Choosing the Right Business Entity for You

As an entrepreneur, you understand the merits of your business better than anybody. You’ve decided the next step to growing your business is to structure your business as a Limited Liability Company, Limited Liability Partnership, C Corporation, or S Corporation, but you aren’t sure which entity type is best suited for your particular business. What type of business entity should you form? This is an important decision that invokes a variety of nuanced decisions and must be specifically tailored to your situation. While an in-depth analysis is vital to such a determination, we discuss an overview of the business entity types.

Corporations

Corporations are incorporated businesses that must have at least one shareholder and offer limited liability protection. They have shareholders, officers and directors. Shareholders are the owners of the company and elect the board of directors. The board of directors oversees and directs corporate affairs and decision-making. The directors elect officers to manage daily business affairs. Corporations are presumed to be for-profit entities, and as such, they may have an unlimited number of years with losses. Corporations are subject to internal and external corporate formalities and obligations, including the adoption of bylaws, filing annual reports, paying annual fees, stock issuance, and holding shareholder and director meetings. There are two types of corporations generally considered by entrepreneurs.

i. S Corporations

S corporations must have at least one, and no more than 100, shareholders. S corporations are “pass-through” entities, whereby profits and losses are passed through the business and taxed at the shareholder level. S corporations are limited to only one class of stock issuance. Only U.S. citizens and resident aliens may be shareholders of S corporations and S corporations cannot be owned by other S corporations, LLCs, C Corporations, partnerships or many trusts.  But what is the difference between a S Corporation and a C Corporation?

ii. C Corporations

C corporations may be subject to double-taxation: at the corporate level and at the shareholder level. C corporations have far fewer ownership restrictions, as they do not restrict shareholder numerosity, the type/identity of shareholder, or classes of stock. Consequently, C corporations provide increased flexibility when starting a business if you plan to grow, expand ownership, wish to have institutional or foreign investors or sell your company down the road.

Limited Liability Companies

A limited liability company (LLC) is a flexible business entity enabled by state statute that merges the limited liability elements of a corporation with the tax efficiencies and operational flexibility of a partnership. Members of a limited liability company are given the same advantage of limited liability as shareholders in a corporation. LLCs are pass-through entities and therefore are not taxed as a separate business entity. LLC members are the owners of the LLC as much as shareholders are the owners of a corporation. LLCs may offer more flexibility than corporations in terms of how the management of the business is structured and may be dealt with contractually through an operating agreement. You may choose from two possible management structures.

You can choose to have a member-managed LLC where all the members participate in running the business, or you can have a manager-managed LLC where on designated members, or certain non-members (or a combination of the two) are given the responsibility to run the business. In a manager-managed LLC, the other members are passive investors who are not involved in business operations. Unlike corporations, LLCs do not face strict ongoing meeting and documentation requirements as these can be modified. LLCs may have unlimited number of shares and multiple classes of stock; however, there are stringent limitations and requirements on the sale of stock. On January 1, 2014, California’s Beverly-Killea Limited Liability Company Act was superseded by the California Revised Uniform Limited Liability Company Act (New Act) and includes substantive changes that you should review if you are considering forming a California LLC or if you are a member of a California LLC.

Limited Liability Partnerships

A limited liability partnership (LLP) provides limited liability protection to partners for certain partnership liabilities. Liability protection is state specific. Many states only provide protection to tort claims and do not extend protection to a partner’s own negligence or for the partner’s involvement in supervising wrongful conduct. Other states provide broader protection to partners, including protection against contractual protection claims brought by a partnership’s creditors. LLPs are particularly well-suited to professional groups. In fact, certain states restrict this business form to certain professionals. LLPs generally protect each partner from the debts against the partnership arising from professional malpractice lawsuits against another partner. Partners are liable for filing personal income taxes and the partnership itself is not responsible for paying taxes. The credits and deductions of a LLP are passed through to partners to file on their individual tax returns.

Determining the structure that best suits your business’s needs is a complicated and important one. Many components comprise reaching a final decision. A seasoned attorney can be extremely useful throughout this process. To contact an attorney in San Francisco you may use this contact form here.

* The information contained herein does not constitute legal advice or establish the existence of an attorney-client relationship.

In the last few years, parties seeking to enforce patent rights through litigation are increasingly faced with counterclaims for patent misuse or violations of Sherman Act anti-trust laws. Defendants essentially argue that the plaintiff inequitably attempted to extend the licensor’s patent monopoly. If Defendants are successful, then all of plaintiff’s asserted licenses and patents may be unenforceable.

However, the law is rather unsettled and often unclear as to which and how licensing terms violate the Sherman Act or otherwise constitutes misuse. As a result, parties seeking to enforce patent rights face great costs and risks in responding to such counterclaims, which greatly complicate litigation and enforcement. Sherman Act antitrust violations turn an infringement action into a complex antitrust dispute as well.

The issue commonly arises when a licensor conditions the license of intellectual property on the purchase of other goods or services. Software companies that provide software services often desire to have licensees use the company’s own products. Companies that overstep their boundaries may lead to allegations of patent misuse, which may include mandatory package licenses, grant-back clauses, covenants not to contest a licensor’s patents, etc.

Antitrust claims can limit patent owners and licensors from enforcement, and attempts to enforce invalid patents may result in antitrust liability. Accordingly, licensors and businesses must take care to purge any anti-competitive practices or risk antitrust liability or allegations of patent misuse.

Buying a business is a complicated process, and often times, the business purchase agreements are presented by brokers and designed to protect the broker. Parties themselves must take great care in scrutinizing not just the transaction itself, but also the business purchase agreement. Starting with the big picture, parties need to look at the agreement itself to make sure it matches up with expectations. Parties should not “assume that the agreement is standard” or contains the basics.

Buyers should make the purchase contingent upon a careful investigation of all aspects of the business. Buyers need to think carefully about not just the financial records, assets, and monetary aspects, but other issues such as whether the seller is the actual owner, whether any liens or judgments exist, pending disputes and litigation, business licenses and transferability, compliance with ADA, and existence of warranties. All of these issues need to be investigated and properly addressed in the agreement if necessary.

The parties should also investigate all assets relating to the business. This includes all tangible property as well as intellectual property such as trademarks, trade secrets, business plans, customer/client lists, and domain names for any websites. Such assets should similarly be addressed in the agreement.

The buyers will also want to pay attention to how the sale itself will proceed logistically. Transfers of some of the assets above may be simple, but sometimes additional agreements may be needed such as for an assignment agreement to transfer intellectual property. Other transfers, such as lease transfers, credit cards, or log-in information,  may be more complex.

These are only some of the numerous issues that come up in the purchase and sale of a business. Again, it is important that you conduct careful due diligence on all aspects of the business.

 

During the course of a business litigation case, parties are often asked to mediate or consider mediation.  Sometimes, parties consider mediation prior to litigation.  In California, civil mediation is a type of alternate dispute resolution designed to assist parties in resolving their cases without litigation or trial.

Parties may have to mediate by contract, by stipulation, or by order of a judge.  The judge may order mediation if the case is suitable and will often ask if the parties are open to mediation or some other type of alternate dispute resolution.

Upon initiation of mediation, the parties must complete various forms and applications.  The parties will also likely have to pay any mediation fees or deposits.  Afterwards, the parties will usually select a neutral party to act as the mediator.  The parties may use a court-appointed mediator or a private third-party mediator.  Parties may choose to use a court-sponsored mediator due to price, as private third party mediators may be more expensive.  The mediator himself or herself is often a retired judge or attorney.

After a mediator is selected, a mediation time and place is scheduled.  The mediator may send out specific instructions prior to the mediation date.  Every mediator is different, and each may have different rules on continuations, deadlines, settlement, or mediation procedures.

Finally the parties will attend mediation at the scheduled time and place.  Whether the case settles or not, the mediator will usually submit statements describing the events at mediation.  Furthermore, the Court must be notified of settlement or non-settlement.  If the case does not settle, the parties will likely continue to proceed with the case and go to trial if necessary.

For more information regarding mediation in San Francisco, you can check out the Court’s alternative dispute resolution package here.

 

The United States Supreme Court, in a unanimous decision written by Justice Thomas, found that you pretty much cannot patent genes.  More specifically, merely separating out naturally occurring DNA is not patentable, but synthetically made (i.e. complementary DNA or cDNA) could be patented.  This makes sense, as there has been a long standing rule against patents on naturally occurring things, laws of nature, and natural phenomenon.

The ruling is summarized by Justice Thomas as follows: 

“[W]e hold that a naturally occurring DNA segment is a product of nature and not patent eligible merely because it has been isolated, but that cDNA is patent eligible because it is not naturally occurring.”

The patent at issue involved genes (called BRCA1 and BRCA2) isolated by Myriad Genetics.  The genes were involving mutations which indicate a high likelihood of developing breast cancer. Myriad Genetis apparently conducted significant research and developed an expensive set of tests to find those mutations and argued that others companies testing for the same breast cancer genes would violate Myriad Genetics’ patents.  However, the Supreme Court rejected their arguments, noting that “[g]roundbreaking, innovative, or even brilliant discovery does not by itself satisfy the §101 inquiry [for whether something can be patented].”  Discoveries are generally not inventions, and cannot be patented.

The Supreme Court wrote:

“It is undisputed that Myriad did not create or alter any of the genetic information encoded in the BRCA1 and BRCA2 genes. The location and order of the nucleotides existed in nature before Myriad found them. Nor did Myriad create or alter the genetic structure of DNA. Instead, Myriad’s principal contribution was uncovering the precise location and genetic sequence of the BRCA1 and BRCA2 genes within chromosomes 17 and 13. The question is whether this renders the genes patentable.”

This landmark case will invalidate a large number of gene patents, especially considering that the US Patent Office has routinely granted gene patents for the last several years.  Many, like Myriad, believe that such a ruling stymies research and may destroy the biotechnology fields.  After all, a good chunk of one’s patent portfolio may  now be considered void.  On the other hand, some companies may be able to do more exploration on genes without fear of patent infringement suits.

The state of California requires franchise registration from prospective franchisors, as well as compliance with a host of other California franchise laws.  The franchise registration involves the submission of a series of documents including but not limited to the application, the franchise disclosure documents, financial statements, certification page, sales agent disclosures, and the registration fee.

The financial statements must demonstrate that there is sufficient capital to meet various obligations.  In other words, you cannot rely on franchise fees to meet initial obligations.  The rules are to prevent large corporations from taking advantage of smaller potential franchisees, or developing some type of unfair pyramid scheme.  For more information, see here. Failure to register and file the disclosure documents may result in significant liability.

Keep in mind that the registration normally expires 110 days after the date of its next fiscal year.  As such, franchise renewals must be filed every year.  Failure to do so may lead to the franchisor to have to temporarily cease selling franchises in California until a new registration order is issued.

As such, it is important to know your franchise-related renewal filing deadlines (often in April of each year).  Franchisors can start preparing for the renewal early by compiling updated information.  Franchisors can also use the renewal time to implement any changes to their franchise system, if necessary.  In addition, remember that any changes to the disclosure statements or franchise agreements may require changes elsewhere, such as in the franchise promotional materials, manuals, and website advertisements.  As always, it is important to present the renewal application in an easy format for the examiner, so that you can expedite the renewal process.