As corporate attorney’s practicing in Orange County, California, specializing in Incorporation & Corporate Records Management for small business corporations, we receive many interesting questions regarding day to day corporate problems. Many of these issues can be avoided, or at least mitigated, with the correct corporate records management and maintenance processes in place.
Here we share a recent specific, but not unusual, example problem experienced by one of our Orange County clients. As is common with many small business corporations, when they originally formed their corporation they decided that they wanted to be 50-50 owners.
When things are going well, this can be a good thing; they are working together and making equal decisions. A problem, however, arose whereby the two shareholders had a significant disagreement. The details of which are not relevant but suffice to say they had very different opinions as to what should occur in their business. They quickly found that they were stuck, at a standoff, and didn’t know what to do to resolve it.
We counseled them that they had four different ways to think about and work through their dilemma.
1. Is there a “Dispute Resolution Agreement” in their Corporate Records?
The first place they needed to look is to see whether or not in their corporate records they had a document called the ‘Dispute Resolution Agreement‘.
The purpose of a dispute resolution agreement is that it will set out a formalized process on how shareholders with equal power will actually work through a situation like this; and it is important to note that, if there is such an agreement in effect, it is those rules that must be followed.
This is an important component ofgood corporate records; disagreements generally can and will occur at some point in most corporations. Having a formal process for managing disagreements and problem resolution can defuse what can otherwise turn into long winded and disruptive disputes.
2. The Corporations Bylaws should have a Framework of How the Corporation will Operate & the Formalization of Meetings
The next place to look will be in the bylaws of the corporation. The bylaws of the corporation are essentially the framework of exactly how operations will run within the corporation. One of the pieces of the framework is how meetings are called and run.
There are two kinds of meetings for the shareholders and board of directors. There is the annual meeting and special meeting. In this case, it will probably be a special meeting. There will be a process set out in the bylaws as to how exactly that meeting should be run in terms of: when notice is given, how much time before the meeting the notice must be given, exactly what the agenda items will be. It is a very good idea, once shareholders get stuck, to formalize the discussion process by exercising the right to call for a special meeting and discussing the particular problem issue.
3. Retain an Outside Third Party Mediator
A third option will be to retain an outside third party mediator. There are companies in most cities that offer dispute resolution services where you bring in an independent third party, such as a retired judge. In the mediation process, the parties explain the matter to the mediator, and it will be the mediator who will formalize the process and assist the shareholders that are stuck in coming to a resolution to the problem that will be mutually satisfactory to both parties.
4. Least Ideal Solution would be to Dissolve the Corporation
Finally, the fourth way to approach the issue would be if the two shareholders could agree to actually dissolve the corporation. The corporation could be dissolved on a vote of a person holding 50% or more of the shares and in this particular case that was the actual scenario. That, of course, is probably the worst of all the solutions. Ideally, one of the other three options we discussed earlier would be the most effective way for the shareholders to move beyond the problem and get back to running their company.
We hope this example is helpful to you. We have also recorded this in video format to help you to think about these processes.
If you have a question, find yourself in a similar situation, or would like help to implement best practice corporation records in your corporation, simply call us at +1 (714) 634-4838 or complete a simple Corporate Records Orange County free trial request form.
Orange County Entrepreneurs should engage with Corporate Lawyers Early
As Orange County California Corporate Attorneys, we would observe that entrepreneurs who are starting a business for the first time often treat it just like a first date; inasmuch as the whole world looks full of promise to them and they feel they can achieve just about anything. After all, what could possibly go wrong?
In those beginning heady days, they feel that they and their new business partners can weather whatever the world throws at them. The difficulties that arise however are the same as with all relationships, there will be problems, no matter how hard they try to avoid them.
If this sounds familiar to you, we would counsel you to think about it this way. It’s how you and your partners prepare for and solve those inevitable problems that count.
One of the most common and basic problems a lot of new startups face is, getting agreements in writing. After all, you get on well with your partners so it can be done later, right? Wrong. Later will be too late.
As most corporate lawyers in Orange County California know from long experience of dealing with the problems, when everything is smooth sailing, is the time to get those incorporation documents in order. As everyone is really enthusiastic about this new business venture, it will be much easier to outline and document each party’s roles and obligations.
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Entrepreneurs think that they just want simple forms to get over hurdles. Where really what they are looking for is ADVICE… When they go to internet providers since there are not usually very many options to choose from They think that the advice is limited to JUST those options, this is often not the case at all – Corporate Attorneys Orange County California
You all know what type of business you are creating, how you want it to grow, what type of funding you need, the percentage of ownership you will each get, etc. Getting these in writing at the beginning of your venture may seem unnecessary and you might feel that you don’t have the time or it will interfere with getting the new venture off the ground. In reality, it has been found that those businesses that make use of a corporate lawyer to get their documentation in order at the beginning have a significantly better probability of succeeding than those that don’t.
Corporate Lawyers Practicing Primarily in Orange County California
We have been supporting small and large business corporations as corporate lawyers practicing primarily in Orange County California for many years and have seen many examples of this play out repeatedly.
No matter how much you all agree now, there will be times when differences of opinion arise along with ambiguity over what was agreed in the beginning. Not only that but having those crucial articles of incorporation and corporate records in place will help you all plan for future events such as changes in the companies principles, buyout clauses, sources of funding, allocation of shares, and even what to do if the company closes its doors forever. Getting these types of things in writing, in the beginning, will save a lot of time, money, and heartache later.
Whether you are a business in Orange County California or any other location in the U.S. you would be smart to learn from other people’s mistakes. Corporate Lawyers are by definition in a unique position to see the common mistakes businesses make and how they could have been avoided, to begin with.
Start your Corporate Records Management Process before Accruing Debt or Even Transacting
These documents should be drawn up as early and as quickly as possible – before you even start transacting business if possible, and definitely before you take on any kind of debt. The longer you leave it and the more the company grows and gains value, the harder it is to make unemotional, logical decisions. It is always better to make decisions regarding finance when everyone is on an equal footing.
Solid Agreements Increase Likelihood of Success – Orange County Corporate Lawyers
Many owners attest to the fact that when they sold their businesses, having solid agreements between the business owners and or founders made the corporate transition much easier. Not only that, but they all attest to the fact that having solid agreements, in the form of corporate or partnership documents in place, improves the day-to-day operation of their companies.
An entrepreneur who uses a lawyer at the very early stages of getting their business started has a much higher likelihood of success in their business than those who do not.
When owners and employees know what is expected of them, what their responsibilities are, and what value of ownership they have, they tend to be not only more loyal but will be more committed to their jobs and work harder. It should also come as no surprise that having clear incorporation documentation in place prevents all sorts of legal disputes such as when there are lower than expected sale proceeds for example. Legal disputes such as this can not only cost you financially but could also cost you through hurt feelings, ruined reputation, and destroyed friendships.
Good Incorporation and Corporate Records Play a Significant Role when Seeking External Funding
One ugly problem that often arises is seeking outside financing. If your incorporation or partnership documents have not been drawn up properly, you may have a significant problem because of trying to get outside funding. Whether through a bank or venture capitalist, without the correct documentation, getting funding will be very difficult. This is because banks and investors always require good, well-drafted incorporation and other foundational documents. This will be even more so if one founder or partner is furnishing a large amount of the upfront capital. If this is the case, it is doubly important that you get a corporate lawyer to review your articles of incorporation.
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When you get to the point of looking to add money into the business, banks and private equity investors always require good, well-drafted incorporation and other foundational documents – Corporate Attorneys Orange County California
Good Corporate Records are in Your Interest – Outside Financing Through Venture Capitalists
If your outside financing is through venture capitalists, for example, they will always want to see that your corporate records and incorporation documents are accurate and complete. Especially, if they want part of your corporation (and they usually do) by being issued shares and becoming a shareholder. This means they become one of the owners. It also means that if your documents are not water-tight, and if the company is eventually sold for instance, you could end up losing your control over the company or even limiting the amount of profit to which you are entitled.
Many companies who go into financial negotiations with third-party finance services firms become vulnerable without the correct corporate documents. These firms are often proficient at making deals that will work to their benefit, not the business owners.
You can of course always acquire an ‘off the shelf’ set of incorporation documents and it will cost around $100 to $200. Conversely, an experienced corporate lawyer’s services will usually start at around $1500. Keep in mind though that these ready-to-go documents are written with a ‘one size fits all’ philosophy which often falls short of doing a good job for the company. There is also the very real possibility that there might be a large loophole through which anyone with a ‘real’ lawyer can exploit. Investing in a good corporate lawyer at the very start of your company will be worth every penny invested.
Another reason to get yourself a good lawyer is the options available to you. Unfortunately, these one size fits all legal documents, and the websites they can be found on, give a very limited view of the corporate legal world. By going to these sites, you are seeing only a very small proportion of the options that are actually available. Corporate lawyers on the other hand are trained in ALL aspects of legal business documents so they will often have options the new business owner didn’t even know existed.
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It normally costs twice as much to fix a problem than it does to prevent the problem. In other words, it will cost far more to fix improperly created incorporation and corporate records than it does to get the documents right from the start – Corporate Attorneys Orange County California
51% of Companies Sidestep Legal Counsel, even though it’s their Biggest Risk
RocketLawyer, the web-based legal services company, did a survey in 2010 in which 1,000 small businesses were asked about the legal services they used. 51% said they had sidestepped looking for legal counsel because of the cost and a staggering 25% said that legal issues were probably the most significant risk their companies had and yet they still avoided getting a ‘real’ lawyer.
Entrepreneurs are usually so busy getting their small business up and running they give no thought to the fact that they may be a big company one day. A number of owners of large businesses have admitted that in the beginning they did it all themselves but have also admitted that every time they have started their business without the assistance of good professional services it always comes back to haunt them.
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You can’t be a CEO, a COO, and a CTO and a lawyer, all at the same time! Legal work is one of the easiest things to outsource for an entrepreneur – Corporate Attorneys Orange County California
One thing entrepreneurs have to keep in mind though is that legal work is one of the easiest things to outsource. You can’t be a CEO, COO, and CTO at the same time as you are trying to be your own lawyer. It’s much smarter to go outside your company and find someone who you can have a legal relationship with and that you can trust, someone from whom you can get good solid advice and with whom you can have confidence.
When you are looking for a lawyer you will find that there are many who are willing to work with entrepreneurs financially. They can negotiate a payment plan for instance and some will even defer billing until your financing is in place. You can always use a standard business organization layout, NDA (non-disclosure agreement), and other standard agreements to save you billable hours.
What do you do if your product or service is actually ‘intellectual property’? If you do not have clear agreements with all the owners and employees as to what constitutes ‘intellectual property’ and who that property actually belongs to, you could end up losing everything you thought you owned, along with your whole business. In this case you want clear ownership agreements and you really need the services of a corporate lawyer to review any and all ownership agreements for intellectual property so as to prevent any disputes. This will also protect the business from violating other people’s rights as well as disputes between the business owners.
Again, there are a number of ways to protect yourself, your company and the other owners. As an example, intellectual property rights could be held in the name of an LLC (limited liability Company) which could be co-owned by all the founders of the business. The property rights could then be leased to the actual operating business that is a C Corporation. This way the C Corporation remains free to do business while the LLC bears the brunt of any claims made against the patents intellectual property.
What about patent applications? This can be covered with employee employment contracts with the addition of a ‘Proprietary Information Agreement’. One excellent way to use this would be to get the new employee to list any and all inventions that were created by them before they joined the company. You then have a very clear picture of what has been invented; and, therefore, what your company owns after the employee joins. If you also throw into the mix of non-disclosure agreements with employees and new business partners, you have a clear indication of where you stand if your patents or intellectual property are threatened.
Incorporation Attorneys are Corporate Lawyers practicing in Orange County California. If you have a question call +1 (714) 634-4838 or complete or complete our simple content form. I have a question for Corporate Lawyers Orange County California, please contact me.
Highly recommended!
Andy Gale & the associates at Gale and Vallance were awesome in setting up the CA Professional Nursing Corp for ARF Admin Solutions. They were very responsive and knowledgeable from the start. Highly recommended!
George
01/01/2023
Business legal services
Gale & Vallance provided excellent business legal services. The firm was professional, prompt and prepared. The entire process of starting a new corporation was easy and affordable. They have my recommendation.
Raj
07/10/2022
Highly Recommend!!!
I met Andrew Gale through a mutual friend several years go. I was so impressed with their business practice that I made it a point to get to know the attorney to expand my own business. Several years later following their advice i am successful with my business endeavors and do not make any decisions unless i consult with them. Not only do they manage my corporations but also literally help 30 of my clients who use their services. Rare gems in the industry. Highly recommend Gale and Vallance.
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Incorporation Attorney
1820 W Orangewood Ave Ste 104a, Orange, CA, United States
This firm is excellent, efficient, reliable, with great valuable expertise and very thorough. Their dedication to providing great work and service is apparent in their kind, supportive, consistent great communication. Including providing consistent updates on new laws and regulations. Working with them and having them on my team, I have the confidence and reassurance that all services provided will be of great assistance and help to the continued positive growth and success of my corporation business along with the maintenance of keeping in compliance with and within federal state laws and regulations.
Hannah K
27/01/2024
A trusted colleague/friend of mine actually referred me to Andy's firm and I'm really grateful!
He and his team were incredibly prompt, informative, helpful, and patient (with inevitable questions that came there way by a new business owner like myself). With all the specificities it takes to create a business, this team was awesome in communicating with me and assisting me with navigating not only the needs to get the ball rolling but also how to keep it rolling and with tips to help with bank accounts and accounting packages (if I were to want to take those routes).
They were also very neutral in providing all the options possible and when I requested advisement or pros/cons, they were able to share these promptly and in a way that helped me choose what was best for me.
I'm glad to have worked with them and will continue to work with them
Courtnie L.
07/11/2023
I am so grateful for Andy Gale and his firm's help in getting my S Corp established. He has great expertise and I feel more at ease knowing everything was set up properly with their assistance!
X
Incorporation Attorney
1820 W Orangewood Ave Ste 104a, Orange, CA, United States
Andy and his team were a pleasure to work with! As an LMFT opening a private practice, I was nervous and felt like I didn't know what I was doing. Andy did a great job at explaining everything step by step. I got off of our kick-off call feeling confident and ready to take the next step to opening a practice! I decided to go with a corporation for my private practice. Andy and his team are thorough and answered all my questions throughout the process. I was surprised how quickly everything was taken care of. They also sent me emails along the way, giving me updates. I will be using them for my yearly legal needs. 10/10 recommend!
Julie Eyssallenne
12/11/2023
Andy and his team of professionals are amazing to work with. Not only are they extremely knowledgeable and professional, but they are also very friendly and easy to work with. They will always be my go-to. I appreciate Andy and his team!
Z D
12/01/2024
I could not be more pleased, and frankly impressed with the expertise, attention to detail, follow-up and professionalism of the whole office staff. Andrew Gale Esq is extremely knowledgeable of his craft. His overall approach to corporation creation and management took any doubt or apprehension I had about the process.
Thank you so much for everything and I look forward to a long relationship with your legal practice.
Zouhair Kevin Daif, FNP, Nursing P. C.