Business Law 101

Author: David

  • What is a Smaller Reporting Company?

    Introuduction

    A smaller reporting company (“SRC”) is a designation under the SEC rules allows for less stringent requirements reporting requirements.

    Eligbility

    To qualify as an SRC, the reporting company must have:

    • less than $250 million in public float; or
    • annual revenues of less than $100 million and either
      • (1) no public float; or
      • (2) public float of less than $700 million.

    Benefits of Being an Smaller Reporting Company

    SRCs don’t need to provide certain disclosures on Form 10-Q and on Form 10-K.

    SRCs have 45 days after the reporting period as the deadline to file the 10-Q or the 10-K (as opposed to 40 days for regular reporting companies).

    SRCs only need to provide 2 years of audited financial statements (as opposed to 3 years for regular reporting companies.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • When is the 10-Q Due?

    Generally speaking, the 10-Q is due 40 or 45 days after the end of the reporting period (the fiscal quarter for which the 10-Q is filed).

    The 40 day deadline applies to smaller reporting companies (“SRCs”), and the 45 day deadline applies to all other companies.

    If the 10-Q is the first quarterly report after a company’s IPO, the 10-Q is due by the later of:

    (1) 40 (for SRCs) or 45 days after the registration statement (e.g., S-1) becomes effective; or

    (2) 40 (for SRCs) or 45 days after the quarter for which the 10-Q is filed.

    • This would be the fiscal quarter after the last fiscal quarter discussed in the registration statement.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Rule 504 of Regulation D

    Introduction

    Section 5 of the Securities Act of 1933, as amended (the “Act”), requires that all offerings of securities be either (1) registered with the Securities and Exchange Commission (the “SEC”) or (2) exempt from registration.

    Section 4(a)(2) of the Act exempts from registration transactions that are not public offerings.

    The term “public offerings” is not defined in the Act.

    Due in part to differing interpretations on what a “public offering” is, the SEC adopted Regulation D has a safe harbor under Section 4(a)(2).

    Regulation D is a regulation promulgated under the Act that offers a safe harbor from registration.

    There are 3 rules under Regulation D: Rule 504, Rule 506(a), and Rule 506(b).

    Rule 504

    In order to utilize Rule 504, the following must be true:

    (1) the maximum size of the offering is $10 million (when combined with all securities sold under Section 3(b)(1) or in violation of Section 5(a) of the Act) per year;

    (2) the issuer is a non-reporting company;

    (3) there is no bad-actor disqualification; and

    (4) there is no general solicitation or advertisement (unless pursuant to an exception provided by Rule 504(b)(1))

    Benefits of Rule 504

    Rule 504 has no limits on the number of investors that can participate.

    As well, Rule 504 does not require that the investors be sophisticated or accredited.

    Drawbacks of Rule 504

    In addition to the limitations already mentioned, there are certain drawbacks to relying on Rule 504.

    Unlike Rule 506(b) or 506(c), Rule 504 does not preempt state blue sky laws, which means that state security laws still need to be complied with.

    Like Rule 506(b) and 506(c), there are resale limitations on securities offered pursuant to Rule 504.

    Conclusion

    The main reason to utilize Rule 504 is to not have to worry about whether the investors are sophisticated or accredited.

    However, the $10 million yearly cap, the inability for reporting companies to utilize the exemption, and the prohibition against general solicitation means that Rule 504 is not suitable for every issuer.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • What is an S corporation?

    Introduction

    Rather than being a distinct type of corporation from a corporate standpoint, an S corporation is an election under the U.S. tax code.

    Benefits of an S Corporation

    The primary benefit of electing as an S Corporation is the avoidance of double taxation.

    Corporations are usually taxed as C Corporations, which means that they are taxed both at the entity level and at the shareholder level.

    An S Corporation provides the limited liability benefits of a C Corporation with the tax benefits of being a LLC (limited liability company).

    Drawbacks of an S Corporation

    An S Corporation is limited in ways that a C Corporation is not.

    An S Corporation can only have:

    (1) a maximum of 100 shareholders;

    (2) one class of stock;

    (3) stockholders who are individuals, single-member LLCs, estates, trusts, or certain tax exempt entities.

    An S Corporation cannot have corporations, multi-member LLCs, partnerships, or non-resident alien stockholders.

    The S Corporation election is also only available to corporations incorporated in the United States; foreign corporations do not have the option to make the S Corporation designation.

    Conclusion

    An S Corporation election can be a good option for corporations (which satisfy the aforementioned requirements) to avoid double taxation.

    An alternative to electing as an S Corporation would be to convert the corporation into a LLC; this would avoid double taxation without having to meet the limitations of an S Corporation.

    However, converting a corporation into a LLC generally requires more work than making an S Corporation election, so it’s important to keep that in mind in deciding which path to take.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Does my LLC need a Separate EIN?

    If you are the only member of your LLC, your LLC does not need a separate EIN (Employer Identification Number).

    Instead, you can use your own SSN (social security number) for the LLC (such as to open up a bank account).

    However, if you anticipate that your LLC would soon have another member, it may be a good idea to set it up with its own EIN.

    This is because LLCs with two or more members need its own EIN for tax purposes.

    You can apply for an EIN here.

    Please note that a corporation, even if it only has one shareholder, needs to have its own EIN.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Should I Form an LLC or a Corporation?

    If you’re just starting on your entrepreneurial journey, a LLC (limited liability company) is almost certainly the way to go.

    Unlike a corporation, a LLC is considered fully organized from an entity standpoint as soon as the relevant jurisdiction issues a letter (attached to the filed Certificate of Formation) stating that the entity has been formed on a certain date.

    To understand the steps needed for a corporation to be fully organized, check out this article.

    Corporate Formalities

    In addition to the steps needed to be fully organized, a corporation has many corporate formalities that must be observed.

    For example, acts by directors and shareholders need to be at a formal meeting where minutes are recorded or via written consent.

    If these formalities aren’t observed, this may give rise to allegations that the directors or shareholders acted without authority; this may lead to lawsuits down the line.

    As well, if corporate formalities aren’t observed, this may lead a judge to “pierce the veil,” thereby subjecting the shareholders of the corporation to personal liability for the corporation’s obligations.

    Does an LLC Need an Operating Agreement?

    Most states do not require that an LLC have an operating agreement.

    California, New York, and Delaware, Maine and Missouri are in the minority of states that do require their LLCs to have operating agreements.

    Irrespective of whether an operating agreement is legally required, it is highly recommended that an operating agreement be adopted, as this would increase the probability that all the members are on the same page with respects to their rights and responsibilities.

    Furthermore, in the absence of an operating agreement, the default rules under the jurisdiction’s limited liability company laws would apply, which may lead to unintended or undesired consequences.

    What if the Company will Eventually IPO?

    The structure of a corporation is better suited to be a public company, but a LLC can always be converted to a corporation when and if that becomes necessary.

    As long as the operating agreement is properly drafted and records of LLC ownership are properly maintained, converting an LLC to a corporation would be a relatively straightforward process.

    While the limited liability company laws generally do not require that Managers or Members of LLCs act by formal meeting or written consent, this would still be good practice for documentation purposes.

    Tax Considerations

    LLCs enjoy pass through taxation, which means that the profits of the LLC are taxed directly at the membership level.

    On the other hand, corporations are taxed both at the entity level and the shareholder level, which results in the shareholders keeping less of the profits.

    Flexibility of Operating Agreements

    Another reason to choose an LLC over a corporation is that the operating agreement for an LLC can be much more tailor made than the bylaws of a corporation.

    Generally speaking, almost all of the default rules of limited liability company law can be overridden by the operating agreement.

    By contrast, while some provisions of the corporate law can be overridden by the bylaws, many provisions of the corporate law cannot be changed.

    To better understand the laws that govern corporations, check out this article.

    Conclusion

    Early stage companies should strongly consider organizing as a limited liability company instead of a corporation.

    In addition to simplicity for governance purposes, there are also tax benefits.

    Because LLCs can be converted to a corporation at a later stage, there is minimal downside with starting with a LLC as proper planning and documentation is in place.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Articles of Incorporation (CA) – A Step by Step Guide

    Articles of Incorporation (CA) – A Step by Step Guide

    Introduction

    This article focuses on the Articles of Incorporation for a standard corporation.

    If you’re looking to form a professional corporation (i.e., for a law form, accounting firm, etc), a non-profit corporation, or a corporation for an insurer, please note that there are different incorporation forms for these corporations.

    Preliminary Steps

    Go to the forms page of the CA Secretary of State (the “SOS”) website.

    Click on “Articles of Incorporation – CA Corporation – General Stock.”

    Register for an account with the CA SOS website or log in to your account.

    Read and accept the Privacy Statement.

    Fill in the fields under “Submitter Information” or leave the fields blank; this section is optional.

    Corporation Name

    Indicate whether a previously reserved name will be used for the filing.

    If yes, click on the reserved name.

    If not, enter the name that you want for the corporation.

    The name of the corporation should end in “Inc” or Inc.”

    A comma before “Inc” or “Inc.” is optional.

    Business Address

    Enter the complete address of the principal office of the corporation.

    This must be a physical address and cannot be a P.O. box.

    Mailing Address

    Enter the mailing address of the corporation.

    This can be the same as the business address or different. The mailing address may be a P.O. box.

    Directors

    Determine whether you want to name the Director(s) in the Articles of Incorporation. (“Articles”).

    Most corporations do not name directors in the Articles.

    If you name Director(s), all Director(s) must sign the Articles.

    The names and addresses of the Director(s) listed will be part of the public record.

    Unless there is a specific reason to name Director(s) at this point in time, it’s generally best to not do so.

    Agent for Service of Process

    Designate an agent for service of process. Such agent will be responsible for receiving legal documents on the corporation’s behalf (including documents related to lawsuits).

    You may designate someone within the corporation for this purpose.

    If so, the address provided cannot be a P.O. box.

    Alternatively, you can also designate a California Registered Corporate Agent.

    Such agent must agree beforehand before being so designated and usually charge fees for this service.

    Shares

    Enter the maximum amount of shares the corporation is allowed to issue.

    10,000,000 is a good starting point, but any amount may be designated as long as there is at least 1 share designated.

    The 10,000,000 number allows good flexibility for additional issuances in the future so that many shareholders can receive nice full numbers of shares (as opposed to fractional shares).

    If additional authorized shares need to be provided in the future, the Articles will have to be amended and resubmitted with the SOS.

    For this reason, it’s good to not have too little authorized shares.

    Please note that the amount of authorized shares is not the same as the amount of issued shares. The amount of authorized shares simply designates the total amount that can be issued.

    Class or Series of Shares

    Most corporations only have one class of shares and do not have series of shares.

    Unless there is a specific reason to do this, only allow for one class of shares at this point in time.

    This can be amended in the future as needed.

    File Date

    Choose current date unless there is a specific reason to defer. A common reason to defer is so that the corporation is not incorporated until the next calendar year (so as to save on CA incorporation taxes).

    Please note, however, that the future date cannot be more than 90 days from the date the Articles are submitted.

    The Articles would also not begin to be reviewed until such date.

    Signature

    Review and sign the Articles, pay the processing fee of $100, and submit!

    Conclusion

    Once you’ve received the Articles back from the SOS with a letter stating the date the corporation was incorporated, your corporation is officially a legal entity in the eyes of the state.

    Please note, however, that the corporation still has to be fully organized before it begins to conduct business. For an explanation of the difference between being incorporated and being fully organized, check out this article.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Is Your Corporation Fully Organized?

    Is Your Corporation Fully Organized?

    In order for your corporation to be fully organized, 5 things need to be true.

    Incorporation

    First, the Articles of Incorporation must be submitted to the relevant jurisdiction.

    The jurisdiction will issue the Articles or Incorporation once the incorporation is complete.

    Some jurisdictions refer to the incorporation document as the Certificate of Incorporation.

    However, a corporation is not fully organized just because it’s been incorporated; the following steps are still required.

    Adoption of Bylaws

    Second, Bylaws must be adopted to govern the corporation. Depending on the jurisdiction, this can be done either by the incorporator or the director(s).

    Appointment of Directors

    Third, director(s) must be appointed.

    Some jurisdictions allow the director(s) to be appointed in the incorporation document itself.

    If not, the incorporator will usually appoint the director(s) in a resolution.

    Appointment of Officers

    Fourth, the president, the secretary, and the treasurer must be appointed.

    Generally speaking, all corporations must have at least these three officers.

    These positions can all be held by the same person.

    Issuance of Shares

    Fifth, shares of the corporation must be issued.

    This requires the approval of the director(s) and the execution of a share purchase agreement between the corporation and the shareholder.

    Conclusion

    Once all five of these steps have been accomplished, your corporation is fully organized.

    It’s important for a corporation to be fully organized so as to reduce the chances that a judge may find that corporate formalities have not been observed and “pierce the veil,” thereby subjecting shareholders of the corporation to personal liability for the obligations of the corporation.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.

  • Corporate Governance – What Law Governs Your Corporation?

    Corporate Governance – What Law Governs Your Corporation?

    In order to understand the rules that govern your corporation, you need to be familiar with (1) the corporate law of the jurisdiction in which your corporation is formed (the “Corporate Law”), (2) the Articles of Incorporation (the “Articles”), and (3) the Bylaws.

    Corporate Law of Jurisidiction

    The Corporate Law takes precedence in the event of any conflicts with the Articles or the Bylaws; this is so unless the Corporate Law specifically provides that rules set forth in the Articles or the Bylaws are to take precedence over the default rules set forth in the Corporate Law.

    Articles of Incorporation

    The Articles takes precedence in the event of any conflicts with the Bylaws.

    The Articles are usually a short document that sets forth some basic facts about the corporation, such as (1) the corporation’s name and (2) the number and class of authorized shares.

    Certain jurisdictions also require indemnification of officers and directors to be set forth in the Articles.

    Bylaws

    Even though the Bylaws are less authoritative as compared with the Articles or the Corporate Law, the Bylaws are nonetheless incredibly important because they set forth the details of how the corporation operates.

    Disclaimer

    This is not legal advice and does not create an attorney-client relationship between you and the author. This article is being furnished for educational purposes only.

    The author makes no warranty as to the accuracy, completeness or applicability of the information and undertakes no obligation to update the information.