Corporation Shareholder Rights to Inspect and Participate

The California Corporations Code, as well as common law not found in the statutes, provide for shareholder inspection and participation rights in a corporation.

California Corporations Code section 1601(a)(1) provides that any shareholder is entitled to inspect and copy the following, at any reasonable time during usual business hours for a purpose reasonably related to such holder’s interest as a shareholder or holder of a voting trust certificate.

  1. the record of shareholders
  2. the accounting books and records
  3. minutes of proceedings of
    • the shareholders and
    • the board and
    • committees of the board.

The holders of 5% of any class of shares of the corporation may request, at specified intervals during the fiscal year, income statements and balance sheets and, if no annual report has been sent, the statements required by Corp. Code section 1501 (a).

The definition of “accounting books and records” is not defined explicitly in the Corporations Code. Other sections impose duties of financial disclosure that show the meaning of accounting books and records—balance sheet, income statement, and statement of cashflows.  The corporation does not have to allow inspection of the General Ledger at entry level, or line item level balance sheet showing what each principal has loaned the Company, if the balance sheet shows a summary of those loans as a consolidated number. The inspection must be allowed at any reasonable time, so, the shareholder might access monthly information rather than just annual data, if the shareholder repeats the requests more than once annually.

Corp. Code section 1501(a) is an example of the type of accounting books and records that a shareholder may inspect. (Jara v. Suprema Meats, Inc. (2004) 121 Cal. App. 4th 1238.) Section 1501 requires that the directors of a corporation send to shareholders an annual report on the business and financial condition of the corporation.[1] Corp. Code section 1501(a)(1) provides that the report must contain a balance sheet and an income statement and statement of cashflows for the fiscal year, accompanied by a report of independent accountants or a certificate of an authorized officer that the statement was prepared without audit from the books and records of the corporation.

So even if waived in the smaller corporation’s bylaws, this section informs the definition of accounting books and records.

The inspection of books and records does not mean the shareholder is entitled to unfettered access to corporate confidences and secrets. (National Football League Properties, Inc. v. Superior Court (1998) 65 Cal.App.4th 100, 107 [no shareholder inspection of attorney-client privileged material.]) The shareholder’s inspection must have a proper purpose “reasonably related to shareholder’s interest as a shareholder.”  (Corp. C. §1601(a).) So in most instances, the limited books and records inspection described here will fulfill the corporation’s duties to the shareholders. The “purpose” must be to determine the condition of the corporation and the value of shareholders’  interests therein.[1] For instance, inspection was permitted by the California Supreme Court in Schnabel v. Superior Ct. (1993) 5 Cal. 4th 704, 715, the purpose being to “ascertain the value of the stock” in a divorce case.

Meeting minutes are open to inspection (Corp. C.§ 1601[a]), even if they contain information about salaries and bonuses. Some privileges will apply, and possibly third party financial privacy could protect the actual dollar amounts and recipients. (National Football League Properties, supra.) But the information will probably be detected in the accounting books and records. Accessing historic minutes is probably required by section 1601. The section makes no exception for minutes created prior to the shareholder’s acquisition of stock.

Shareholders have rights around dissolution. The corporation can voluntarily dissolve only  upon the vote of shareholders holding shares representing 50% or more of the voting power of the corporation. Any 5% of the shareholders can petition for court involvement in a voluntary dissolution. Any 33.3% of shareholders can petition for involuntary dissolution, and the shares of the alleged wrongdoers don’t count.

Shareholders have rights around meetings as well. Shareholders have a right to attend shareholder meetings, which must occur at least annually for the election of directors. (Corp. Code § 600.) Although shareholders have no right to attend directors’ meetings, they have a right to inspect the minutes upon demand, at a reasonable time.

This subject is purposefully vague, and the courts are there to protect shareholder legitimate interests.  We have litigated cases in the past where the Board of Directors did not want to share certain requested information as it believed the information would be used for wrongful purposes, such as for competition. Such litigation is costly, time consuming and bad for morale.  However, for fully transparent corporations, the sharing of books and records and other legitimately requested reviews works just fine.

[1]This obligation can be waived in the bylaws of a corporation with fewer than 100 shareholders of record.

[2]One extreme example is Hobbs v. Tom Reed Gold Mining Co. (1913) 164 Cal. 497, 500-501, which is now considered limited by section 1601 because it allowed a shareholder to inspect the company’s Arizona gold mine. Hobbs set forth the common law definition of proper purpose: to determine whether company operations were carried on with skill and good judgment. In Hobbs, The California Supreme Court permitted the gold mine inspection “for the protection of his interest or for his information as to the condition of the corporation and the value of his interest therein.” (Hobbs supra at 501.) Section 1601 would not permit the mine inspection, but, the basis for the inspection–to protect the shareholder’s interest and the value of his stock—still applies.

Article By: Kathleen J. Smith

Kathleen J. Smith is an experienced civil litigator. Kathi advises clients on and handles all types of civil litigation, including employment matters, wage and hour, business, real estate, trademark disputes, class action defense, trust and probate, and homeowners association disputes. Kathi is experienced in all types of dispute resolution, from mediation to arbitration to civil trial.

Fiduciary Responsibilities and Your Business

As the owner of a corporation, you have certain responsibilities to other parties that must be fulfilled. Although being a sole proprietor gives you more leeway, a sole proprietorship lacks any liability protection for its owner.  Business owners who use corporations or LLC’s for their business structure must be familiar with fiduciary responsibilities. These obligations extend to corporate officers and even managers in some situations. So, what are fiduciary responsibilities for business owners and corporate officers?

What are Fiduciary Duties?

A fiduciary duty is a legal requirement that applies to anyone who has a relationship of trust with another person or organization. While fiduciary responsibilities extend to more than just the business context, they are often associated with corporations and partnerships. 

Other examples of this type of relationship include:

  • Trustee and beneficiaries
  • Investment manager and participants in an investment plan
  • Banker and customers
  • Attorney and client

In these relationships, the fiduciary often accepts legal ownership or control of property or an asset that belongs to someone else. In the business context, corporate owners and managers have this type of obligation to stockholders and investors in the business.

An Overview of Fiduciary Responsibilities

Several duties apply to those in fiduciary roles, such a corporate director or officer. Below is a general overview of responsibilities that likely apply to corporate owners and officers.

  1. Obedience – Officers and directors must carry out their roles according to the requirements of the corporate bylaws, articles of incorporation, and other controlling documents. They are obligated to follow voting procedures and executed decisions made by the stockholders or investors. They must also fulfill their obligations under state and federal law.
  2. Loyalty – Business owners and officers have a duty of loyalty to the corporation and their shareholders. This means they must put the interest of the shareholders and the company ahead of any personal aspirations or goals. Any conflict of interest should be decided in favor of the business, and officers cannot use information gained in their roles in a way that would harm the company.
  3. Care- Diligence and care are essential duties in the corporate context. If corporate officers make decisions without thoroughly investigating the implications of those decisions, that could seriously endanger the company. They should act as prudent investors and decision makers and consider how the stockholders are affected in making every important decision involving the company. 
  4. Good Faith and Fair Dealing – Officers, directors, and owners are required to act with honesty, fairness, and good faith in everything they do for the business. This requirement applies to daily operations of the company as well as significant decision-making functions. This duty dovetails with the obligations of obedience, loyalty and care.
  5. Disclosure – Those who make important decisions for the business must disclose relevant information about those decisions to others. The duty of disclosure is often referred to as a “duty of candor.”  Officers, owners, and directors not only have a duty to their shareholders, but to the other key decision makers as well. There is also a duty to disclose potential conflicts of interest which coincides with the duties of loyalty, good faith and fair dealing.

The Takeaway

Given the significant fiduciary responsibilities associated with running a business, owners, directors, officers and managers should contact our office for proper legal representation in fulfilling these important duties.

By: Theodore Schneider, Esq.

Theodore Schneider assists his clients in Ventura County and surrounding areas, with respect to all aspects of personnel matters, including employee discipline, wrongful termination, retaliation, discrimination, hostile work environment, sexual harassment, leaves of absence, Americans with Disabilities Act, Fair Employment and Housing Act, Fair Labor Standards Act, and the California Labor Code. Ted also drafts and reviews employee handbooks and employment policies for his clients. Email Ted at

Coronavirus and Covid-19 Issues and Defenses in Contracts

By Kathleen J. Smith, Civil Litigation Attorney

Let’s be clear—Covid 19’s pandemic shutdown may affect your company’s ability to perform its contracts, but it’s no panacea for avoiding all your business obligations. Your contracts may contain variously worded “force majeure” clauses. That doesn’t mean you can ignore paying for services already received.

Here is a typical force majeure clause:

Force Majeure. Any delay or failure by either party hereto in performance hereby shall be excused if, and only to the extent that, such delays or failures are caused by occurrences beyond such party’s control, including Acts of God, decrees or restraints of governments, strikes or other labor disturbances, war, sabotage, and any other cause or causes which cannot be controlled by such party. Notification of such delay or failure in performance shall be promptly provided to the other party, including the cause thereof, and the extent of the performance which will be delayed or not performed.

See that? If the pandemic shutdown qualifies as a “decree or restraint of government” causing delay or failure in your performance, you have to promptly notify the other party about the effect on performance. Many commercial landlords have tenants who failed or delayed paying rent without ever telling the landlord that the shutdown caused the failure or delay.

On the other hand, if normal business vagaries and risk exposure caused the failure  or delay in performance, force majeure is not a trump card. “A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller …; if it falls, as here, the seller gains at the expense of the buyer…. A force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.” Horsemen’s Benevolent & Protective Assn. v. Valley Racing Assn., 4 Cal. App. 4th 1538, 1565 (1992), modified (Apr. 6, 1992) citing Northern Indiana Pub. Serv. v. Carbon County Coal (7th Cir.1986) 799 F.2d 265 at 275.

If the pandemic shutdown makes it illegal for you to perform—think live stage performances—then you have a defense to a breach of contract claim.

Witkin says: The excuse of impossibility is covered in several Code sections:

“A condition in a contract, the fulfillment of which is impossible or unlawful … , or which is repugnant to the nature of the interest created by the contract, is void.” (C.C. 1441.)

“The object of a contract must be lawful when the contract is made, and possible and ascertainable by the time the contract is to be performed.” (C.C. 1596.)

Performance is excused “[w]hen it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States.” (C.C. 1511(2); see Pub.Contr.C. 7105(a), (b), infra, § 1027.)

In sales, California Commercial Code 2615 provides excuse by failure of a presupposed condition that there would be no pandemic. But the seller may be required to make/produce whatever product they are able and allocate among buyers. Section  2615 provides:

Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:

(a) Delay in delivery or nondelivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) Where the causes mentioned in paragraph (a) affect only a part of the seller’s capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

(c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.

Lawsuits are still happening, even with the shutdown of many law offices and courthouses. Contact our litigation experts today! We can remotely intake any new case and enforce contract rights in court with complete efficiency.  Pleadings are filed electronically. Court hearings are telephonic. Even mediations and arbitrations are done on videoconferencing platforms. Lawsuits happen—completely untouched by human hands, with personal attention remotely applied.

Annual Employment Law Update, 2021 – Webinar

The emergence of COVID-19 has changed the world as we once knew it; therefore, it should come as no surprise that the virus would impact employment law as well. California’s ever-changing employment laws will have employers scrambling to keep up in 2021! What are the reporting requirements if someone is exposed to COVID-19 at the workplace? What is the PPE requirement? Is my employee eligible for workers’ compensation benefits in the event of an outbreak? These are all new questions that employers need answers to.  The employment law attorneys at Schneiders & Associates are prepared to help!

Join us on Friday, January 22, 2021 at 8:30 am, when our employment law experts, Roy and Ted Schneider, will discuss the new employment law changes in 2021, via Zoom.

In addition to COVID-19 related employment law updates, there are several other employment law changes that the anticipated new year will bring. In addition to new laws related to COVID-19, other topics to be discussed include employee handbooks, wage and hour, contract employees, and much more! Do not miss the most important webinar of the year!

Click here to register for this event. For more information, please contact Marketing and Client Relations Director Angela Mumme at 805-764-6370 or by email at

Starting a New Business – Common Start-Up Costs

Starting a new business is an exciting time. For serial entrepreneurs, starting a new business is often more routine because they have developed a system from their prior ventures. For those who are just diving into entrepreneurship, understanding how to handle the early stages of the business, such as start-up costs, won’t be so routine. If you have a business idea and you’re considering taking the plunge with a start-up, it is essential to have a good business plan which will provide structure for handling the early stages of the company as well as managing start-up costs. The core start-up costs include:

Legal Fees

When establishing a business plan, many entrepreneurs overlook the cost of legal fees. For many, legal fees are an unwanted expense which results in pursuing subpar legal documents online. Unfortunately for many entrepreneurs, these documents fail to account for the individual needs of the business and entrepreneur, which can result in expensive litigation and exorbitant future business expenses. When establishing a start-up, always consult with a business attorney to ensure that you and your company are protected.

Regulatory Costs

Another often overlooked cost is related to regulatory costs. Depending on your start-up, you may be required to receive certain licensure and permitting from the state, local governments, or professional associations. These costs can quickly build up from a fee standpoint, and failure to satisfy these requirements can result in greater costs as your business may not be able to operate while you wait for the licensure, permit, or other regulatory approval.


Insurance protects you and your company from unexpected events that would otherwise cripple the company. Carrying the proper insurance means that your employees are protected, your customers are protected, your business is protected, and you are protected. In addition to potentially being illegal in your area, attempting to skip out on insurance has the potential to sink your company and make you personally liable.

Marketing Expenses

Even if you have the greatest product in the world, no one can buy it if they don’t know it exists. Thus, your business plan should always include a budget for marketing. The avenue you pursue for marketing will be specific to your business, but always take the time to budget for marketing costs.

Employee Expenses

One of the largest expenses for companies around the world is the cost of labor, or the amount it costs them to have employees. When budgeting for employees, you need to be realistic in what you are requiring of each employee when estimating the wage that the employee will require. In addition to an employee’s salary, don’t forget about employee benefits. Underestimating the cost of an employee can cost you thousands in unplanned expenses.

Administrative Costs

An often-overlooked expense is the administrative cost of operating the business. Here, you need to budget for accounting costs, payroll costs if you intend to have employees, and information technology costs. Additionally, some may include the costs of operating a website as an administrative cost, although others may budget their website as a marketing expense.

As you can see, there are numerous costs common to start-ups that need to be addressed in the business plan. If you need assistance with starting your business, we can help! Call us today!

An Overview of Foundational Corporate Documents

There are a number of steps to form a corporation, including selecting a name, obtaining the necessary licenses and permits, paying certain fees, and filing foundational documents with the appropriate state agency. While an attorney can help prepare and file the required papers, the owners, officers and directors should have a basic understanding of these documents.

Articles of Incorporation

The first underlying document is the Articles of Incorporation, which states the corporate name, business address, registered agent and purpose of the business. This is typically, but not always, a generic statement that the corporation will conduct any lawful business in the state in accordance with its objectives.  In addition, the type and amount of authorized stock that will be issued (common or preferred) must be established. This document should also contain an authorization for the corporation to indemnify its officers and directors.

Corporate Bylaws

Bylaws are the formal rules regarding the internal operations of a corporation. This document outlines the corporate structure and establishes the rights and powers of the shareholders, officers and directors. Bylaws specify how officers and directors are nominated and elected, as well as their responsibilities. In addition, this document should clarify how disputes among the parties will be resolved. Bylaws establish where and when shareholder and director meetings will be held, whether quarterly, annually or at other times, what constitutes a quorum, as well as number of directors on the board of directors, voting, and proxy rules. This document should also contain information on the issuance of shares of stock and other operational details.

Meeting Minutes

After corporate existence is commenced, an initial organizational meeting of the principals must be held in order to adopt the bylaws, elect directors, issue stock, authorized banking powers, and to conduct any other business. All of these activities must be memorialized in meeting minutes, which must also be prepared during any subsequent meetings.

Stock Certificates

Stock certificates are the record of any stock in the corporation that was issued to the stockholders. These certificates are the record of ownership of the corporation.

Once these foundational documents are in place, a corporation is also required to keep complete and accurate books and records of account and must maintain a record containing the names and addresses of all shareholders.

Incorporating is a complicated process and one that requires careful analysis and consideration.  An experienced business law attorney at Schneiders & Associates can help you prepare and file the necessary foundational documents for your corporation.

By: Elana Cuzzo, Esq.

Should I Incorporate My Business?

By: Theodore Schneider, Esq.

The primary advantages of operating as a corporation are liability protection and potential tax savings. Like any important decision, choosing whether to incorporate involves weighing the pros and cons of the various business structures and requires careful research.

Once incorporated, the business becomes a separate legal entity, and assets of the corporation are separated from the owner’s personal finances. As a result, the owner’s personal assets (house, cars, savings, investments), generally can be shielded from creditors of the business.

However, to maintain this legal separation and avoid a creditor “piercing the corporate veil,” the corporation must observe certain formalities, including:

  • Keeping corporate assets and personal assets separate (no commingling of funds);
  • Holding shareholder and director meetings at least annually;
  • Maintaining a corporate record book including bylaws, minutes of shareholder and director meetings and shareholder records;
  • Filing annual information statements with the Secretary of State; and
  • Filing a separate tax return for the corporation.

Failing to observe these corporate formalities could result in personal liability for the owner. Having the corporation formed and maintained by an experienced business attorney will help to ensure that the corporation is properly formed and maintained so the benefits of incorporating are not lost.

Many business owners are concerned about “double taxation” of income that affects certain types of corporations known as “C-Corporations.”   Double taxation results when the C-corporation has profit at the end of the year that is distributed to the shareholders. That profit is taxed to the corporation, at the corporate tax rate, and then the dividends are taxable income to the shareholders on their personal tax returns. However, the corporate tax and dividend rates can be lower than the individual tax rate that a sole-proprietor would pay on a 1040 Schedule C, and a knowledgeable accountant or tax attorney may be able to advise on how to minimize the burden of double-taxation and indeed pay an effective tax rate which is lower than what a sole proprietor would pay.

For example, a small C-Corporation will likely have a shareholder who is also an employee. Paychecks to the shareholder-employee are, of course, tax deductible to the business. To the shareholder-employee, they are taxable income (as would be the case with a paycheck from any employer). A bonus could be paid to the shareholder-employee in order to lower the corporation’s taxable profit, eliminating the double-taxation. These calculations should be performed by a tax advisor, but shifting income from the corporation to the shareholder-employee (or not, depending on which has the lower tax rate) can be an effective way to lower your overall tax liability. In addition, there are certain advantages that are only available with a C-Corporation. Of course, if the shareholder decides to sell the business, the double-taxation will be a significant deterrent to structuring the sale as a stock sale.

The S-Corporation avoids the double-taxation by offering a tax structure similar to the Limited Liability Company. A corporation with 100 or fewer shareholders, all of whom are United States residents, can elect to be treated as an S-Corporation. If the corporation is profitable, the shareholder-employee must draw a reasonable salary (and pay employment tax on it), but then all remaining corporate profits flow through to the shareholder’s personal tax return (thereby avoiding the FICA tax on the portion of profits that is taken as a distribution).

An experienced business attorney at Schneiders & Associates can help you decide which form of ownership is best for your business, help you establish the entity, and ensure the required formalities are observed. Please contact one of our attorneys with any questions about entity selection and formation.

Oral Contracts & The Statute of Frauds- Is The Agreement Binding?

By Ted Schneider, Esq.

There is a widespread misconception that verbal contracts are unenforceable.  A contract made orally with another party, without embodying the particular terms in a signed writing, can still be valid and binding. However, without a signed writing, any disagreement between the parties concerning the deal terms will create multiple problems for both parties. In order for a court to enforce a verbal contract, each party will have to try to prove its version of the terms of the deal, and that there was in fact a meeting of the minds of the parties. This could involve pricey litigation and an extensive discovery process. Therefore, it is advisable to have an attorney draft any contractual agreement.

Moreover, according to the Statute of Frauds, there are certain contracts that must be in writing in order to be legally binding. This includes: (i) contracts for the sale of land or real estate, (ii) surety agreements (in which one person guarantees to take over another’s contractual obligations), and (iii) agreements that cannot be performed within one year. Other agreements that must be written to be legally binding include agreements “made in the consideration of marriage,” and those made for the sale of goods valued at $500 or more. If the requirements for contractual validity are not met, either party runs the risk of the other party rescinding the contract by declaring it void.

In an effort to prevent deception and fraud, the Statute of Frauds requires specific written terms for a contract to be valid. The Statute of Frauds requires the document to include a description of the “subject matter” of the agreement, the primary conditions of the deal, and the signatures of the parties. These requirements may vary with the sale of goods under the Uniform Commercial Code, where a signature only by the “party to be charged” (rather than both parties) may be sufficient. For a sale of goods, the terms should include the price and quantity of the goods to ensure the contract will be enforced.

Often, even if the contract is unenforceable under the Statute of Frauds, it may be saved if one party suffered damage or cost by relying on the oral contract (i.e., the verbal promises made by the other party), and if the injured party can prove this reliance in court. Likewise, an exception may exist if “specially manufactured goods” were provided under the contract or one party “partially performed” what was required by the agreement. The outcome may also vary if two merchants were the contracting parties, rather than a business and a consumer.

Seek advice from an experienced business law and contract attorney at Schneiders & Associates, LLP to draft your agreements to ensure they are legally enforceable, or to have one our attorneys evaluate a verbal agreement that you may be trying to enforce.

Forming an LLC to Purchase Real Estate

By: Ted Schneider, Esq.

Ownership of real property is a risky business. There are many ways in which users of real property can become injured, from tenants falling down stairs, injuries from construction equipment, or even an entire building collapsing from natural forces or faulty construction. Landowners often become defendants in lawsuits claiming damages from the use of their property.

Because of the inherent risks of owning real property, owners limit that risk by holding property in entities, such as LLCs, rather than their personal names. In this article, we will focus our attention on these critical considerations:

  • Entity selection strategies
  • Minimizing risk
  • Critical tax considerations based on choice of entity


Series LLC, Single member LLC, S-Corp, or C-Corp?

Series LLCs: Although series LLCs are flexible and hold promise, they have not yet been widely used in real estate transactions. Series LLC’s cannot be formed in California, but California recognizes series LLC’s formed in other states (e.g., Delaware).  However, California treats each unit of a master LLC as a separate entity for filing and tax purposes, essentially eliminating the utility of a series LLC in California. There are also uncertainties as to how series LLCs will be treated under federal tax law, questions about how bankruptcy courts will treat bankruptcy of one series of a series LLC, and how to protect security interests.

Single Member LLCs: Single member LLCs are often used for wholly owned subsidiaries. They have pass-through taxation, yet are treated as separate entities for liability purposes.

The primary concerns of an owner in structuring an LLC to purchase real estate include (a) creating the LLC in a jurisdiction that has the right balance of legal protection and accessibility; (b) choosing a management structure that provides fairness, protection, and expertise; and (C) documenting membership interests in ways that minimize asset protection and tax concerns.

Although the single member LLC, properly formed and managed, protects the owner from liability arising out of a claim related to the real estate owned by the LLC, in many jurisdictions, including California, an owner’s membership interest in the single member LLC will be subject to attachment by creditors for liabilities of the owner arising outside the property owned by the LLC.  For example, if the owner is subject to a large monetary judgment for a business-dealing unrelated to the real estate in the LLC, the judgment creditor can take the membership interest (and the property owned by the LLC) in satisfaction of the judgment.  This result is avoided in multi-member LLC’s.  Further, some states still shield an owner of a single member LLC from that type of liability, and consultation with a legal advisor on that topic is recommended.

In addition, if an individual owns multiple properties, it is advisable to form separate LLC’s to hold each piece of property, to prevent cross-collateralization, or putting all of the real estate at risk from a claim arising out of only one of the properties.

Corporations: Corporations may be either “C” corporations or “S” corporations. Corporations are not used for real estate investments as frequently as LLCs, because of LLCs’ preferable tax characteristics. However, there are a number of situations in which corporations do hold real property, such as part of a portfolio of assets, including equipment, inventory, and other assets of an ongoing business operation, which assets are not as negatively affected by being held in a corporation. However, if the only asset to be held by the entity is real estate, a corporation is not the recommended vehicle.


In addition to forming an LLC as a basic form of protection, owners can increase that protection by using single purpose entities, seeking limitations on guarantees, considering use of a particular state’s law, purchasing adequate insurance, and carefully drafting the operating agreement.

An experienced business attorney at Schneiders & Associates, LLP can provide advice and assistance regarding the best practices mentioned above for minimizing risks.


Partnerships (and LLC’s taxed as partnerships) and S corporations have pass-through taxation, which means that tax is assessed on the member, partner, or shareholder obtaining income, rather than on the entity itself. By contrast, C corporations are taxed first at the entity level and then, a second time, at the shareholder level. LLCs can elect to be taxed as corporations, but when holding real estate, an LLC should elect to be taxed as a partnership.

An S corporation must divide profits according to share ownership. By contrast, an LLC can divide profits in any way it chooses. Part of the flexibility of partnerships (including LLCs taxed as partnerships) is that they can set up different classes of owners with different benefits.

Members of an LLC may be able to deduct business losses on their individual income tax returns, which is a benefit of LLCs taxed as partnerships. However, deduction of losses is subject to various tax restrictions, such as risk of loss rules and passive loss limitations.

LLCs usually can be converted to other types of entities without tax consequences, in contrast to conversion of corporations.

In California, LLC’s are subject to a $800 franchise tax each year, just like a partnership or corporation.  However, LLC’s are also subject to an additional tax called a gross receipts tax.  This tax is calculated based upon the LLC’s annual gross revenues, and can be as much as $11,790 per year.

Forming an LLC to Purchase Real Estate is an expansive topic with many important considerations. While this article highlights critical considerations, this list is not exhaustive. For more information on forming an LLC to purchase real estate, contact an experienced business attorney at Schneiders & Associates, L.L.P.

Common Lawsuits Brought Against Small Businesses

By Ted Schneider, Esq.

It is impossible to predict every lawsuit that a small business might possibly face. There is nothing to prevent angry vendors, entitled customers, or disgruntled employees from filing a lawsuit, even if there is no legitimate basis for it. The more a business owner delegates responsibilities to employees, the greater the risk that an employee makes a mistake and exposes the business to a lawsuit. Even the most vigilant, hands on business owner could make a mistake that can lead to a complaint filed against the business.

The most common lawsuits brought against businesses are brought by employees – typically discrimination, wrongful termination suits or claims for wage and hour violation. The impetus for such a suit can be anything from a fired employee feeling slighted to an employee being demoted or passed over for an advancement opportunity. If the employee or candidate believes that the action was taken for a reason related to race, gender, religion, sexual orientation, gender identity, or another protected classification, that employee might file a lawsuit. It is important to document any sort of negative or positive behaviors at work, so that if an employee does complain of discrimination, the court can see the employee’s work history and the real reason why he or she may have been terminated or passed over for a promotion. Disparaging remarks made about any of these protected classes have no business in a work place as they can create a hostile work environment and lead to lawsuits as well. In the event that an employer is faced with a lawsuit, or threat of a lawsuit by an employee or former employee, it is advisable that the employer seek counsel immediately from a knowledgeable attorney experienced in employment law and employment litigation.

Other common lawsuits brought against businesses concern overtime pay. Many employers deny their employees overtime pay in the interest of saving money, often through misclassifying the employee as “exempt” and paying the employee on a salary basis. This can be significantly more expensive in the long run because, if an employee sues, he or she may be entitled to back pay (potentially up to four years), penalties, and applicable attorneys’ fees. It is a good idea to discuss the new federal overtime rules with an experienced employment law attorney and to have contracts or offer letters clearly establishing the relationship between an employer and an employee to minimize confusion. Working with an experienced attorney is the best solution for drafting these agreements and avoiding these types of lawsuits.

It also makes sense to put agreements with vendors and customers in writing. The contracts should include a general description of the work to be performed, a list of any items to be delivered, a project schedule with deadlines, the fee, and the circumstances under which additional fees might be charged, warranties included with the work, indemnification, how long the contract lasts, how it can be terminated, and how disputes will be resolved.

Personal injury lawsuits against businesses are also common. In addition to keeping a place of business in safe condition, it is important that employees are properly classified as employees or independent contractors, and that the business carries the correct worker’s compensation insurance. Most states require employers to carry insurance in case of a workplace injury. Additionally, employees who are injured at work are usually precluded from suing their employer and are instead referred to worker’s compensation courts; however, an employer may be responsible for an injury and associated damages of an employee that has been misclassified as an independent contractor, and therefore no workers’ compensation insurance coverage was in place for the employee.

The attorneys at Schneiders & Associates L.L.P. are well versed in the areas of employment law, contracts, and litigation. For more information on any of the above, please contact us at,, or 805-764-6370.