Continued from "Starting a New Business In California - Hiring Employees".
To conclude our series on starting your own California business, we turn to examining the legal health of your company as it moves forward. In essence, a legal check-up is a business risk assessment. New and growing businesses may be reluctant to seek legal advice for broad issues fearing excessive fees. They worry that attorneys will exaggerate their legal needs or at least nitpick to such a degree that the business will feel compelled to comply with all recommendations. However, burying ones head in the sand is not the answer. In fact, many San Diego business attorneys will provide a legal check up for a reasonable fee. Of course, the size of the business matters. A legal check up for an international corporation for instance would require much greater analysis than the typical San Diego business. For most new and growing businesses, a basic legal check can cost less than $1,000.00.
Most importantly, the fact that a business is made aware of additional legal risk doesn't necessarily mean that it must immediately remove all risk. Rather, the legal check up will assist entrepreneurs in prioritizing risk. For instance, if a business learns that its workers' compensation insurance has lapsed (for whatever reason), that the term of its commercial lease expires in one year, that several of its hand-shake agreements should probably be memorialized in a written contract and that its name and goodwill are vulnerable because it doesn't own a trademark, the business can react accordingly. Clearly, the workers' compensation issue would need to be resolved immediately at whatever cost. The remaining issues can be dealt with one at a time. There is a year to think about a new commercial lease, the handshake agreements are at least in the short term working out and the trademark issue can be carefully considered over the coming months.
The following is a summary of the issues your attorney will examine.
Existing Concerns: Often owners will have immediate concerns they need advice on. These concerns are typically addressed first and may include plans for expanding the business.
The Type of Business Entity: If the business is operating as a formal business entity such as a corporation or limited liability company (LLC), it is important that the corporate books are in order. Are annual meetings being held pursuant to California law and/or the company's bylaws or organizational minutes? Are corporate minutes maintained? Are the company's officers and managers complying with other corporate requirements under California law and the company's bylaws or organizational minutes? Are statements of information being filed with the California Secretary of State when required? Is the company complying with securities regulations? Corporate entities that fail to comply with corporate formalities (including LLCs) put themselves at risk. The owners of the business may find themselves personally liable for the debts of the corporation. Litigants may be able to pierce the corporate veil.
Operating as a formal business entity is advisable for most businesses. If your company has not yet done so, the attorney will analyze your business structure and desired goals and discuss the various options available. See "California Limited Liability Company versus the S-Corporation" and "Choosing the Right Business Entity - Sole Proprietorship May Still Be the Right Choice" for some insight.
The attorney will also analyze agreements between partners, including shareholders' agreements, buy/sell agreements and written partnership agreements regarding transferability of ownership interests. A written partnership agreement is always advisable. See "Why Oral Partnerships Are a Bad Idea".