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Frequently Asked California corporation questions (FAQ)

 

Disclaimer WarningThis FAQ is published as a general informational resource and is not intended to constitute legal advice regarding any particular matter or any specific facts.  Transmission of this FAQ does not constitute legal advice for the reader and does not create an attorney-client relationship. 
Should a corporation be formed in California, Delaware, Nevada or another state? The optimal state of incorporation for a business requires an analysis of, among other things, the business plan of the corporation, the desire to avoid shareholder derivative suits, the likelihood of institutional or venture capital investors, indemnification issues, the willingness to pay both California taxes and another states taxes, and other matters which are beyond the scope of this FAQ.  Readers are encouraged to review publications on this matter at www.svlg.com.
Are there corporate name restrictions or corporate names which cannot be used? Corporations cannot use (i) corporate names previously taken by other businesses, or (ii) names that conflict closely with or resemble[1] a name of a corporation in good standing or (ii) the following words without satisfying certain requirements or obtaining governmental approval[2]:

·         “bank”, “trust,” or “trustee”

·          “cooperative” or abbreviations thereof,

·         “Olympic,” or Olympiad,” or

·         “national,” “federal,” “United States,” “reserve,” “deposit insurance,” or certain words referring to “credit unions”.

Do I need to have “Inc.”, “corporation” or some other version in the corporate name? California law allows flexibility in choosing a corporate name.  In most cases, the words “corporation,” “incorporated, “or abbreviations, such as “Inc.”, do not have to be included in a corporate name unless:

o   the corporation will be a statutory “Close Corporation[3],”

o   an individual’s name is used in the corporate name, or

o   certain types of professional corporations, such as law, accounting, medical, architectural, or engineering.[4]

However, use of such word is recommended to clearly signify a company’s corporate existence.

How can I check if a corporate name is available? A quick way of checking the availability of a corporate name is to perform a “Business Search” on the California Secretary of State website; however, you cannot be absolutely certain that the name is available without reserving the corporate name.  This is because (i) the Secretary of State database is not current due to delays in processing submitted corporate documents, (ii) there can be a conflicting corporate name which is the same or has similar pronunciation (but different spellings), and (iii) there can be corporate names already under a reservation.
Can my proposed corporate name be reserved?

 

 

Due to the abundance of existing corporate names and the slow processing of the articles of incorporation, you consider submitting a name availability inquiry or reserving a corporate name at the California Secretary of State’s website.  For a filing fee of $10 per name, a corporate name can be reserved for 60 days.
Does the corporation have to qualify or register in states outside a California? Although each state has its own rules, regulations and exemptions, before a corporation transacts business in another state, it should investigate the need to be qualified or registered in such state.  As a general prophylactic rule, a corporation should assume that it will need to qualify or register if the corporation is going to transact business or have a presence (assets, employees or sales – each of which have their own implications which are beyond the scope of this FAQ) in another state.
How many Board of Directors are required? California Corporation Code Section 212 (a) requires that if there is only one shareholder the number of Directors must be at least one (1); or when there are two (2) shareholders, there must be at least be two (2) Directors.  If there are more than two (2) shareholders, the number of Directors must be three (3) or more.
What is “par value” and is it required? Par value is an antiquated concept for establishing minimum legal capital, which has been eliminated in California for many years.  California, like Delaware, permits, but does not require, the issuance of stock with or without par value.  Many common stocks are issued with “No-Par Value or extremely low par values of between $.01 to $.0001.
What is and does a California corporation need a “corporate seal”? A corporate seal is a stamp, generally metal, but can be rubber, of a corporate signature which contains the corporate name, state and date of incorporation.  However, corporate seals have fallen out of use.  Even banks and insurance companies, which have requested or require corporate seals in the past, have discontinued the practice of requesting them.  Corporate seals are considered relics in California and New York.  Although California statute gives corporations the authority to use and adopt them, corporate seals have no effect on the validity of any corporate document or instrument.[5]
What factors should be considered before issuing stock of the corporation? Before founders or management issue any stock or securities of a corporation, they should identify and evaluate the characteristics of such potential shareholders. Analysis should include what consideration (cash, intellectual property, future employment, etc.) is being exchanged for the securities, whether there will be any restrictions on the transfer or sale of the stock, whether the ownership of the stock will vest over time, whether there will be voting restrictions or options to repurchase the stock, and whether the securities offering needs to be registered with the Securities Exchange Commission (SEC) or the state of California, or other states in which shareholders live.
Does the offering of securities require registration with the SEC? Unless there is an exemption, all securities sold in the United States by corporations must be registered with the SEC. Such registration involves, among other things, the delivery of financial statements and other important information regarding the securities to the investors and the preparation of a registration statement, all of which can be extensive, costly, and time-consuming.
Are there exemptions from the federal registration of securities? Most companies want to avoid the costs and challenges of filing a registration with the SEC.  The most common transactional exemptions are the Regulation D Exemption, Regulation A Exemption, Interstate Offering Exemption, and Private Offering Exemption, all of which have extensive requirements and restrictions which are beyond the scope of this FAQ.  Readers are encouraged to review publications on this matter at www.svlg.com.
What state security regulations should be of concern? In addition to complying with the SEC’s registration requirements, a company must also register and comply with Blue Sky Laws of each State, in which the investor or shareholder resides.  Founders, management and corporate legal counsel need to carefully monitor and analyze the residence, financial condition and sophistication of potential shareholders before any securities offering to determine whether the securities must be registered with the state of the potential shareholder’s residence, and whether there is an exemption under such Blue Sky Laws.  Violations of a state’s Blue Sky Laws can result in the issuance of cease-and-desist letters, injunctions, rescission offerings, costly penalties or other expensive legal proceedings.
Should I issue stock outright? Consideration should always be given to issuing stock on a vesting or earned over time basis (i.e. vesting schedule) to avoiding unnecessary windfalls, encourage completion of a shareholder’s obligations and/or commitments, and ensure retention of founders and employees.
Should the Corporation be a C Corporation or an S Corporation for income tax purposes? “C Corporations” are treated as a separate taxable entity and upon the sale of the corporation’s assets can be subject to taxation at both the corporation level and the shareholder level; commonly known as “double taxation”.  A “S Corporation” is generally treated as a pass-through entity [6]which reports income, deductions, credits and information to the federal and state income tax authorities and provides tax information to its shareholders for reporting on their personal tax returns.  Whether a corporation should be a “C Corporation” (default status), or elect to be treated[7] as an “S Corporation” is a complex question beyond the scope of this FAQ.  The relevant analysis requires, among other things, examination of the nature of the corporation’s business, the likelihood of institutional or venture capital investors, shareholders’ citizenship, potential number of shareholders, shareholder nature, characteristics and criteria, future plans for raising capital, future potential liquidity (i.e. potential sale in the future), and other variables and considerations.
What should I do if I receive notice or letter from a company soliciting to prepare annual minutes, file statement of information or file corporate documents? You should provide your corporate attorney with a copy of such notice or letter.  California companies have been receiving official looking solicitation letters or notices, warning of defaults and penalties, requesting information about a corporation payment of fees and costs, and completion of forms.  In general, these solicitations are not made by the California Secretary of State’s office and are not made by, or on behalf of, any governmental agency.  These companies have no authority and are generally viewed as fraudulent solicitations.
Does the Corporation need to have an accounting firm? The identification of an accountant or accounting firm is not immediately necessary at the time of incorporation; however, founders and management should engage an accounting firm as soon as possible for financial and tax purposes.  If you do not have an accountant or an accounting firm and need a referral, please contact Bernie Vogel of our law firm, and we will supply you with two (2) referrals.
What should be the Corporation’s Fiscal/Calendar Year End The Corporation’s Tax and Accounting Year End must be December 31 for all corporations electing to be treated as an S Corporation.  However, for C corporations, the Fiscal Year End can be December 31 or other dates during the year.  If you are contemplating using a non-December 31 year end, please discuss this matter with your accountant and have them explain the restrictions and ramifications for such a year-end.

 

This FAQ is intended to give the reader general information about various issues surrounding the formation of a Corporation.  If you desire a more extensive discussion and analysis on any of the topics listed above or any other corporate and legal matters, please contact the undersigned.

 

Sincerely,

Bernard J.  Vogel, III

 

Vogel@svlg.com

[1] Pursuant to California Corporation Code (“CCC”) Section 201(b), the California Secretary of State shall not file articles or amendments if the proposed corporate name is likely to mislead the public or resembles closely, or is the same as, any California corporation in good standing, foreign corporation qualified to do business in California and in good standing, or corporate names under reservation.

[2] Requirements, necessary governmental approvals, and procedures are beyond the scope of this FAQ

[3] A “Close Corporation” is a unique statutory California entity which is generally restricted to smaller closely held corporate ownership and has very limited uses, which is beyond the scope of this FAQ.

[4] Each Governmental Regulatory Agency has specific regulations which are beyond the scope of this FAQ.

[5] California Corporation Code Section 207 provides that a corporation shall have “the power to: (a) Adopt, use and at will alter a corporate seal, but failure to affix a seal does not affect the validity of any instrument.” [Emphasis added]

[6] A common misperception in the public is a S Corporation is a corporation treated as a partnership for income tax purposes.  This is a dangerous oversimplification.  For example, unlike a partnership, the distribution or transfer of assets out of a S Corporation is deemed to be a sale of such assets at their fair market value, which can result, and often times does, in a surprising recognition of income or gain to the shareholder.

[7] In order for a corporation to be treated as an S Corporation, all of the then current shareholders (and their spouses) must sign and file the Election To Be Treated As a Small Business Corporation (IRS Form 2553) and additional eligibility requirements beyond the scope of this FAQ must be satisfied

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You may have heard that California has a new privacy law. The California Consumer Privacy Act (CCPA) came into effect on January 1, 2020. It covers large(r) businesses in California. Covered businesses have to give “consumers” four key rights:

  • The right to know their privacy practices regarding how they collect, use, share, and sell consumers’ personal information.
  • The right to demand that businesses delete personal information.  There are some exceptions in the law.
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What if you never knew your grandfather because he allegedly died early in life from natural causes, and one day an elderly gentleman informs you that your grandfather died of “lead poisoning”?

That real-life event prompted author and San Jose’s Sam’s BBQ owner, Sam Carlino to discover his grandfather and great uncle control the flow of prohibition alcohol in Colorado before their gruesome and bloodied separate assassinations in 1931.  “Colorado’s Carlino Brothers” provides newspaper accounts, intimate photographs and surprising revelations, including the confirmation that his grandfather Pete Carlino met with crime boss “boss of all bosses” Salvador Maranzano in New York before his murder under the orders of Charles “Lucky” Luciano, and that both men’s September 10, 1931 assassinations may not have been a coincidence.

 

Congratulations Sam Carlino on the successful launch of your riveting book on Amazon.  It was an honor to assist you in this journey.

 

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Shareholder Stephen Wu will be speaking at the American Bar Association Annual Meeting in San Francisco. On August 9 at 2 pm, he will be presenting in a panel Presidential Showcase continuing legal education program entitled “Law Firm Cybersecurity Requirements You Never Dreamed Of: Emerging Threats, Ethical Obligations, and Survival Tactics.” The sponsor is the ABA Cybersecurity Legal Task Force, and Stephen is a new member of the Task Force. If you are attending the ABA Annual Meeting, please join us. For event details please click on the link below:

https://drive.google.com/file/d/1Wgdu-R8FKk6Ri1mYCPc63IvWcmeQs54v/view?usp=sharing

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On May 23, 2019, shareholder Stephen Wu spoke with Marianne Kolbasuk McGee of Information Security Media Group about a HIPAA an enforcement case.

The case was brought by the Office for Civil Rights, Department of Health and Human Services. It emphasized the importance of conducting a security program risk assessment in order to prevent security breaches.

To read the article with Stephen’s comments click here.

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Today, shareholder Stephen Wu hosted DMH Stallard partner Anthony Lee and talked about fast-breaking news about personal data exports from the United Kingdom to the United States in light of Brexit and the status of the General Data Protection Regulation in the United Kingdom.  Steve Wu spoke about the American Artificial Intelligence Initiative executive order that President Donald Trump was expected to sign today.

To listen to the podcast or download a copy, please click here.

Stephen Wu’s practice includes compliance, transactions, liability, investigation, and governance in advanced information technologies such as artificial intelligence   He collaborates with lawyers in other member firms of the International Network of Boutique and Independent Law Firms’ in a global GDPR working group. For assistance on GDPR, GDPR compliance program, or artificial intelligence matters, please contact Stephen Wu by completing the web form here.

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SVLG Shareholder Stephen Wu will host a webinar on February 27, 2019. at 10 am Pacific/1 pm Eastern. The presenter for this webinar is Attorney Paul Starrett. The program is entitled “Leveraging Artificial Intelligence in Investigations.”

SVLG regularly hosts Meetups of the American Bar Association Section of Science & Technology Law’s Artificial Intelligence and Robotics Committee.  The Committee offers Meetup programs as a member benefit.

During the program, Paul Starrett, EnCE, CFE, an attorney and private investigator specializing in high-profile investigations, will discuss applying machine learning to investigations. More specifically, he will focus on the synergy among machine-learning tools found in information retrieval, natural-language processing and graph databases. He will also talk about how that synergy provides an efficient means to reveal vital insights.  Without such insights, those insights might be lost.

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The Internet of Things connects machines to other machines in a wide variety of fields and industries. In our digital lives, we are connecting devices to our networks at work and at home. In addition to work and home, however, we spend much of our waking time in transit from one place to another, often in our private automobiles. The Internet of Things is extending our digital lives to our cars, trucks, and other road vehicles. With this new integration comes privacy, security, and other legal issues.

A 2015 episode of the CBS television show “60 Minutes” vividly illustrates what can happen when we connect cars with information technology networks. In the show, reporter Lesley Stahl sat behind the wheel of a nondescript dark gray sedan while driving through a tree-lined suburban parking lot. She appeared on a 60 Minutes segment aired on February 8, 2015. In the driver’s seat next to her was Kathleen Fisher, a veteran of the Defense Advanced Research Projects Agency or “DARPA” for short. As Stahl navigated one end of the cleared parking lot, two men stood at the other end – Karl Koscher, a University of Washington Ph.D. student, and Dan Kaufman, who was then Director of DARPA’s Information Innovation Office. Koscher used a laptop sitting on black boxes of what appeared to be equipment, while Kaufman provided instructions.

Kaufman told Koscher, “You wanna hit the fluids?” Koscher typed something on the laptop and suddenly the windshield wiper fluid sprayed onto the windshield on Stahl’s car and the wipers started moving back and forth. Stahl said “I did nothing” to turn on the spray. And yet, without Stahl doing anything, Koscher had taken control of the wipers and fluid. In a cut-away scene, Stahl explained that hackers had contacted the car’s emergency communications system, flooded it with sound data, and inserted a piece of code, which reprogrammed the car’s software so the researchers could take complete remote control of the car. Further demonstrating this control, Koscher caused the horn to sound, again without Stahl’s knowledge or action.

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Silicon Valley Law Group, through corporate attorneys Bernard Vogel and Bill Bretschneider, advised Cosmopolitan Catering, LLC (See www.cosmocaters.com), Silicon Valley’s premier full-service corporate catering and café management company, in connection with its acquisition by Compass Group USA, Inc., a wholly owned subsidiary of United Kingdom based Compass Group PLC, a global leader in contract foodservice and hospitality.  See www.compass-usa.com.  Congratulations to Cosmopolitan Catering’s owners, Rick Angelini and Jake Caputo, on their joining the Compass Group USA family of companies.  We thoroughly enjoyed working with, and appreciated the levelheaded professionalism of the professional members of the Compass Group USA team.

Please contact Bernard Vogel if you would like more information about how SVLG’s corporate transactions team can help your business.

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The ISO 27001 standard[1] is a specification for managing an information security program in an organization. The International Organization for Standardization (ISO) developed and maintains this standard. Worldwide, ISO 27001 has become the most popular standard for managing information security programs, and many organizations have received a certification that their information security management system complies with the standard.

When companies obtain an ISO 27001 audit, they usually envision working with auditors to complete the project using operational, management, information security, and internal audit teams within the organization. What they may find surprising is that the ISO 27001 framework contains a number of legal topics, and the input of the legal team is vital as well. Some organizations may consult legal counsel about these topics, but I believe most organizations try to address these topics without legal help or use “off the shelf” documentation offered as samples from their auditors.

Writing documentation without the help of legal counsel creates risk for the organization. In the event of a security breach, for instance, government or plaintiff’s lawyers will ask for, and be entitled to examine, the “off the shelf” policies and procedures adopted by the company. If the policies and procedures were never implemented properly, these lawyers would point to the lack of adoption as evidence of knowing failure to implement security practices properly. If the policies and procedures are inconsistent with actual security practice, the inconsistency will make the company look lax in its security practices.