Now What: You’ve Messed Up Corporate Formation

I get quite a few calls from clients that MESSED UP their corporate formation.

  • Owners are afraid of being SUED because their entity is not “formally” set up
  • The State Franchise Tax Board has SUSPENDED the entity
  • NO ONE has been ISSUED any equity (stock if a C corp; units if an LLC)
  • NONE of the owners have a  shareholder agreement (e.g. c corp) or
  •  operating agreement (e.g. LLC)
  • Directors are ONE THE HOOK for anything that GOES WRONG
  • Someone has left the entity and there is NO RIGHT TO REPURCHASE

Some of these problems are EASY FIXES.

  1. Let’s Diagnose YOUR Problem

First – let’s compare notes.  Do you have all of the below?

screenshot-2016-11-14-14-30-18

2) Let’s drill down one more level.

a) DO YOU USE UNANIMOUS WRITTEN CONSENTS in lieu of Annual Meetings of Shareholders or Directors?  √ CHECK

–> (Note: LLC’s use Resolutions.)

b) Do your Unanimous Written Consents (or Resolutions) specify ALL material events to your shareholders or directors? √ CHECK

By material – I mean, that any event or decision or information that a reasonable person would need to make an informed decision.  Are we on the same page?

[the SEC defines materiality as: “to which there is a substantial likelihood that a reasonable investor would attach importance in determining whether to buy or sell the securities registered.”

Practice Tip: Consider being as specific about what you put into these Consents and Resolutions.  They can be used to disclose an entity’s important (ie. material) facts and events and can serve as a chronological record of the decisions made by the entity.

3) What is the status of these documents:

screenshot-2016-11-14-14-31-24

Have ALL shareholder’s executed a stock purchase, shareholder or if an LLC – an operating agreement?

Are there differences in the agreements between these individuals?

If so, is that because some have more or less rights than others?

Fiduciary duties:  In the LLC context, did you limit the duties that one member has to the others or between the manager and any member?

Deadlocks: How do you resolve deadlocks? If there are only two owners and they each own 50% of the equity, how will you resolve a deadlock?

Rights to Repurchase or Buyouts: What triggers the rights? what is the method of valuation? Does one equity holder have the right to force another equity holder to buy them out (ie. they have a put) versus the Company or a member have the right to buy away the equity of another member (ie. an call like option?).

4) Tax Matters: Many suspension and reporting problems come about because the tax preparer, advisor and the Client are not communicating about the following items:

screenshot-2016-11-14-15-37-03

 

IF YOU WOULD LIKE TO GO THRU MY APPROACH TO FORMATION, PLEASE GIVE ME A CALL 310-570-2399.  I offer fixed or flat fee programs for various scenarios. 

 

 

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  1. Pingback: Corporate Formation | Gregory Rutchik

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