Zero Filing Fee for Entity Formations (for now)!

Because of recent legislation, the California Secretary of State’s processing fees for initial entity filings, such as articles of organization for limited liability companies (LLCs), articles of incorporation for corporations, and out-of-state entity registrations to do business in California, have been suspended for the period of July 1, 2022, through June 30, 2023. All other filing and processing fees still apply.

Posted in Entity Law, Foreign LLC, Limited Liability Comanies (LLC's), Limited liability companies (LLC), Limited Partnerships | Tagged , | Comments Off on Zero Filing Fee for Entity Formations (for now)!

California Secretary of State to Enhance Online Filing Portal

The following information was taken from an e-Bulletin published by the Corporations Committee of the California Lawyers Assocation. It was prepared by William Ross, of counsel to Hirschfeld Kraemer LLP, and Darren L. Nunn, a partner at McCorriston Miller Mukai MacKinnon LLP, with input from Mary Mooney of the California Secretary of State’s office.

The California Secretary of State recently announced that on March 29, 2022, significant enhancements to its online filing portal will go into effect. Per the announcement, among the enhancements are:

·         Over 70 online forms for corporations, LLC’s and limited partnerships

·         Shopping cart for online payment

·         Online certified copies and certificates of status (good-standing certificates)

·         Online certification-verification search

·         Online entity-name reservations

·         More robust business search

·         Free access to over 17 million images of documents filed by corporations, LLC’s and limited partnerships

Some current online filing applications have already been, or will need to be, taken offline to prepare for the launch. The table below provides the offline dates. It is expected that online services will resume on or after March 29, 2022.

For the period of March 23 to March 28, 2022, the Secretary of State’s office has recommended holding back filings that are not time-sensitive and filing them online a bizfileOnline.sos.ca.gov on or after March 29, 2022.

Paper documents and online resubmissions for rejected filings submitted between March 23rd and March 28th will be processed after March 29th.

 

Online Application/Features Planned Date to Take Offline
·         Future file date Wednesday, 2/2/2022
·         Future effective date Wednesday, 2/2/2022
·         eForms online Saturday, 3/12/2022
·         Corporate formations Saturday, 3/19/2022
·         LLC formations Saturday, 3/19/2022
·         LLC terminations Wednesday, 3/23/2022
·         Corporate statement of information Wednesday, 3/23/2022
·         LLC statement of information Wednesday, 3/23/2022
·         UCC BizFile online Friday, 3/25/2022
·         California business search Friday, 3/25/2022
·         Legacy online resubmissions Friday, 4/15/2022

 

Posted in Corporate Law, Entity Law, Foreign LLC, Limited Liability Comanies (LLC's), Limited liability companies (LLC), Limited Partnerships | Tagged , | Comments Off on California Secretary of State to Enhance Online Filing Portal

What is a Professional Corporation?

According to the law in California (the Moscone-Knox Professional Corporation Act), a professional corporation is a corporation that is engaged in rendering professional services.

In this context, “professional services” are any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the California Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act.

Examples of professional services include services rendered in the practice of law, medicine, accounting, and architecture.

Before a profession may be practiced through a professional corporation, the Business and Professions Code or the Chiropractic Act must expressly authorize such professional services to be rendered by a professional corporation. Moreover, most professional corporations must obtain a certificate of registration issued by the governmental agency regulating the profession, though some do not.

A professional corporation rendering professional services by persons duly licensed by the following agencies is not required to obtain a certificate of registration in order to render professional services:

  • Medical Board of California
  • California Board of Podiatric Medicine
  • Osteopathic Medical Board of California
  • Dental Board of California, Dental Hygiene Board of California,
  • California State Board of Pharmacy
  • Veterinary Medical Board
  • California Architects Board, Court Reporters Board of California
  • Board of Behavioral Sciences
  • Speech-Language Pathology and Audiology Board
  • Board of Registered Nursing
  • State Board of Optometry

One may wonder why doctors don’t have to get a certificate of registration for a professional corporation, but lawyers and accountants do. It’s simple. The doctors have better lobbyists!

Typically, all the outstanding shares of a professional corporation must be owned by persons licensed to render the professional services rendered by the professional corporation, but for many of the professional corporations involved in the healing arts, up to 49% of the shares may be owned by persons licensed in specified related fields. For example, registered nurses and licensed psychologists are permitted to own shares in a medical corporation.

A professional corporation does not limit the liability of a professional for his or her own malpractice, but it will often shield a professional from liability for the malpractice of an employee or fellow shareholder. A professional corporation will also typically shield the shareholder from liability for business obligations other than malpractice. For example, if a landlord rents an office to a professional corporation and does not get a personal guaranty from one or more shareholders, then typically none of the shareholders have any liability to the landlord if the rent is not paid.

From a tax perspective, a professional corporation is for the most part no different from a regular business corporation. If it meets the requirements, a professional corporation may elect to be an S corporation. Being an S corporation entitles the corporation not to pay corporate income tax at the federal level; the corporation’s income or loss passes through to the shareholders, who each report their pro rata share of the corporate income or loss on their personal tax returns. Although an S corporation may pay no federal income tax, California does impose a 1.5% income tax on the net income of an S corporation.

There are intricacies to properly organizing a professional corporation that make it particularly unsuitable for self-help or for online legal filing services such as LegalZoom. As always, it is best to hire an experienced practitioner to help you with your legal needs.

 

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Good Standing Certificates in California

California does not issue good-standing certificates under that name.

For what is referred to in other states as a “good standing certificate,” the California Secretary of State will issue a CERTIFICATE OF STATUS certifying to the current status of an entity registered with the Secretary of State (e.g., active/good standing, suspended, dissolved, or cancelled).

For what is referred to in other states as a “long-form good standing certificate,” the California Secretary of State will issue a CERTIFICATE OF FILING OF ALL DOCUMENTS (a certified list of ALL the business entity’s documents on the records of the California Secretary of State (e.g., formation, registration, amendment, statement of information, correction, merger, termination, or conversion).

A Certificate of Status must be obtained by application to the Secretary of State.

For a certificate issued by California’s income tax agency, the Franchise Tax Board (FTB), that an entity is in good standing with it, the FTB will issue an ENTITY STATUS LETTER.

An Entity Status Letter verifies whether or not an entity is in good standing with the FTB and provides certification for:

• An outstanding liability that would be of concern to a third party (e.g., closing an escrow for a financing or sale transaction).

• Verification of an exempt status.

• Registering a corporation or LLC to transact business in another state.

• Legal status in court proceedings.

An FTB Entity Status Letter may be obtained instantly online for a corporation or limited liability company (LLC) by using the FTB’s “Self Serve Entity Status Letter” function by clicking here.

A searcher may use either an Entity ID or Entity Name.

An FTB Entity Status Letter does not reflect the entity’s status with any other state agency and is not a substitute for a Certificate of Status issued by the Secretary of State.

Posted in Bulk Sale, Buy-Sell Agreement, Commercial Law, Contract Drafting, Mergers & Acquisitions, Mergers and Acquisitions, Purchase and Sale of a Business, Qualifying to Do Business | Tagged , , , , , | Comments Off on Good Standing Certificates in California

Administrative Dissolutions

As previously posted on this blog, California law was changed (AB 2503) to allow the state to dissolve entities administratively instead of allowing zombie entities to remain on the rolls permanently.

A word to the wise:  Abandoning the entity and awaiting an administrative dissolution is not a recommended alternative to affirmatively taking steps to dissolve an entity when it has reached the end of its useful life. An administrative dissolution can require years to take effect, and the failure to take steps to dissolve an entity might in some circumstances have an adverse effect on the owners.

The news here is that the Franchise Tax Board (FTB) has announced that, since January 1, 2019, when the FTB established the Voluntary Administrative Dissolution Program, the FTB has administratively dissolved 1,500 corporations and limited liability companies (LLCs). Given the large number of zombie corporations and LLCs, this seems like a small number for a two and one-half year period. One wonders whether the number of zombie corporations and LLCs has grown during the period since the inception of the program.

To see the original post on this topic, click this link.

Posted in Alter Ego Liability, Corporate Law, Entity Law, Limited Liability Comanies (LLC's), Piercing the Corporate Veil, S corporations, Suspended Entity | Tagged , | Comments Off on Administrative Dissolutions

LLC Taxes Due April 15 Even with Extension to File

A single-member limited liability company (SMLLC) is a disregarded entity for federal income tax purposes. But for state law purposes, California SMLLCs are separate legal entities that are subject to paying the $800 minimum franchise tax (and if gross receipts are $250,000 or more, the LLC fee) and to filing an FTB Form 568.

Normally, a disregarded SMLLC must file FTB Form 568 at or before the same time that the owner is required to file his or her personal tax return.  Although California grants an individual an automatic extension of time to file a return, an extension of time to file is not an extension of time to pay any tax due.

This year, although the Franchise Tax Board has postponed to May 17, 2021, the state tax filing and payment deadlines for individual taxpayers, this postponement applies solely to individual taxpayers. SMLLCs do not benefit from this postponement.  Therefore a SMLLC owned by an individual is required to file Form 568 on or before April 15 and pay any tax due.

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FTB Has Started to Dissolve Administratively Suspended Corporations

In 2019, a new law took effect in California, which permits a California corporation to be administratively dissolved if the corporation’s corporate powers have been suspended by the Franchise Tax Board (“FTB”) for 60 consecutive months.

Before dissolving the corporation administratively, the FTB must notify the corporation of the pending administrative dissolution by mailing to the last known address of the corporation an Administrative Dissolution/Cancelation – Intent Notice letter.  For the first time, the FTB has started mailing these Intent Notice letters. According to the FTB, it recently sent Intent Notice letters to nearly 500 California corporations.

Many of these corporations have long since been out of business and abandoned by the owners, and such notices will be received with a shrug of the shoulders. But if the corporation has valuable contract rights or intellectual property rights (patent, trademark, or copyright) or if the corporation owns real property, it will want to avoid administrative dissolution. It can do so by objecting in writing within the 60-day period starting with the notice date on the Intent Notice letter and following the specified procedure for objecting. Failing a timely objection, the corporation will be administratively dissolved.

If a corporation timely objects to the administrative dissolution, it will have 90 days to (1) file past-due tax returns, (2) pay all accrued taxes, penalties, and interest, (3) file a current Statement of Information with the Secretary of State, (4) fulfill any other requirements to be eligible, and (5) apply for a certificate of revivor.

If all the foregoing conditions are satisfied, the administrative dissolution will be canceled, but if not, the corporation will be administratively dissolved. Once the administrative dissolution takes place, that’s it for the corporation. There are no appeal rights.

The FTB may extend the 90-day period one time.

 

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When Are Out-of-State Entities Doing Business in California?

Lawyers talking about foreign businesses in CaliforniaWhat if a corporation or a limited liability company (LLC) is formed in another state, like Delaware or Nevada, but does business in California? The out-of-state business entity (a “foreign” business entity) must register with the state, file tax returns, and (most important to the state) pay taxes to California.

Sometimes it is obvious when a foreign corporation or foreign LLC is doing business. California’s tax law defines “doing business” in the state as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.” So, for instance, operating a business that is physically located in California is obviously doing business here.

But the definition doesn’t stop there. California, being hungry for tax revenue, has enacted a statute that specifies other activities that will result in the foreign entity being deemed to be doing business in California even if it’s not operating a business here.

Since January 1, 2011, based on California Revenue and Taxation Code § 23101(b), a taxpayer has been deemed to be doing business in California for a taxable year if any of the following conditions were satisfied:

  • The taxpayer’s sales in California exceed the lesser of $500,000 or 25% of the taxpayer’s total sales in the taxable year.
  • The real property and tangible personal property of the taxpayer in this state exceed the lesser of $50,000 or 25% of the taxpayer’s total real property and tangible personal property combined.
  • The amount the taxpayer paid in California for compensation in a taxable year exceeds the lesser of $50,000 or 25% of the total compensation paid by the taxpayer.

But the foregoing threshold dollar amounts are not carved in stone, so to speak. The Franchise Tax Board (FTB) is required to revise the dollar amounts annually based on increases in the California Consumer Price Index.

The FTB has spoken, and so for 2020 the threshold dollar amounts are:

  • Sales: $610,395
  • Property : $61,040
  • Payroll :  $61,040

Remember, even though the foreign business entity’s activity is below the dollar amounts, it could still be deemed doing business here if it exceeds the percentage amounts.

A business organized in California but does business in another stateWhat if a corporation or LLC is organized in California but only does business in one or more other state? That business entity, by virtue of being formed in California, is automatically doing business in California and must pay taxes in California (in addition to any taxes payable in other jurisdictions).  So you could say that California gets you coming or going.

If you need help registering your entity with the state of California, feel free to call me or use the contact form to send an email.

 

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Bulk Sales Law: A Possible Trap for the Unwary Buyer of a Business

Buyers of businesses should be aware that California, like some other states, has a “bulk sales” law. Its official name is Uniform Commercial Code—Bulk Sales. The bulk sales act is designed to protect the creditors of a business by giving them notice of a “bulk sale” (sometimes called a bulk transfer).

What Is a Bulk Sale (and Who Cares Anyway)?

In general, a bulk sale is a sale to a buyer of all or most of the assets of the business outside the ordinary course of business. The object of the act is to reduce the prospect that the owner of a business will sell all or most of the assets of a business and then disappear with the money, leaving the creditors unpaid. In most cases, when a transaction is a bulk sale, creditors have to be given notice of the transaction. In some cases, the bulk sales law requires the purchase price to be put into an escrow so that the seller’s creditors can submit claims into the escrow and be paid.

The general rule is that a purchaser of assets or a buyer of a business is not liable for a seller’s obligations unless the buyer agrees to assume those obligations, but there are a number of laws that create successor liability, also known as transferee liability, for the purchaser of a business. The bulk sales law is one of them. Even though it creates no liability for the seller of a business, the seller of a business should consult with counsel to avoid an expected snag in the closing of the transaction. Of course, it is of more concern for the buyer.

If the transaction is subject to the bulk sales law and the buyer doesn’t make sure that the transaction complies with the law, the buyer may be liable to the seller’s creditors to pay the seller’s debts to the extent of the consideration the buyer paid the seller (or if the assets were sold for a value below their value, to the extent of the value of the assets acquired). Of course, a buyer who gets stuck paying the seller’s debts when that is not part of the deal is entitled to be reimbursed by the seller, but if the seller’s creditors haven’t been paid by the seller, the likelihood is high that the seller is a deadbeat. Thus, in most cases, the buyer will want to make sure that that the purchase of a business subject to the bulk sales law complies with that law.

California’s bulk sales act is contained in Division 6 of the California Commercial Code, which is based on the Uniform Commercial Code drafted by the National Conference of Commissioners on Uniform State Laws (sometimes referred to as the U.S. Uniform Law Commission). Because the Uniform Commercial Code is adopted in all 50 states (though only partly in Louisiana), almost every state had a bulk sales law. The operation of the law would vary from state to state, but the existence of the law was fairly universal. Most of the states have now repealed their bulk sales laws for the simple reason that the bulk sales law doesn’t do much to protect creditors. There is talk of proposals for California to repeal its bulk sales act, but for now, the law is in full force and effect.

Sales Subject to the Bulk Sales Law

First, California’s bulk sales act applies only to certain sellers. In California, the bulk sales act applies only to a seller whose principal business is the sale of inventory from stock, including those who manufacture what they sell, or that of a restaurant owner. Thus, a service business is not subject to the bulk sales act.

Second, the seller must be located in California. If a seller has more than one place of business and some of them are not in California, the seller is deemed located in California if its chief executive office is in California. Thus, if a corporation or LLC has formed under Nevada or Delaware law but has its chief executive office (or its sole place of business) in California, a sale by it is subject to California’s bulk sales act.

Third, the sale must be of more than half (in value) of the seller’s inventory and equipment. So a sale of, say, one-third of a seller’s inventory would not be a bulk sale, even if the other criteria for a bulk sale are met.

Fourth, the sale must be not in the ordinary course of the seller’s business. Naturally, this is the case when the seller sells his business to a buyer; such a sale is not in the ordinary course. On the other hand, a retail shop is not conducting a bulk sale when it sells its goods to its customers in the ordinary course of business (no matter how much it sells at any one time).

In addition to the traditional negotiated sale of a business, the bulk sales law can apply to a sale by auction or a series of sales conducted by a liquidator on the seller’s behalf, but the focus of this blog post is on the acquisition of a business, either as a going concern or in liquidation.

By the way, the bulk sales law is not the only law that can make a buyer liable for the seller’s debts (even though the buyer has expressly disclaimed assuming any of the seller’s debts). See the links at the end of this post.

Bulk Sales Notice

To comply with the act, there are two steps that are essential.

First, the buyer has to prepare a notice of bulk sale that provides:

  1. A statement that a bulk sale is about to be made.
  2. The buyer’s name and business address.
  3. The seller’s name and business address.
  4. A list of any other business names and addresses used by the seller during the three prior years (the buyer is to obtain this list from the seller).
  5. A general description of the assets and their location.
  6. The place of the bulk sale.
  7. The anticipated date of the bulk sale.
  8. A statement whether the bulk sale is subject to the escrow requirements of the bulk sales law, and if so,
    (a)   the name and address of the person with whom claims must be filed and
    (b)   the last date for filing claims (one business day before the anticipated date of the bulk sale set forth in the notice).

Whether a bulk sale is subject to the escrow requirements of the bulk sales will be discussed later in this blog post.

Second, at least 12 business days before the sale takes place, the buyer must (1) record the notice of bulk sale in the county recorder’s office, (2) publish the notice in a local newspaper of general circulation, and (3) deliver the notice of bulk sale to the county tax collector. A “business day” is any day other than a Saturday, Sunday, or state holiday.

Delay Resulting from Notice Requirement

The notice requirement results in a two and one-half week period between giving the required notice and closing the transaction. In some cases, the notice period has no effect on the transaction because the time that the parties have scheduled between signing the contract and closing the transaction is longer than 12 days, and the giving of notice does not delay closing.

Often, however, the parties are negotiating the contract while the buyer is doing his due diligence, and they want to sign the contract and to close the transaction simultaneously with the signing. In that case, the notice period introduces an unwanted delay in closing the sale. In a number of cases, the parties are motivated to move as quickly as possible and any delay is unwelcome.

For example, in a distress sale, the seller may be selling because he has an obligation to make a payment by a certain date, and he intends to use the sales proceeds to satisfy that obligation. Or the seller may have an option to extend the term of his lease, but the seller does not want to exercise the option before closing because the seller does not want to commit to the additional term if there is no sale of the business. The buyer, of course, does not want to buy the business unless the buyer can extend the term. If the date parties must act by is before the twelve-day notice period expires, the notice requirement of the bulk sales law can present a serious problem.

Escrow Requirements of a Bulk Sale

In a bulk sale subject to the bulk sales law, there is no escrow requirement if the price is more than $2,000,000. There is also no escrow requirement if the price will be paid by consideration other than cash (or a promise to pay cash in the future). So, if the price will be paid by the buyer’s giving stock in the buyer exchange for the seller’s assets, there is no escrow requirement.

If the price is $2,000,000 or less and will be paid in cash or by a promise to pay cash in the future, whether or not set forth in a note (or a combination of the two methods of payment), then there is an escrow requirement.

Technically, the bulk sales act does not require an escrow, but because the purchase and sale of a business are often handled through an escrow, I refer only to the obligations imposed on the escrow agent. If there is no escrow, then the duties that would be imposed on an escrow agent are imposed on the buyer, and references to the duties of the escrow agent are references to the duties of the buyer.

If there is an escrow, the buyer must deposit the full amount of the purchase price into escrow. If part of the purchase price is to be paid by a promissory note, then the note is deposited into escrow along with the cash portion. Thus, while the entire purchase price is to be deposited into the escrow, only a portion (or none) may be cash.

When a proper claim is timely submitted by a creditor into the escrow, the escrow agent must pay the claim from the cash in the escrow. A proper claim is one that is due and payable before the date of the bulk sale. A timely submittal is one that is made in writing and is received on or before the date for filing claims set forth in the bulk sales notice.

If the seller disputes the claim (either on the ground that it is not due and payable or that the amount is not correct), the escrow holder must withhold from any distribution to the seller 125% of the first $7,500 of the claim ($9,375 on a $7,500 claim) plus an amount equal to the balance of the claim. Thus, if the claim is for $5,000, the escrow agent must withhold $6,250 (125% of $5,000). If the claim is for $10,000, the escrow agent must withhold $11,875 ($9,375 + $2,500). The balance of the purchase price can be disbursed to the seller.

On or before the second business day after the disbursement of the purchase price to the seller, the escrow agent must send a notice to the claimant that the amount withheld will be paid to the seller unless the claimant files for and obtains a writ of attachment within 25 days of the mailing of the notice. After 25 days, an amount that is not subject to a writ of attachment must be disbursed to the seller.

Creditor Claims in Excess of Cash

What happens if the cash in the escrow is not sufficient to pay all claims?  Things get more complicated.

If the cash in the escrow is not sufficient to pay all claims, the distribution of the purchase price and the conveyance of title must be delayed for at last 25 days and no more than 30 days from the mailing of the notice to claimants.  The escrow agent must send out a notice to each claimant, stating:

  1. The total consideration deposited or agreed to be deposited in the escrow.
  2. The name of each claimant who filed a claim against the escrow and the amount of each claim.
  3. The amount proposed to be paid to each claimant,
  4. The new date scheduled for the passing of the legal title.
  5. The date on or before which distribution will be made to claimants (no more than five days after the new date specified for the passing of legal title).

The statute provides a distribution scheme that sets forth the priorities of various types of creditors. Thus, some types of creditors may get paid in full, and others may share pro-rata share of the balance remaining (or receive nothing at all).

Noncompliance with the Act

Many times, however, parties proceed with a transaction that falls within the act but knowingly doesn’t comply with it. Often, a buyer can do that, either with complete safety from any claim under the act or with relative safety.

Transactions That Are Exempt

First, the California version of the bulk sales act contains two express exemptions. It does not apply to a sale of assets having a value of more than $5,000,000 on the date of the bulk sale agreement or to a sale of assets having a value, net of liens and security interests, of less than $10,000.

What if the value falls within those two amounts? Quite often, the Purchase and Sale of business is structured in a way that the transaction does not fall within the act even if the value falls within those two amounts.

Transactions Not Subject to Act

The act does not apply to the sale of an interest in a business entity, even if the entire interest is owned by one person and the entire interest is being sold. Thus, the act does not apply to the purchase and sale of stock in a corporation, even if there is only one shareholder and all the stock is being sold. Likewise, it does not apply to the sale of a membership interest in a limited liability company (LLC) or a partnership interest.

For this reason, the bulk sales act typically does not apply to a buy-sell transaction between partners in a partnership or co-owners of a corporation or LLC. In those cases, the remaining owner is not buying the assets from the business but is instead of purchasing the partnership interest or stock or LLC membership interest.

This also does not apply to a merger of a corporation or LLC into another entity, even though the result is that all the assets of the party who would be considered the seller are transferred to the party who would be considered the buyer.

Intentional Noncompliance

Finally, many purchasers of a business intentionally don’t comply with the act, though the purchaser will ordinarily protect himself otherwise against the claims of creditors. Here are two typical scenarios applicable to the acquisition of a business subject to the act.

In one scenario, the asset purchase agreement provides that the purchaser is not assuming any liabilities, and the seller promises to pay the existing liabilities. (Of course, the whole point of the bulk sales act is that when a transfer falls within the act, third-party creditors have rights against the buyer independently of any agreement to assume liabilities. So an agreement that the purchaser takes the assets free and clear of any liabilities does not limit the creditors until the statute of limitations for claims by creditors expires).

Another typical scenario is that the seller represents and warrants to the purchaser what the liabilities are, the purchaser expressly assumes those liabilities, and the seller promises to pay any liabilities not expressly assumed by the purchaser. In this scenario, the purchaser is already liable to the third-party creditors who have been disclosed so the bulk sales add no exposure as to those creditors.

In either scenario, the purchaser is exposed to risk. What if the seller doesn’t pay the creditors whose claims the purchaser has not agreed to assume?  If the act applies and if there is no exemption, then the purchaser is on the hook to creditors.

But in these types of transactions, the purchaser typically owes the seller a portion of the purchase price, either in the form of a post-closing escrow or express hold-back of the purchase price for a specified period (which in either case can protect the purchaser against hidden claims) or in the form of deferred payment of the purchase price (typically a promissory note). It is standard for a purchaser to retain the express right to offset against the deferred payment of the purchase price any claims that the purchaser has against the seller, including a claim that the seller misrepresented liabilities or failed to pay liabilities that the purchaser did not assume. Thus, through a combination of due diligence and careful structuring of the transaction, a purchaser can avoid complying with the bulk sales act with a relative, and sometimes absolute, impunity.

Conclusion

To avoid inadvertently becoming liable to the creditors of a seller, a purchaser should be advised by a California lawyer experienced in the acquisition of a business. One of the most valuable services a lawyer can provide a client in a business purchase is helping to structure the transaction.  The prospective acquirer of business would do well to consult with counsel before making any kind of offer, including a proposed letter of intent.

For information on possible buyer liability for the seller’s liability to the Board of Equalization (for sales taxes) (whether or not the bulk sales act applies), see https://richardburtlaw.com/boe-tax-clearances/

For information on possible buyer liability to the Employment Development Department (for the seller’s state payroll tax obligations) (whether or not the bulk sales act applies), see https://richardburtlaw.com/edd-tax-clearances/

For information on possible buyer liability for the seller’s liability to the Franchise Tax Board (whether or not the bulk sales act applies), see https://richardburtlaw.com/franchise-tax-board-tax-clearance-certificates/

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Out-of-State LLC Owning Property in California

Experienced San Jose, CA Foreign LLC Lawyer Ready To Assist You

LLC in San JoseMany California residents are members of LLCs formed under the law of other states (often referred to as “foreign LLCs”). California, being hungry for tax revenue, often tries to tax the LLC on the ground that it is doing business in California. Obviously, if a Delaware LLC owns rental property in California and is generating rental income from the property, it would be considered to be doing business in California.

But what if the resident forms an out-of-state LLC simply to hold raw land or a personal residence for the owner (either a principal residence or vacation home)? Ownership alone is not a business activity, and assuming there is no rental of the property, it might seem that the LLC is not doing business in California. But things are not always what they seem when it comes to tax law in California.

Under California Revenue and Taxation Code § 23101(b)(3), if a foreign (out-of-state) LLC’s real property and tangible personal property in California exceeds $51,186, the foreign LLC is statutorily deemed to be doing business in California. Given that most California real property is worth more than $51,186, any foreign LLC that owns real property in California is likely to be doing business in California, which will require it to register with the Secretary of State, file tax returns with the Franchise Tax Board, and pay tax to California.

An LLC Operating Agreement in San JoseBy the way, in case you are wondering why an odd number like $51,186 was chosen, the answer is that the original figure was $50,000, and the FTB is authorized to increase the original figure by an inflation factor, which it has done.

If you need assistance with the arbitration, buy-sell agreements, or outside general counsel, contact Attorney Richard Burt. Serving San Jose, CA, and all of the San Francisco Bay areas, Mr. Burt can be reached at (408) 286-7333 or by filling out the online contact form.

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