California Business Lawyer

2003-05-13T17:46:00.001-07:00

Dissolution
Checklist: Dissolution and Winding Up
Businesses faced with persistent disagreement, negative business results, or simple disinterest may dissolve according to state law. Most states provide a variety of dissolution forms for different types of business interests. The proper procedure depends on the time and reason for the dissolution. In some instances, laws may prevent dissolution, and businesses must seek other solutions.

Dissolution before commencement of business involves a simple procedure that dissolves a new business before it opens its doors. The incorporators or the original board of directors can file a notice of dissolution to end the business before it even begins.

Dissolution by shareholder consent occurs when all shareholders agree to wrap up business. Many states allow this type of procedure as long as a plan is made to protect creditor interests. Other laws require that the board take action to effectuate the dissolution in addition to the shareholder's decision. This type of dissolution is most common among closely held businesses.

Example: Elaine's Embroidered Epaulets, Inc. is losing money since the bottom fell out of the embroidered epaulet market. Although the company has no debt at this point, the shareholders do not want to risk any further financial losses. At a shareholder meeting, everyone agrees that the company should throw in the towel. After a subsequent board resolution required by state law, the business dissolves.

Regular dissolution means that the board of directors approves the dissolution and a specified portion of the shareholders votes for the action. The applicable law may require a simple majority of the shareholders, or a larger percentage. This form parallels the procedure required for most corporate changes, such as acquisitions.

Involuntary dissolution may occur when dissension and deadlock persist and no buy-out agreement can be reached. Shareholders can bring a dissolution petition to court for a judicial decree dissolving the company. The petitioner must show that legal grounds exist to dissolve the business, including illegal, oppressive, or fraudulent action by the board; threatened or actual irreparable harm to the business; detriment to the shareholders; and misapplication or waste of corporate resources.

States may not allow dissolution if the action is unfair to minority shareholders. If majority shareholders freeze out the minority interests from the dissolution decision, courts may strike down the action. Legal standards on this issue vary widely from state to state.

After the dissolution decision is made, state law may require a filing of notice of intent to dissolve, and may mandate a period for settlement of corporate affairs. Creditors must receive notice of the impending action so that they may press their outstanding claims prior to the close of business. After any wind-up period and satisfaction of creditor and tax obligations, the company files final articles of dissolution with the state. Some states allow for an expedited procedure requiring only the final articles.

Legally, the corporation may continue for a specified period to deal with predissolution claims. Creditors with unsatisfied debts, customers injured by defective products, or employees with residual disputes may bring actions against the legal shell of the corporation during this time. All claims must be made before statutory time limits run, so parties with disputes against dissolved businesses should seek legal assistance immediately.

2003-05-13T17:46:00.000-07:00

Closely Held Businesses
Form: Choosing a Business Form
As entrepreneurship expands, closely held businesses comprise an increasing proportion of the business community. Closely held businesses (or close corporations) are companies with few shareholders. Since there are so few shareholders, the principal holders usually exert management prerogatives over the company. As a result, closely held businesses experience special management challenges because of the tighter relationship among the shareholders.

Majority shareholders of closely held businesses possess a large degree of power over the corporation. These shareholders usually name the board of directors and management, or even choose employees. They may personally assume the direction and management of a close corporation. Because minority shareholders' interests may not receive adequate representation in such an environment, special business planning may address the rights of these shareholders to ensure their continued participation.

While state laws require corporations to comply with formal record keeping and procedural requirements in order to keep their limited liability status, shareholders of closely held businesses often act more informally. In recognition of this tendency, some states provide legal exemptions from some corporate requirements. Many states allow closely held businesses to eliminate or modify their boards of directors through their articles of incorporation. If a board of directors is not used, the shareholders will manage the company's business directly. Other state laws provide for variations in the usual director responsibilities.

Example: Denise and Chris each own half the shares of a landscaping business. Unfortunately, they cannot agree on many important issues, and their two-member board of directors experiences frequent deadlocks. As their state's law allows, Denise and Chris agree that the company's general manager, Val, will act as a director when stalemates occur. Val casts the deciding vote in such instances, allowing the company's business to move forward.

Some states give businesses the option of operating in the much the same manner as partnerships by becoming statutory close corporations. Partnerships enjoy easier business succession, freer decision-making procedures, and fewer formal requirements. If a closely held business makes this election, its individual directors can bind the entire organization. This freedom could reduce deadlocks, but many lawyers fear this personal decision-making could reduce legal protections for directors. Since not every state uses this option, businesses should seek legal advice concerning the specific options available in their states.

While some closely held businesses operate more flexibly than corporations with many shareholders, this freedom may create legal difficulties for the business and its shareholders. Where state law does not allow closely held businesses less formality in their procedures, the tendency of these companies to forget statutory requirements can lead to personal liabilities for the individual directors on contracts and other business obligations. On a practical level, the informality of closely held businesses can encourage dissension and deadlock among directors. In some cases, corporate dissolution may be the only way to resolve persistent disagreements. An experienced business lawyer can craft a business plan to address these issues.

2003-05-13T17:45:00.001-07:00

Formation & Business Planning
The array of possible business forms can dazzle entrepreneurs. Each type of business organization carries complicated legal and taxation decisions that can affect the entity and its owners far into the future. New businesses must consider start-up expenses, the complexity of the possible business forms, personal liability issues, tax consequences, and the continuing legal burden imposed by statutes and regulations. Most businesses choose from among the following forms:

Sole proprietorships combine ownership and management in one person. The owner receives business profits (and losses) directly, with income taxed on the owner's personal return and not at the business level. Sole proprietors hold complete and personal liability for business obligations. While this form requires no statutory establishment (owners can just start business at any time), they must obtain any needed licenses and obey employment laws.

Partnerships involve two or more owners operating a business for profit. As with a sole proprietorship, the partners generally hold personal liability for business obligations, but receive profits directly from the business as income. This tax advantage makes partnerships very attractive to some businesspeople. Some legal modifications to the partnership form allow for some limitation of liability if statutory requirements are met.

Corporations become separate legal entities upon formation. As such, corporations assume liability for their own obligations, thereby insulating the owners, directors, and officers of the business from personal responsibility. Additionally, corporations can sell ownership interests, or shares, in the company to raise capital. Despite these benefits, the tax treatment of a corporation can cause financial obstacles. The corporation files its own tax return and pays taxes on profits before it pays dividends to shareholders. Shareholders then must pay taxes on the dividends on their personal income tax returns. Some tax rules moderate this double taxation effect in some cases. Corporations may range in size from large, publicly held conglomerates to small closely held businesses involving family members as shareholders.

Limited liability companies and limited liability partnerships pose two popular options for new businesses. These organizations combine some tax benefits of partnerships with aspects of corporate limited liability. While this mixture is compelling, limited liability businesses must comply with specific ownership and termination requirements, and may not realize the full extent of either the tax or liability advantages.

2003-05-13T17:45:00.000-07:00

Computer Law
Checklist: Protecting Trade Secrets
Computer law consists of the law of several different areas, as applied to computers and computer use. Because of the complexity and fast changing aspects of computer law, a lawyer can help a businessperson sort out what law applies and how to protect a business's software and hardware.

Much of computer law is intellectual property law, the law concerning human creative works and inventions. A person or business that creates computer hardware or software can protect his or her creation by using the intellectual property tools of trade secrets, copyright, patents, and trademarks.

A trade secret is information that has commercial value that is kept secret by the owner of the information. Computer software is eligible for trade secret protection. Trade secrets are protected from use by unauthorized persons as long as they remain secrets. An employer can use various methods to keep employees from disclosing trade secrets, such as having employees sign confidentiality agreements. Once software is sold, however, knowledgeable users of the software may discover its secrets. This type of "reverse engineering" generally does not violate trade secret laws, but software creators can sell their software with restrictions to prevent it. For example, the software may be sold with a license agreement that grants the licensee only limited rights to use the software, or with a prohibition on resale or distribution of the software, or with confidentiality notices on the packaging and screen displays.

Computer software also can be copyrighted if it is original, creative work. Exactly which aspects of software are copyrightable is being worked out in the federal courts. Copyright protection arises automatically; it is not necessary for a software developer to register the software with the government. Under copyright law, the copyright owner has the exclusive right to produce or copy the software, but federal copyright law allows users of software to make backup copies of software as long as the copies are destroyed when the software itself is sold. Some computer databases can be copyrighted, if their contents are organized with sufficient originality. An alphabetical telephone number listing cannot be copyrighted because it is just a list of factual information. However, a database that consists of a mailing list, which is also factual information, may qualify for copyright protection if organized so that mailings can be made according to specific criteria, such as zip code or personal income.

Most inventions involving computer programs are patentable. A patent applies to a new, useful, and nonobvious invention, and often applies to a machine or process. Ideas and laws of nature are not patentable, so software originally could not be patented. The courts have been expanding software patents, however, particularly if the software controls a physical device. Obtaining a patent can be a time-consuming process however, and because the rate of change of software is so fast, many software designers do not bother with patenting their inventions.

Trademark applies to the names that identify computer software and hardware, such as Apple and Microsoft.

Computer crime has developed with the expanding use of computers. All stages of computer operations are susceptible to criminal activity, either as the target of the crime or as the instrument of the crime, or both. People who gain unauthorized access to computer systems can steal intellectual property, sabotage computer systems, or spy on people's financial records, email, or other data. Criminals can commit fraud by manipulating information in computers, such as financial and employment records. Information stored in computerized documents can be altered, which is forgery. Forgery also can be accomplished using a computer and a printer.

Computer viruses and worms have proliferated, in some cases causing expensive problems, for some businesses and individuals. A virus is a series of program codes that can attach itself to legitimate programs and propagate itself into other computer programs. Viruses can be used to display harmless messages or can irreversibly destroy data on a computer system. Viruses often are transmitted to computers via E-mail or attachments to E-mail, particularly exploiting scripting vulnerabilities in mail browsers such as Outlook. Internet users can usually delete messages or attachments from unknown senders as a way to decrease the risk of infecting their computers.