Just a heads up. If you’re hoping to get a new corporation started quickly, plan on waiting at least a month, unless you are ready to pay substantial expediting fees.

Due to budget cutbacks, the Secretary of State has closed or consolidated a number of functions and several regional offices. They’ve been forced to close offices in San Francisco, San Diego and Fresno, meaning more documents are filed in the remaining Sacramento and Los Angeles offices.

They’ve also eliminated paid overtime for staff members and the use of temporary staffing to help with the workload especially during heavy filing periods.

So what does this mean for you, the entrepreneur filing your business documents?

Some perspective: in February of this year, we were seeing Articles of Incorporation, counter-filed in Sacramento, being processed in 5-8 business days. The turnaround time in May and June has averaged 28-30 business days. With holidays and weekends, plan for at least a month before your Articles are approved, you can obtain a Federal Employer Identification Number (FEIN) and open your business bank account.

Good news: in recent weeks, the LLC filings (Articles of Organization) have been processing faster, due to a light load on the LLC processing division. LLCs are being formed closer to 2 weeks.

Certificates of Dissolution for corporations and limited liability companies has been longer, but not as long as Articles: 12-15 days.  For Amandments to Articles of Incorporation or Organization (usually for a corporation or LLC name changed), these are also longer than they were last year, but shorted than Articles, also at about two week.

So…don’t wait. Get on it, and get that business of yours rolling. And best of luck building that dream!

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Okay, maybe it’s not as fun as going to the dentist for a root canal, but  if you’ve just created a new company, there are quite a few details that are easy to overlook.

Palius + O’Kelley CPA’s Tony Vallejo and Matthew Burgess and Michael Neville of Formation Solutions, Inc. will be co-hosting a free seminar for people who have a new business.

Make sure that all of your t’s are crossed, and your i’s dotted, with the information and tools these companies will suggest during the seminar, to ensure that you will become an even more successful business owner! The topics that will be covered are as follows:

1) Registering with the proper tax authorities
2) Business entity selection
3) Payroll, sales and income taxes
4) Bookkeeping

The best part about this seminar is that it’s free! That’s right: learn how to run a successful business, network with other business professionals, and take advantage of the Q & A session after the presentation. Having the right information is always beneficial to your success.

Here’s the Scoop:

Time: Monday, May 17th, 5:30pm to 7:00pm
Location: Ramada Inn, 4770 Calle Real, Goleta
RSVP: Please contact Tony Vallejo at Palius + O’Kelley by email: tony [at] pokcpa[dot]com

http://www.sbentrepreneur.com/santa-barbara-events/new-business-owner-dont-miss-this-upcoming-seminar

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Here are questions we hear frequently from our clients:

When I form my corporation, what are “authorized shares,” and how many shares should my corporation authorize?

How are authorized shares different from “issued” shares? How many shares should my new corporation issue?

To help with the idea of how many shares are needed, here’s a little primer on:

1. “authorized” shares
2. “issued” shares

The number of shares authorized, the number issued, and the value of each share are usually determined in a fairly arbitrary manner by the owners when they form the new corporation.

We always recommend that our clients check in with their attorney and accountant if they have questions on what is appropriate for their new corporation. But here is what we see in typical situations.

Authorized Shares

In the Articles of Incorporation, companies typically state the number of shares that are “authorized.” Think of this as a pool of shares that the board has at its disposal and can “issue” (sell) to the founding shareholders and any other shareholders that might buy into the business at a later date.

So you’ll want a number of “authorized” shares that leaves room to sell more shares later on.

A local attorney recently told us she recommends to most of her clients that they authorize one million shares, even if they’re only going to issue a couple hundred. She told us that the number is arbitrary.

We typically see clients “authorize” a number of shares that is roughly 10 times the number they will actually issue to founding shareholders. Then, if par value is required by the state of formation, par value is set to match the contribution (total purchase price) desired.

Issued Shares

Once the company is officially formed with the state, the Board of Directors is named. They then convene a meeting or agree by written consent to take a number of steps, one of which is to “issue” shares to the first shareholders.

These shares are purchased by the founders. The consideration can be cash, intellectual property such as a business plan, equipment, etc. The company needs to determine the value of each share. This number is also often considered arbitrary.

For example, let’s say there are 3 founding shareholders. If they each were contributing $1000 to the startup, and the ownership split was to be even between the three, they might each want to be “issued” 1000 shares, for a total of 3000 shares issued by the Board, with each share being worth $1.

Alternatively, it could be 100 shares each with the value set at $10 per share, or 50 shares at $20 per share…and so on. In the beginning, it’s arbitrary.

But in this example, since they want a little breathing room in case the company wants to sell shares to a 4th person later on, the company “Authorizes” 10,000 shares in its Articles of Incorporation. Or 100,000 or even a million shares. This is an arbitrary number, meant to be sufficiently higher than the 300 needed at the beginning.

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It’s commonly know that real estate investors/owners often form an LLC – Limited Liability Company – or corporation. But it isn’t as well known why agents would want to form an LLC or corporation for their own business.

Real estate investors often form LLCs after purchasing one or more properties. Holding property through an LLC can insulate investors’ personal assets from judgement in lawsuits that might levied against them.

However, it can be just as important for real estate agents to separate their personal assets from their business income as it is for investors.

Why? Because their profession, like most businesses, has elements of risk in its day-to-day operations. Risk that create the need for strategic liability protection and insurance. Forming an LLC can be a smart choice for companies who require liability protection that goes beyond the scope of insurance alone.

Real Estate Risks

Real estate agents engage in a vulnerable line of work. Many clients expect their agent to fill many roles at once – lawyer, CPA, accountant, therapist, and friend. High-pressure environments that involve such intimate relationships are inherently filled with risk, which, if not handled correctly, can lead to lawsuits.

Just as owners might be sued for incidents occurring on their property, so too can real estate agents be sued by their clients.

Agents most commonly get sued for misrepresenting the value of a home or appearing to have breached any agreement made with client or potential buyer, although there are other factors to consider as well.

Routine situations for a real estate agent, such as using their personal vehicle to drive clients to properties, are also potentially hazardous.

Real estate agents typically protect against lawsuits by carrying errors and omissions insurance. This can protect the agent up to a certain point. However, once the insurance limit has been reached, there is nothing further to guard the agent’s personal assets from judgement.

Here’s a sobering list of all the ways you might possibly be sued (http://www.reiclub.com/articles/10-ways-get-sued). It’s not pretty.

Notice that the first item on the list is doing business as a sole proprietor.

If you work as a sole proprietor carrying only errors and omissions insurance, you will be held personally responsible for all debts and lawsuits incurred by the business. Forming a general partnership may leave you even more susceptible to bad debts, even if your partner files for bankruptcy.

Here’s a more cheery list of ways that real estate agents can avoid being sued (http://realtytimes.com/rtpages/20041115_avoidsuit.htm). A lot of the items are just plain old common sense, however one items is definitely of interest:

11. Incorporate.

Real estate agents could also consider becoming a professional corporation or a professional limited liability company. Though this will not keep you from getting sued, it can minimize the effect on your personal finances if you should ever get sued and happen to lose. Additionally, there are tax benefits that can be achieved if you set up a properly structured professional corporation.

This is where an LLC becomes important. An LLC combines the structure of a corporation with the routine of a partnership. Like with a corporation, members of an LLC cannot be held accountable for the company’s debts. Unlike a corporation, LLCs are not required to have strict operational procedures, such as board meetings and minutes. Forming an LLC can get rid of a lot of the headaches associated with other business types.

By transitioning your company to an LLC you will gain the following benefits:

• Extended asset protection
• Flow-Through Taxation
• No Self-Employment Tax
• 100% of paid health insurance premiums eligible for deduction.
• Unlimited members

In addition, doing business as an LLC increases your company’s professional cachet and could lead to an increase in new clientele.

Whether you’ve been working as a sole proprietor or have just started your real estate career, taking steps towards becoming an LLC or corporation could be a sound choice.

Final Word

Articles like this can be helpful on the broad strokes¹. But every situation is unique. To make the right choices, it’s critical that you speak with your accountant and attorney to determine the direction that is best for your individual business.

¹ Sorry, but this is as much for your good as it is for ours. Disclaimer:  Neither Formation Solutions, Inc., nor any of its owners, employees, agents, or affiliates for whom it is responsible provide any legal services, legal representation or legal advice. The information and suggestions contained herein have been developed from sources, including publications and research that are considered and believed to be reliable but cannot be guaranteed insofar as they apply to any particular individual, corporation, or taxpayer.  Moreover, because of the technical nature of this material and the fact that laws and statutes are never static, but ever changing, the assistance of a competent, qualified lawyer or accountant is recommended when implementing these documents.  This material does not constitute legal advice and should not be taken as or used as a substitute for the advice of competent legal counsel. Formation Solutions, Inc. specifically disclaims any liability, loss or risk, personal or otherwise, that is incurred as a consequence of the use and/or application of the information in these documents.

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If you’re planning a 2010 filing for your new corporation, LLC, or nonprofit, NOW is the time to get the filings prepared.

If you wait until after the New Year, your entity formation will likely be put at the bottom of a very large stack. It could take months to form your business.

Formation Solutions is a registered service provider with the California Secretary of State. If we start the process for you now, your documents will be moved to the front of the queue.

If you wish to file your documents on January 1, 2010, the Secretary of State will stamp the documents with a January 1, 2010 file date.

When the Articles of Incorporation (for a corporation) or Articles of Organization (LLC) are sent to the Secretary of State, the state scans the document and holds the name on that document for the specified future file date.

The state will also look over the documents to see if any problems exist. If there are problems with the documents (like the proposed corporation or LLC name is taken or considered to similar to an existing company’s name), they will send the documents back so that the problems can be resolved. We will then return the corrected documents to the state for the specified future file date.

Start the new year off right. Contact us ASAP and we’ll work to have your business ready to launch on January 1!

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What type of business are you?

Seth David, at the QuickBooks Help blog, addresses this question, and discusses how, as a financial accounting consultant, he helps his clients understand the issues and decide which business entity is right for them.

Sole proprietor? Seth says that sole proprietors are much more likely to get audited. When is an LLC the best form? When is it a bad idea. S corp, C corp? How do payroll, deductible expenses, pension contributions and other issues fit into this decision?

It’s a helpful article. And he gives us a little plug, which we can’t say we disapprove of.

What Type of Business Are You?

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What lesson have so many sole proprietors found out…the hard way?

Why is a DBA just not enough to protect yourself and your business?

Many entrepreneurs decide to file a Fictitious Business Name / DBA for their business, and then run it as a sole proprietor, to save a few bucks on forming a corporation or LLC. 

I want to share a story…of an entrepreneur who worked hard, built a decent business, and yet lost it all, just as things were starting to grow.

The real heart-wrenching thing is that it never had to happen…

The story is far too common, but you may never hear it because these failed businesses just fade away quietly, unable to fight back against a situation that didn’t have to be.

It’s a story that I wish I would never hear. But we hear it all too often.
 

I started my business to follow my dream,
and it’s become a nightmare.

I love doing the work I do; it’s my passion. But things have been a little slower lately, and we got a little behind on paying one of our vendors.

They were getting a little testy, so I went over to their offices to talk to them. I explained that we’d make the payments and be caught up by next month.

I was hoping to get a little sympathy/leeway, so I told them how we just bought a condo, and how the mortgage payments were making things a little tighter.

“You understand, right?” He seemed to: “Yeah, tough times all around,” he said.

He wanted to know a little about our business so that they could “feel comfortable” about our promise to pay.

I explained that we have a couple clients that are behind on paying us, but that we’re supposed to get those payments this week.

He asked “Well, what if they don’t pay this week, as planned? Then what?”

So I told him that my father, who’d loaned me the startup money for the business, was going to loan the business a little more. When I get that loan, I told them, I’d be able to send a check, for sure.

We closed up the meeting on a friendly note, talking about our kids’ soccer team, and it seemed like everything was fine.

Then, a couple days later, we’re working in the office and a messenger comes in with an envelope for me. As I opened it, I wasn’t quite sure what it was. It looked like some sort of legal document.

Then suddenly, I understood. It was a lawsuit. Our vendor was suing us. As I grabbed a chair and read through the complaint, I felt like I’d been punched in the gut. They were saying all sorts of nasty things about us.

We owed them less than seven thousand dollars, but his suit was for $76,500!

There was all sorts of legal mumbo jumbo about damages, loss of business, willful this-and-that and who knows what.

I never would have thought this could happen to my business.

But when I flipped back to the front page, the real gut punch came. I read the front page again, and realized that they weren’t suing the business.

They were suing me. Me, personally.

And it got worse. My name wasn’t the only one there. Under my name was my husband’s…and under his name, was my father, and even my mother!

My husband doesn’t have anything to do with the business. (Other than being an awesome, supportive guy, of course.) So how in the world does he get involved in this lawsuit?

And my father and mother…what?!

Well…so I talked with a lawyer. And he talked to the vendor’s lawyers.

He explained to me that they were going after our personal assets to pay for this. Our car, our condo, my parent’s house, whatever they could get their hands on!

I asked him how they could go after our personal assets, since this was a business. He explained that I was a sole proprietor.

I had filed a DBA. But since I never incorporated, there is no protection.

Since this is a marital property state, my husband is being sued also. As far as my Dad: they claimed that since I “disclosed” to them that he’d funded the business, that he was a party to the debt. And my mom got roped in as part of the marital property thing.

Wow. I couldn’t believe what I was hearing. I thought filing the DBA protected us from this kind of thing.

“I’m afraid not,” said the lawyer. “The DBA doesn’t protect you one little bit.”

If we’d formed a corporation or an LLC, then the vendor
could only go after the assets of the business.

“Well geez,” I said, “we’d still have been in a spot. The business doesn’t have that much in assets, so the suit would put us out of business.”

“Well, I’m not so sure about that” said my attorney.
He said we might not have been sued in the first place if we were a corporation.

Seriously? This was getting surreal.

You see, the vendor knew we were a small business, with not much to go after. But when they heard about the condo and my father’s involvement, their lawyers got all bright-eyed and bushy-tailed.

If we were a corporation or LLC, they probably would have worked out a payment plan and made the best of it. But since I was a sole proprietor, they saw an opportunity to go after our personal assets.

This has been a heck of a learning experience. Not really an education I would have wanted, though, that’s for sure. I sure wish I’d found you guys before all this happened.

If you feel that you need the protection of a corporation or LLC, contact us, and we’ll help you get it formed properly.

And although Formation Solutions is here to form your entity–done right at the right price–please know it’s always important to seek the qualified legal advice of an attorney.

We’re not lawyers. We don’t just say that to cover our own hide: we say it because as entrepreneurs, we’ve learned again and again how invaluable good legal advice can be as you grow your business.

If you need help finding an attorney that can give you the legal advice you need, please let us know. We work closely with many great attorneys, and we can make a few introductions.

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As your company grows and changes, you may want to consider if you have the right entity type for the present stage of your business.

Perhaps you’ve chosen to do business as a sole proprietor to avoid the costs and maintenance of a formal business entity, and you are concerned with the liabilities associated with the business and how your personal assets are at risk.

Perhaps you chose to form as an LLC, for the simplicity of maintenance and liability protection, and you’re at a stage where you’d like to take outside investment. You may find that investors’ preference is to be a shareholder of a corporation, not a member of an LLC.

Perhaps you organized as an S corporation for the benefits of pass-through taxation and liability protection, but now you’ve reached some of the limitations of an S corporation.

Perhaps you’ve formed as an LLC in California, and your revenue has reached the threshold where your franchise tax is being calculated on gross receipts, not on profit.

However your business grows, the decision of entity type should be revisited periodically. Since businesses change over time, there is not necessarily one best choice for all stages of a company’s life.

Each entity type can have its advantages and limitation. Here are some questions to ponder:

• How important is it to protect your personal assets against liabilities and debts of the business?
• Will the number and type of owners change in the future?
• If you are an LLC, are you paying taxes calculated on gross receipts, and could you reduce your taxes by becoming a corporation?
• Are you satisfied with how you presently allocate profits and losses among owners?
• Do you anticipate changes in how you’ll want to allocate profits and losses?
• Do you want to provide retirement and fringe benefits to owners?
• Do you want to offer medical reimbursement to owners?
• What are the plans for future growth?

As always, if you have any questions, please contact us here or at (800) 610-0373. Some of these are questions for your accountant or attorney, and we’ll do our best to get you answers or point you in the right direction.

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I recently spoke with another accountant who we’ve worked with for years, Lloyd Sreden of Stern, Kory, Sreden & Morgan. He uses Formation Solutions for all his clients’ new LLCs and corporations.

I asked him what he tells his clients about us when he’s recommending that they use our service.

I tell them that they can try to go the cheapo route, with big online filing companies with fancy TV ads like [we won't name it here]. But, you’re never going to get the service you get from Formation Solutions.

I tell them that you [Formation Solutions] have the most complete and helpful package I’ve seen, right down to little “sign here” tabs and instructions that walk them through how to operate the business.

I tell my clients that you’re always available to them for calls and questions. And that they’re going to get the same person each time; someone who understands your business. This is huge.

Does it cost a little more than the bare bones online service? Sure. But I tell them to think of this as additional insurance on your business. Get it done right.

He went on

You know, I’ve seen about 20 formations from [he named a well-known company], and there weren’t more than 3 or 4 that were done right. The thing is, people just don’t know what services they need, and those sites have pick-and-choose add-ons, and people don’t know which are required.

I’ll elaborate on the last part. We know that the process of forming a new corporation or LLC can be intimidating. And we feel that advertising one low price, and then selling you on lots of ”optional” add-ons that cost more is problematic for two reasons:

1. it buries the true cost of the complete service, and we’d rather be up front
2. since people don’t know which services they really need, they may end up missing things that are absolutely required. And that could cause a big mess.

There are many steps, many filings, and lots of nuance in the whole process. We feel that it’s important to talk to our clients, and help them understand which filings are needed for their unique situation. 

One more quote from the CPA:

Sure, I have an example for you. We recently got an IRS audit project handed over to us from another CPA we know. We asked the client to show us all their corporate info. To our horror, the book was pretty much blank.

They’d had it set up by [he named a well-known company], and there was no stock issued, no capitalization, no minutes, no nothing.

It was a really scary thought that they’d been going about their business for years, thinking they were a corporation, but officially, there was not really a corporation at all.

We had to clean it all up before the audit. It ended up fine, but it cost them a lot of money, and it could have been way worse.

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As we prepare Articles of Incorporation for new corporations and Articles of Organization for new LLCs, we get a lot of questions about how to choose a name for your LLC or corporation.

Naming your company can be a very important decision. There are many considerations.

In this article, we’re going to talk about some technical requirements on naming, as put forth by the California Secretary of State. The subject matter is a little dry, but we hope it will help you decide what name to choose for your new LLC or corporation.

First: The Search for Existing LLCs or Corporations.

The name cannot be the same as another existing LLC or corporation. Many states provide a simple online names search on their Secretary of State website. For example, if you’re forming in California, you can go to the California Business Portal Business Search, and search for the LLC or corporation name you hope to register.

If your search shows a company already formed with the name (and their status is “Active”), then you’ll need to consider another name.

In many cases, the exact name is not taken, but there are other active companies with names that are very close.

So How Close is Too Close?

Generally speaking, it should not be so close to another business’ name that it would be easy for a reasonable person to confuse them. The California Secretary of State’s office seems to give themselves a little leeway, and we’ve seen them rule in different ways.

That said, there are regulations that spell out pretty clearly how they are supposed to rule.  The California Code of Regulations chapter on Business Entity Names says the following:

Section 21002. Same or Deceptively Similar Names.

(a) …the Secretary of State shall not file a document or grant a name reservation that includes a proposed name that is the same as or deceptively similar to an existing name.

OK, but what does “deceptively similar” mean?

Again, from the California Code:

“Deceptively similar” means to resemble so closely as to tend to deceive. A resemblance is considered as tending to deceive when a person using that care, caution and observation which the public uses and may be expected to use, would mistake a proposed name with an existing name.

Examples:

• Sampson, Incorporated, Sampson Corporation and Sampson Ltd. are deceptively similar to each other.
• Northwest Services Limited, Northwest Services Company and Northwest Services are deceptively similar to each other.
• Grandma’s Cookies, Limited Liability Company and Grandma’s Cookies, LLC and Grandma’s Cookies, Ltd. Liability Co. are deceptively similar to each other.

 

• A B C Corp, AB C Corp. , A.B.C. Corp. and A-B-C Inc. are deceptively
  similar to each other.
• Good Time Rest Home, Inc. and Goodtime Rest Home Inc. are
  deceptively similar to each other.
• D.R.E.A.M. Incorporated and Dream Corporation are deceptively similar
  to each other.

 

• Got Ham Company and Gotham Company are not deceptively
  similar to each other.

Crystal clear, right?

There’s one other section that identifies that 3 types of naming problems that we see the most. Your proposed name will be considered deceptively similar if it consists of:

1. The addition or absence of a numerical expression or a compass direction;
2. The addition of a geographic designation at the beginning or at the end of the name or
   immediately preceding a business entity ending; or
3. The addition or absence of the word “holding” or “holdings”.

Examples:

• For #1, you can’t be “Burger King No.57, Inc.” if there is a “Burger King No. 5, Inc.”
• For #2, you can’t be “Johnston Financial Santa Barbara, Inc.” if there is a “Johnston Financial Riverside, Inc.” or even a “Johnston Financial, Inc.”

Generally, if we think its a grey area, we can run a name check with the Secretary of State, who charges a small fee for the service.

Alternatively, we can go ahead and file the Articles of Organization with the name you hope for, and if they reject it for closeness to another name, we would just refile the Articles with your second choice. With the latter strategy, you’re mainly just losing time if the first name is rejected. But there is always the chance your papers will be handled by a Document Specialist who will put it through.

Contact us, and we’ll help you decide if its worth filing your desired LLC or corp name on your Articles of Organization or Articles of Incorporation.

We’re here to help.

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