The High-touch Legal Services® Blog • For Startup Companies

Recently, several start-up entrepreneurs have asked me whether they can form a limited liability company (LLC) without a lawyer’s assistance. The following answer reflects practices in California.

The first step, filing Articles of Organization with the Secretary of State, is easy – no lawyer is required (unless you want expedited turnaround, in which case a lawyer who has an existing relationship with a commercial filing service in Sacramento is invaluable).

The second step is to prepare the Operating Agreement for the LLC. The Operating Agreement has a role similar to the roles of both bylaws and shareholder / voting rights agreements for a corporation: It provides the rules by which the LLC will be managed and operated, and it specifies the members’ (owners’) respective economic interests and voting rights.

Read more…

This post is based on my answer to the following LinkedIn question (the answer would be similar for a contract entered into before a corporation, rather than LLC, is formed):

I signed a lease for office space one day before my LLC became active. Am I personally responsible for the lease?

The answer:

You entered into what is called a pre-formation contract. You intended to bind the LLC by acting as an agent of the LLC (your principal). However, because you signed the lease before the LLC came into existence, there was no principal, so you did not act as an agent. Instead – as you fear – you entered into the lease as an individual.

It is possible that the landlord will never notice this fine point. However, if you were to end up in litigation over the lease, it is safe to assume that the landlord’s counsel would notice.

If you explain the situation to the landlord and the landlord is willing to work with you to “paper over” this problem, there are several ways to do so. Generally, now that the LLC exists, the landlord and the LLC need to sign a document establishing that the LLC, rather than you, is the tenant. In addition, the Manager(s) of the LLC should, in accordance with the Operating Agreement, approve a resolution authorizing entering into the lease.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

From time to time, I answer questions – typically about the law or about startups – on LinkedIn. Recently I answered the following question:

What is the best way [in a contract] to limit liability when you’re the party receiving payment?

I believe the answer will be helpful to any supplier of goods or services, so I am reproducing it here in slightly edited form.

I interpret “best” to mean the highest level of protection that is reasonably likely to be acceptable to the customer based on common commercial practices. The contract with the customer should:

1. Exclude liability for consequential damages.
2. Limit liability for any damages to the amount of payments actually received. (Some customers will ask for a multiple of the amount received; this should be resisted, if possible, or kept to a low number, such as 1.5.)
3. Disclaim as many warranties as possible. (Many customers will not accept a disclaimer of all warranties.)
4. Limit indemnification obligations as much as possible. (Note that indemnification obligations normally are carved out from both exclusions of consequential damages and limitations of damages.)
5. Include favorable jurisdiction, venue and choice of law provisions.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Startup and early-stage entrepreneurs often are pressured to provide personal guarantees for their companies’ obligations. Presser & Goldstein, LLC in Boca Raton, Florida has posted Avoiding Corporate Guarantees, which discusses how business owners can avoid or limit personal guarantees.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Last month, my post Court Curbs Inspection of Employee Text Messages discussed an employer that was held to have unreasonably searched employee text messages because, despite a policy stating that employer-supplied technology must be used only for the employer’s business activities, that policy was undercut when it was only selectively enforced.

Continuing this theme, in a more recent case, Guard Publishing v. NLRB, the D.C. Circuit held that selective enforcement of a policy limiting employee e-mails constituted a violation of federal labor law.

In my opinion, Guard Publishing actually made two mistakes. First, the e-mail policy prohibited “non-job-related solicitations” (emphasis added) but did not prohibit other other non-job-related communications. So the employer gave itself the ability to limit only a fraction of all possible non-business communications.

Read more…

Last month I posted You May Be a Software Pirate and Not Even Know It. The issues raised there now apply to equally content.

The Software & Information Industry Association is pursuing unlicensed use of content as aggressively as unlicensed use of software. For example, as recently reported in InfoWorld and elsewhere, Knowledge Networks agreed to pay SIIA $300,000 to settle a complaint that it distributed news articles to its employees without permission of the copyright owners. Similarly, in a media release earlier this year, SIIA announced that it was aggressively fighting graphics content piracy by filing lawsuits against individuals and companies that copied and distributed clip art without appropriate licenses. In another media release, SIIA touted the use of paid whistleblowers to help SIIA find infringers.

The implications are clear: Whether the subject is software, content or any other works of authorship, use and distribute the products only to the extent that you are authorized to do so by the terms of the applicable licenses.

This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.

Over the years I have negotiated a number of international agreements, typically representing domestic clients. My more recent work with EU-based clients, however, has given me additional insights about the U.S. and other legal systems.

These clients have established technology businesses in Europe. Each recently set up operations here in the Bay Area and asked that I adapt existing agreements for use in the U.S. As I work with these clients, two differences between the U.S. and the European Union jump out at me.

Length of Agreements

First, in the U.S. we often have longer agreements. European contracts tend to rely on, and implicitly or explicitly incorporate, detailed statutory provisions that do not exist here in the U.S. Furthermore, agreements here tend to include more business details and legal protections in case the relationship sours and ends up in litigation. For example, one client shared its existing reseller agreement. I found the document charming in its brevity and the abundance of white space on the page. By the time I added everything that is considered normal here in the U.S., the new version had four times as many words!

Read more…

Fairly frequently, an individual will ask me whether he should form a limited liability company (LLC) or corporation for his business. Here are the factors that I typically find are most important.

First, we can pretty much dismiss income tax considerations. While by default, an LLC is not taxed as a separate entity but a corporation is taxed separately, there are ways to override the default tax treatments. An LLC may elect to be taxed as a separate entity by filing IRS Form 8832. Subject to certain limitations, a corporation can avoid separate taxation (i.e., can become an “S corporation”) by filing IRS Form 2553.

Read more…

Separately, two clients asked me to review “teaming agreements” that had been presented to them. In each instance, the client was proposing to “team” with another company that had complementary expertise so they could carry out, jointly, a sophisticated technical project for a customer.

A brief aside: I prefer the term “teaming” to “partnering”, which often is used by technology companies to emphasize how closely they will work with one another. My concern about “partnering” is that the term suggests the companies may be partners rather than independent contractors, potentially sharing unlimited legal liability for their joint business activities. Fortunately, my clients avoided that trap.

Read more…

I am not a litigator (trial attorney), so I normally do not write about litigation. Recently, however, I have discussed several matters where small-claims court seems appropriate, so I will share some basic information about small-claims cases in California.

The CA Courts’ Small Claims Self-Help Center provide extensive, detailed information. The most important point to understand is that small-claims court judgments are limited to ordering the payment of money. You cannot, for example, ask a small-claims court to order that the defendant stop infringing a patent or trademark.

Read more…