In California, corporate directors are protected by the so-called Business Judgment Rule (“BJR“): They are not responsible for honest mistakes of business judgment. A recent case revealed that in California the BJR does not protect corporate officers.
During 2007, Indymac Bank bought more than $10 billion in risky residential loans, ultimately generating losses of more than $600 million. Indymac closed, and the Federal Deposit Insurance Corporation was appointed receiver.
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I recently received, via Quora, a private question about setting up an LLC membership interest (rather than shares of a corporation) with reverse vesting (see Rewarding Key Personnel: Restricted Stock or Options?). That question, and my answer, are reproduced below with minor editing.
Q. I am starting a company and forming as an LLC. My co-founder will received a reverse-vested membership percentage. I’ve found plenty of sample restricted stock agreements, but nothing for LLCs and memberships. Do you have any suggestions where I can find a sample agreement?
A. Sorry, I know of no such document. I believe there are two somewhat-related reasons why this is the case:
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A short while ago, I answered a Quora question about whether and why a startup might want to form a general partnership. The question and my answer are reproduced, with emphasis added, below.
Q. What are some of the reasons a business might organize itself as a general partnership? Considering all the liability risk that general partners might potentially face, why not organize as a limited liability company? Was there an era when the general partnership was an attractive form and, if so, why?
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This post is based on a Quora question in which a user who already had invested money in his corporation wanted to know how he can invest an additional amount. My answer, reproduced below almost verbatim, starts by summarizing the steps for an initial equity investment.
Let’s assume you did your startup paperwork properly: The board of directors approved issuing some or all of the corporation’s authorized shares to you in exchange of payment of certain consideration; you deposited that consideration into the corporation’s bank account; the secretary recorded your share ownership on the corporation’s share transfer ledger and issued a share certificate to you.
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This post is based on a question that I answered on OnStartups.com. The short answer is “Yes, an undocumented immigrant can form a corporation.” The rest of this post is adapted from the full answer that I provided.
You can form a corporation – no problem. I have helped dozens of foreign clients (non-citizens, no social security number) go through that process.
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Sample Share Certificate with Legend from Attorneys Corporation Service, Inc.
Last year, I wrote about the importance of placing appropriate legends on corporate share certificates (Why Do We Need a Corporate Records Book?) and limited liability company membership certificates (Should My LLC Issue Membership Certificates?). This post provides more details about why legends are required and how they can be printed on the certificates. (Although I will use corporation-specific terminology below, the considerations are similar for LLCs.)
The legend that routinely appears on my clients’ share certificates (I have the company that prints the certificates include it) is one stating that the shares have not been registered under state or federal securities laws. The reason: To put the shareholder on notice that, under applicable securities laws, the shares cannot be transferred unless certain circumstances are satisfied. Here is an example:
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In Blue Nile v. Ideal Diamond Solutions, the U.S. District Court for the Western District of Washington held that co-defendant Larry Chasin, founder and an officer of defendant IDS, was personally liable for infringement of plaintiff Blue Nile’s copyrighted images, even though Chasin claimed he had no role in putting infringing images on websites and he did not know the images were infringing.
Blue Nile is an online jewelry and diamond retailer. Chasin founded and operated IDS to create websites for brick-and-mortar jewelers to help them compete online. The websites included some of Blue Nile’s copyrighted images.
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An entrepreneur who was trying to prepare a limited liability company (LLC) Operating Agreement on his own (apparently using someone else’s as a template) was puzzled by the concept of “sharing losses”. I could tell right away that he was not familiar with two fundamental concepts of LLC accounting: Allocations vs. distributions.
Before going further, I need to make two disclaimers:
- This post is not about taxes.
- The following discussion is extremely simple, addressing only the most basic considerations. One of the great things about LLCs is that the members can agree to make allocations and distributions in any way they desire to meet their business needs. As a result, LLC accounting can be far more complex than the following might suggest.
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Several months ago, I wrote “Which Financial Information Must a Corporation Provide to its Shareholders? “ This post – prompted by a client’s question – discusses the financial information that a California limited liability company must provide to its members.
Corporations Code Section 17106 provides a broad set of rights to LLC members, managers and holders of economic interests. These include, among others, the right to inspect and copy, during normal business hours and for purposes reasonably related to the person’s interest as a member, manager or holder of an economic interest, the following records (specified in greater detail in Corporations Code Section 17058(a)):
- A list of members and holders of economic interests
- A list of managers
- The articles of organization
- Federal, state and local tax returns
- The operating agreement
- Financial statements for the past six fiscal years
- Books and records for the current and past four fiscal years
Photo credit: iStockphoto
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
This post explains the difference between a corporation’s board of directors and an advisory board – a point that may not be clearly understood by some people, especially those from other countries, where corporate governance is different from that in the U.S.
The board of directors is elected by the shareholders and is responsible for management of the company. It appoints and removes officers (who run the corporation’s day-to-day business) and makes important decisions about finances and other matters.
An advisory board provides advice on issues that are important to the corporation’s business. The advisory board is merely a resource – it has no power to make corporate decisions or to act on behalf of the corporation.
Photo credit: Muriel Miralles de Sawicki via stock.xchng
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.