Category: Business & Corporate

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.

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 tschneider@rstlegal.com.

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

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!

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.

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.