignation of Directors

 

§6.149

Compensation in General

 

§6.150

Compensation for Disqualified Directors

 

§6.151

Required Officers

 

§6.152

Appointment of Officers; Term of Office

 

§6.153

Appointment of Subordinate Officers

 

§6.154

Removal of Officers

 

§6.155

Resignation of Officers

 

§6.156

Vacancies in Offices

 

§6.157

Compensation of Officers and Other Shareholders

 

§6.158

Limitation on Compensation of Disqualified Officers

 

§6.159

Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.160

No Fixed Record Date for Purposes Other Than Notice and Voting

 

§6.161

Shareholder Restrictions

 

§6.162

Disqualified Shareholder Not Entitled to Benefit

 

§6.163

Legends Required for Share Certificates

 

§6.164

Restrictions on Transfer to Nonlicensed Persons

 

§6.165

Restrictions on Transfer Following Death or Disqualification

 

§6.166

Malpractice Insurance or Other Security for Claims Against Corporation

 

§6.167

Construction and Definitions

 

§6.168

Procedure for Amending Articles of Incorporation; Effective Date

 

§6.169

Procedure for Amending Bylaws

06-170

§§6.170-6.176

Introduction to Resolutions

 

§6.171

Resolutions Regarding Application for Certificate of Registration

 

§6.172

Resolutions Regarding Approval of Employment Agreement

 

§6.173

Resolutions Adopting a Tax-Qualified Pension or Profit-Sharing Plan

 

§6.174

Resolutions Regarding Election of Limitation Year

 

§6.175

Resolutions Designating Process Agent and Investment Committee

 

§6.176

Adjournment

06-183

§6.183

Intent to Comply With Law and Regulations

06-184

§6.184

Purchase Agreement

06-185

§6.185

Purchase Price

06-186

§6.186

Time for Completion of Sale or Transfer

06-187

§6.187

Repurchase by Reinstated Employee

06-188

§6.188

Sale of Shares to Eligible Employee of Medical Corporation

06-189

§6.189

Change of Corporation’s Name

06-190

§6.190

Restrictions on Certificate

06-191

§§6.191-6.205

Heading; Parties

 

§6.192

Recitals: Effective Date, Preamble

 

§6.193

Term of Agreement

 

§6.194

Services to Be Provided

 

§6.195

Employer’s Authority and Professional’s Duties

 

§6.196

Basic Annual Salary

 

§6.197

Bonuses

 

§6.198

Additional Benefits

 

§6.199

Expenses

 

§6.200

Vacation

 

§6.201

Malpractice Insurance

 

§6.202

Disability Insurance

 

§6.203

Life Insurance

 

§6.204

Termination of Agreement

 

§6.205

Signatures

CH07

Chapter 7

Close Corporations

07-006

§7.6

Legend on Share Certificates

07-055

§7.55

Checklist: Provision in Shareholders’ Agreement for Statutory Close Corporation

CH08

Chapter 8

Social Purpose Corporations and Benefit Corporations

08-009

§8.9

Checklist: Required and Optional Articles Provisions

08-010

§8.10

General Statutory Purpose Statement

08-012

§8.12

Sample Special Purpose Statement

08-036

§8.36

Indemnification for Directors

08-042

§8.42

Restrictions on Amendments to Articles of Incorporation

08-043

§8.43

Table 1: The Spectrum of Public and Private Enterprise

 

Selected Developments

January 2020 Update

The IRS issued final regulations under IRC §199A (concerning the new deduction for certain income from pass-through entities of up to 20 percent) effective February 8, 2019: Treas Reg §§1.199A.1—1.199A.6 and 1.643(f)–1. See 84 Fed Reg 2952. See §1.67.

Under Corp C §§301.3, 2115.5, publicly traded corporations that are headquartered in California are required to have at least one female board member by the end of 2019. By the end of July 2021, a board having five members must include at least two female members, and boards with six or more members must include at least three female members. Corporations in violation of this requirement are subject to fines. See §2.113A.

If a parent corporation owns or controls all of a subsidiary’s stock and operates that subsidiary in a way that renders the subsidiary as a mere alter ego of its parent, courts will pierce the corporate veil and treat the two corporations as a single entity. Davidson v Seterus, Inc. (2018) 21 CA5th 283, 305. See §1A.7. In Brugnara Props. VI v IRS (In re Brugnara Props. VI) (Bankr ND Cal, July 20, 2019, Nos. 17-30501, 17-3071) 2019 Bankr Lexis 2157, the bankruptcy court held that both the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB) could use an alter ego theory and were entitled to summary judgment against the debtor. The debtor was acting solely as a nominee for the taxpayers and served no business purpose except for holding title to the taxpayers’ residential real property. Recognition of the debtor as a separate entity from the taxpayers would have enabled the taxpayers to evade tax liability. See §1A.10A.

In Savea v YRC Inc. (2019) 34 CA5th 173, an employer furnished wage statements to its employees using the employer’s fictitious business name rather than the employer’s corporate name. Labor Code §226(a)(8) requires an employer to provide wage statements accurately listing “the name and address of the legal entity that is the employer.” The court held that because the employer and its fictitious business name were the same legal entity, the employer did not violate the accurate statement requirement of Lab C §226(a)(8) by listing its fictitious business name as the employer name on its wage statements. See §2.11.

Certain businesses who act as “marketplace facilitators” (as defined in Rev & T C §6041) for sellers outside California are also subject to the use tax law, including the registration requirement. Additional information is available at the website of the California Department of Tax and Fee Administration (CDTFA), https://www.cdtfa.ca.gov/industry/wayfair.htm. See §3.19.

Many Delaware corporations doing business in other states have forum selection clauses in their bylaws designating Delaware as the exclusive forum for intra-corporate disputes. In accordance with Delaware corporate law, these clauses can be adopted by the board of directors without shareholder consent. In Drulias v 1st Century Bancshares, Inc. (2018) 30 CA5th 696, a stockholder class action contesting a merger, the California court of appeal ruled that such a clause was enforceable in California and did not conflict with Corp C §2116 (see §5.64). The California court found that the plaintiff stockholder, who was a California resident, had failed to show that enforcement of the bylaw would impair his statutory rights or otherwise violate public policy. For a Delaware case discussing (at length) the scope of a forum selection clause in the bylaws of a Delaware corporation, see Sciabacucchi v Salzberg (Del Ch, Dec. 19, 2018, No. 2017-0931-JTL) 2018 Del Ch Lexis 578. See §5.83A.

Revenue and Taxation Code §6203(c) imposes sales and use tax obligations on “any retailer that has substantial nexus with this state for purposes of the commerce clause of the United States Constitution and any retailer upon whom federal law permits this state to impose a use tax collection duty.” This section was amended, effective April 1, 2019, in response to the U.S. Supreme Court’s decision in South Dakota v Wayfair, Inc. (2018) 585 US ___, 138 S Ct 2080 (retailer need not have physical presence in state to meet “substantial nexus” requirement). Among other things, the “substantial nexus” test includes (Rev & T C §6203(c))

  • A retailer that maintains a business location in California (including temporary locations and locations indirectly maintained through third parties), or

  • A retailer that has an agent, representative or sales person, independent contractor, or solicitor in California making sales, taking orders, or delivering or installing merchandise.

The collection requirement applies to taxable sales of tangible personal property to California consumers made on and after April 1, 2019, and is not otherwise retroactive. Retailers reaching the $500,000 sales threshold are required to register with the CDTFA to collect the California use tax even if they were not previously required to register. These retailers include retailers that sell tangible goods for delivery into California through the Internet, mail-order catalogs, telephone, or any other means. See §5.85A.

Delaware in 2018 introduced the “statutory public benefit limited liability company” (SPBLLC), a limited liability company that is generally analogous to Delaware’s public benefit corporation. (See 6 Del Code §§18–1201 to 18–1208. For businesses that wish to address public benefit, as the public benefit corporation does, but also prefer LLC status to corporate status for other reasons (e.g., pass-through taxation and/or management flexibility), the SPBLLC should be considered. (A few other states also have introduced the benefit LLC, such as Maryland, Oregon, Pennsylvania, and Utah.) See §8.1.

About the Authors

STEVEN R. CHIODINI received his B.A. in 1994, magna cum laude, from Harvard University where he was Phi Beta Kappa. He received a Fulbright Scholarship to Germany in 1994, and earned his J.D. in 1999 from Yale Law School, where he was editor of the Yale Law Journal. Mr. Chiodini, an associate at Adler & Colvin, San Francisco, focuses his practice on the representation of nonprofit and tax-exempt organizations. He is admitted to the bar in both California and New York and is a member of the American Bar Association, the Tax Exempt Organizations Committee of the California State Bar Taxation Section, and the Bar Association of San Francisco. Mr. Chiodini is a coauthor of chapter 8.

JAMES K. DYER, JR., received his B.S. in Business Administration from California State University in Sacramento in 1984, and his J.D. from Texas Tech University School of Law in 1990. Mr. Dyer is the Managing Shareholder of the Sacramento office of Buchalter and has more than 25 years of experience as a corporate and bank regulatory lawyer. He is a former Certified Public Accountant and is admitted to practice in the states of California, Texas, and Alabama. He has served as a member of both the Corporations Committee and the Agribusiness Law Committee of the California State Bar Business Law Section. His practice emphasizes banking, corporate, and intellectual property law. Mr. Dyer is a coauthor of chapter 7.

JAMES F. FOTENOS received his A.B. with distinction from Stanford University in 1968, his M.B.A. from Stanford Business School in 1971, and his J.D. from Stanford School of Law in 1971, where he was selected for the Order of the Coif. Mr. Fotenos has served as a member and Treasurer of the Executive Committee of the Business Law Section of the California State Bar and as Chair of the Partnership Committee of the Business Law Section. He was the primary draftsman of legislation that added merger and dissenters’ rights provisions to the California Revised Limited Partnership Act. He served as Chair of the LLC Working Group of the Business Law Section, which sponsored legislation enacting a limited liability company statute in California. Mr. Fotenos also served as a member of the California State Senate (Killea) Commission on Corporate Governance, Shareholder Rights, and Securities Transactions and was an advisor to the drafting committee of the National Conference of Commissioners on Uniform State Laws, which prepared the Uniform Partnership Act of 1994. Mr. Fotenos is with the firm Greene Radovsky Maloney Share & Hennigh LLP, San Francisco; his practice concentrates on corporate, securities, and pass-through entity law. He is a frequent lecturer on partnerships and LLCs and has written several articles on entity issues for CEB business law publications. Mr. Fotenos is a coauthor of chapter 7.

APRIL FRISBY is of counsel in the Newport Beach office of Newmeyer & Dillion LLP. Her practice includes securities, business transactions, corporate law, and estate planning and administration. Ms. Frisby provides advice on capital formation, business strategy, and legal matters to entities and business professionals. She received her B.A. from the University of California, Irvine, and her J.D., summa cum laude, from Whittier Law School, where she ranked first in her class. Ms. Frisby has taught law school as an adjunct law professor at two accredited law schools in the areas of legal writing and research, contracts drafting, securities regulation, and wills and trusts. She was Editor in Chief for the State Bar of California’s Business Law News, was a member of the Executive Committee of the Business Law Section, and also served as Vice-Chair of Programs and Publications for the section. Ms. Frisby is a coauthor of chapter 2A.

DAVID A. LEVITT is a principal with the San Francisco law firm of Adler & Colvin, which specializes in the representation of nonprofit organizations and their donors. His focus includes the representation of nonprofit and tax-exempt organizations, with an emphasis on nonprofit corporate governance, social enterprise, and program-related investments. He received his B.A. in 1993 from Cornell University and his J.D., cum laude, in 1996 from Harvard Law School. He is a former officer of the Exempt Organizations Committee of the American Bar Association Taxation Section, as well as Secretary and Vice Chair of the San Francisco Chapter of the Social Enterprise Alliance. He has spoken and published widely on tax-exempt organizations law and has served as an Adjunct Professor at the University of San Francisco. Mr. Levitt is a coauthor of chapter 8.

THOMAS A. MAIER received his B.A. in 1976 from Southern Illinois University, his J.D. in 1979 from the University of California, Berkeley, School of Law, and his LL.M. in 1980 from New York University Law School. A partner at Futterman & Dupree LLP, San Francisco, he specializes in general business and tax law. Mr. Maier is a member of the California Bar Association, the International Fiscal Association, the San Francisco Bar Association, and the Alameda County Bar Association. He has served as an Adjunct Lecturer at Golden Gate University, San Francisco, a presenter at University of California, Berkeley, School of Law, co-chair of the East Bay Tax Club, and chair of the Alameda County Bar Association Section on Business. Mr. Maier is an update coauthor of chapter 6.

KEITH W. McBRIDE received his B.S. in 1966 and his M.A. in 1967 from the University of California, Davis, and his J.D. in 1973 from the University of California, Davis, School of Law. He is of counsel to Diepenbrock Elkin LLP. His practice is devoted to a general business representation of his clients, with an emphasis on securities law compliance issues. He is also a frequent contributor to CEB’s California Business Law Reporter and panelist at CEB programs. Mr. McBride is the original author of chapters 1, 2, and 3–5.

DEBRA NICHOLSON received her B.A. from Stanford University and her J.D. from the University of Virginia School of Law. She began her law career with Pillsbury, Madison & Sutro in San Francisco. In 1989, she established a small business planning and estate planning law practice in Tahoe City. She continues a solo practice there today. Ms. Nicholson is a member of the State Bar of California (admitted 1984) and the State Bar of Nevada (admitted 1991). She has lectured on small business planning topics and estate planning topics to various organizations. She is a past president and board member of the Tahoe Truckee Bar Association. Ms. Nicholson is the original author of chapter 6.

LAYTON L. PACE is a tax and closely held business attorney based in Southern California. His practice is divided between business structuring and other tax planning, and resolving tax controversies with federal, state, and local taxing agencies. Mr. Pace received his B.A. in business administration (accounting concentration) from the University of Washington in 1980, and his J.D., cum laude, in 1987 from the University of California, Hastings College of Law. In 2008 he received the V. Judson Klein Award, an annual award presented by the Taxation Section of the California State Bar. Mr. Pace has served on the executive committees and as chairs of the corporate and pass-through committees of the Taxation Sections of the State Bar of California and the Los Angeles County Bar Association. He also has served on the Partnership and Limited Liability Company Committee of the Business Law Section of the California State Bar. Mr. Pace speaks and writes frequently on choice of entity, S corporation, partnership, limited liability company, and other tax and non-tax issues. He is a coauthor of chapter 2A.

MARK E. PETERSON is a partner at Diepenbrock Elkin Gleason LLP, in Sacramento. Mr. Peterson is the update author for chapters 1, 2, and 3–6. Mr. Peterson received his B.A. from Brigham Young University in 2002 and his J.D. cum laude from the University of Michigan Law School in 2006. He assists clients in business matters generally, corporate finance projects, and matters governed by state and federal securities laws. He represents public and private businesses and individuals in a broad range of matters, including start-up transactions, corporate governance issues, mergers, acquisitions and divestitures, and joint ventures. He also handles debt and equity financings, ownership and management succession planning, shareholder disputes, and intellectual property licensing matters.

TIMOTHY J. REIMERS received his B.A. from the University of California, Riverside, in 1998 and his J.D. from the University of Connecticut School of Law in 2001. He is a member of the American Bar Association, Real Property, Probate and Trust Section; and the American Bar Association Securitization and REIT Section. He is a coauthor of chapter 1A.

STEVEN H. ZIDELL is a partner at Wolf, Rifkin, Shapiro, Schulman & Rabkin, LLP, in Los Angeles. Mr. Zidell has published several articles on real estate and business law topics. Mr. Zidell has been awarded an AV rating from Martindale-Hubbell. He received his B.A. in 1982 from the University of California, Los Angeles, where he graduated summa cum laude and Phi Beta Kappa, and his J.D. in 1985 from the University of California, Los Angeles, School of Law, where he served as editor-in-chief of the UCLA Journal of Environmental Law and Policy. Mr. Zidell is a member of the Real Property Section of the State Bar of California and the Los Angeles County Bar Association, and the Vice President of Membership for the UCLA Ziman Real Estate Alumni Group. He was a licensed real estate broker from 1991–2007 and has served as chair of the San Fernando Valley Association of Realtors Multi-Cultural Committee. He has been a consultant for CEB books. Mr. Zidell specializes in transactional real estate law and has significant experience in corporate transactions and the formation of corporations and limited liability companies. Mr. Zidell is a coauthor of chapter 1A.

About the 2020 Update Authors

JAMES K. DYER, JR., is an update coauthor for chapter 7. See his biography in the About the Authors section of this book.

JAMES F. FOTENOS is an update coauthor for chapter 7. See his biography in the About the Authors section of this book.

MARK E. PETERSON is an update author for chapters 1, 2, and 3–6. See his biography in the About the Authors section of this book.

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