California Business Lawyer Blog

The primary advantage of an LLC over a limited partnership is that all members will enjoy limited liability even if they actively participate in the LLC's business. Therefore, says Los Angeles Business Lawyer Steven C. Peck, "an LLC need not have the equivalent of a general partners who is liable for the limited partnership debts". Members will have more flexibility in structuring the LLC's management than limited partners would have in structuring a limited partnership, because a member may participate in management without facing unlimited liability.

A limited partnership is required to have at least one general partner and one limited partner. An LLC that elects to organize in another state and regiater as an foreign LLC in California may have a single member if the law of the other state so provides.

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Continue reading "Choice of Entity: Limited Liability Company or Limited Partnership?" »

Because of its classification as a partnership for tax purposes, an Limited Liability Company ("LLC') will be the preferable form of entity for a C corporation if the owners want to avoid the potential of double taxation says California Business Attorney Steven C. Peck. Peck also says "An LLC also offer significantly more flexibility in organization and operation than a C corporation".

An LLC has significant tax and nontax advantages over an S corporation. One major advantage is that an LLC is not subject to the restrictions that limit the availability and activities of S corporations:

• An S corporation is restricted to 35 shareholders;


• Only certain types of persons may be shareholders of an S corporation;


• An S corporation may own no more than 80 percent of the stock of another corporation; and


• An S corporation must allocate profits and losses pro rata and is restricted to one class of stock.

In contrast, California Business Lawyer Steven C. Peck says, " An LLC permits greater flexibility as follows":




• An LLC may provide for special allocations and for disproportionate distributions;


• An LLC is not subject to the penalty tax for built-in gains and excess passive income;


• An LLC is not subject to the election and revocation rules of an S corporation;


• LLC members can increase their tax basis through allocations of the LLC's debt, which allows members to deduct additional entity level losses against their tax basis;


• An LLC can adjust its tax basis in its assets on the sale of a member's interest or on the death of a member; and


• An LLC is not subject to the California corporate income tax, but is subject to a gross income fee.

Continue reading "Choice of Entity: Limited Liability Company or Corporation?" »

Most practitioners believe that a corporation is an inappropriate entity to hold real property because of the potential double taxation and other tax considerations says California Business Attorney Steven C. Peck.

Likewise, California Business Lawyer, Steven C. Peck explains," S corporations are subject to penalty taxes for built-in gains and excess passive income, limiting there usefulness". Peck goes on to say, "As a result, real property and other appreciating assets are typically held individually or in a partnership, which alternatives require that the owners assume general liability unless the entity is a limited partnership with a corporate general partner."

Steven Peck goes on to explain " An LLC may offer more protection to its members than a limited partnership if the members are actively involved in the operation of the business, and it avoids the necessity of establishing a corporate general partner."

Continue reading "Useful Applications of Limited Liability Companies" »

The buyout of a partner's interest can be structered as a sale to the other partners (i.e. a cross-purchase) or as a liquidation by the partnership. Although the practical differences between a sale and a liquidation may be minimal, the structure of the buyout can result in a significant differences in Tax treatment.

Generally, a liquidation is more advantageous because it permits the partners to decide whether certain payments to a retiring partner or a deceased's partners's successor in interest will be treated either as a distribution of income that reduces the distributivve shares of the remaining partners or as a guaranteed payment that is deductible by the partnership and is ordinary income to the withdrawing partner instead of as a nondeductible payment for a partnership interest that is taxed a capital gain rates.

This ability to pay part of the liquidation price with pretax dollars can be accomplished at little or no cost to the partner whose interest is being liquidated, even with the reintroduction of somewhat more favorable capital gains tax rates.

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced california business attorney and visit us on-line at www.premierlegal.org.

Whether or not to utilize a tax professional such as a Tax attorney is an important decision. Here are some things to consider:

1. Huge agencies. The tax agencies are massive organizations with many highly trained professionals on their side. Despite any hype to the contrary, they are there to collect taxes--not to provide independent counsel to taxpayers.

2. Tax return filings. Taxpayers are required to prepare and file their own tax returns. Even if the taxpayer is well educated and informed, the tax codes are vast and complex. Even tax attorneys struggle to keep up. Thus trying to prepare your own return is not a good idea unless it is very simple such as a wage earner with no special income or deductions. Even then it would be wise to utilize tax software.

3. Tax avoidance. Taxpayers have a legal right to arrange their affairs in such a manner to minimize tax liabilities. This is called tax planning or tax avoidance and is highly advisable for taxpayers that are self employed, have a high net worth or otherwise complex tax situations. There are many legal ways to reduce taxes such as charitable donations, tuition fees, savings plans, estate planning, asset depreciation and so on.

4. Tax evasion. Taxpayers are required by law to file tax returns, not cheat on the accounting and pay taxes due. Failure to do this could result in criminal proceedings for tax evasion. It would be very wise to engage an experienced tax attorney if the IRS is contemplating this route. Dealing with the CID (criminal investigation division) is no small matter.

5. Overdue taxes. The IRS (for federal taxes) and the Franchise Tax Board (for California taxes) are basically collection agencies. Once a tax return is filed with tax due, the tax agency collection procedures kick in to full gear. In a very short time, they will take very aggressive action to collect any taxes due including tax liens, bank account liens, asset seizure and wage garnishment. There are a number of remedies such as negotiating installment agreements and offer in compromise.

Taxpayers looking to solve tax problems would be wise to engage an experienced tax attorney. Steven Peck's Premier Legal has a tax attorney on staff servicing clients in the San Fernando Valley and all of Southern California. Premier Legal has the proven knowledge and skill to effectively represent taxpayers when dealing with the IRS or the Califoria State Franchise Tax Board. Please contact us toll free at 1.866.999.9085 for a complimentary initial consultation

The existence and the amount of the partnership liabilities are factors in setting the purchase price of the partner's interest. Deciding how to treat unknown liaibilities e.g.an asserted tort or breach of warranty claim, that cannot specificallly be taken into account in the valuation can be problematic. This problem is compounded by the fact that the decision on whether to indemnify against unknown liabilities must be made whrn the buy-sell agreement is drafted, perhaps years before any sale or liquidation of partnership interest occurs.

Assumption of the unknown liabilities by the remaining partners may result in windfall to the withdrawing partner. However the partnership also may benefit from future windfall profits, such as the award of large contract shortly after withdrawal when work on the contract had been in process before the partner's withdrawal or an unexpected increase in the value of fixed assets.

Continue reading "The Existence and Amount of Partnership Liabilities: California Business Law" »

If dissolution is caused in any way except in violation of the partnership agreement, or if a partner has wrongfully caused the dissolution and the business is not continued, each partner may require that the partnership's assets be applied to discharge its liabilities and the surplus applied to pay the net amount owed to each partner, in the absence of any agreement to the contrary.

The ability to compel the liquidation of the partnership's assets can be a particular problem for the remaining partners if they intend to continue the business when a partner's successor, e.g. a deceased partner's executor, needs cash to meet estate liabilities.

Thus to ensure that remaining partners will have the right to continue without interruption, the agreement should include an express waiver of the right to have assets liquidated to discharge liabilities. In return the withdrawing partner of his or her successor in interest should be indemnified and held harmless from partnership liabilities, whether they arose before or after the withdrawal.

Continue reading "Dissolution of a Partnership: Liabilities and Indemnification" »

A buy-sell agreement for a partnership is very different document from a buy-sell agreement for a corporation, even though their objectives may be the same, because of the distinctions between the corporate and partnership form of doing business. Moreover, the requirements of the Unifrom Partnership Act and the California Revised Limited Partnership Act are not as comprehensive as the statutues governing corporations.

Consequently, the charter documents of most partnerships are usually not as extensive and specific as the articles of incorporation and bylaws of even simple corporations and may leave open issues that must be addressed in the buy-sell agreement. Perhaps the most important distinction between partnerships and corporations is that a partnership, particularly a general partnership, is not generally recognized as a separate entity distinct from its partners.

For example, general partners (unlike shareholders) are not shielded from liabilities of the partnership and may remain subject to claims even after the partner's withdrawal.

Consequently, clients should be advised and prvosions should be included in any buy-sell agreement to protect a withdrawn partner from possible claims against the partnership, especially those in existence before the withdrawal, if the partnership agreement does not cover this issue.

Continue reading "Partnerhsip Buy-Sell Agreements a Preliminary Analysis" »

Civil procedure students everywhere may be able to thank the U.S. Supreme Court if it rules as expected and holds that, for purposes of diversity jurisdiction, a corporation's home place of business is in the state where its headquarters is located.

The headquarters test is simpler than the rule established by the San Francisco-based 9th U.S. Circuit Court of Appeals that looks to the state where a company's people and property are located. In oral arguments yesterday, Justice Anthony M. Kennedy worried that the 9th Circuit rule could stump some lawyers, the National Law Journal reports.

"Not all diversity suits have major law firms in them" that could handle the calculations to determine a company's citizenship under the "complex tests" of the 9th and other circuits, he said.

The National Law Journal and Dow Jones newswires both reported that the justices appeared likely to reject the 9th Circuit test. The National Law Journal put it this way: "For a corporation, the U.S. Supreme Court's axiom may soon be: Home is where the headquarters is."

Corporate lawyers are also likely to like such a decision, since it would allow more lawsuits to be tried in federal court based on diversity jurisdiction, rather than more plaintiff-friendly state courts, according to the NLJ.

In the case before the Supreme Court, lawyers representing Hertz employees in a wage-and-hour suit are arguing that the company's principal place of business is in California, where more of its business activities take place, even though its headquarters is in New Jersey.

Chief Justice John G. Roberts Jr. asked where Starbucks' principal place of business would be located under the 9th Circuit test. The coffee company was founded in Seattle, but the lawyer for the Hertz plaintiffs said the answer was California, since it has so many employees there.

Continue reading "Diversity Jurisdiction: Look to the Company's Headquarters State" »

Any shareholder who is sued for receiving an improper distribution may implead all other shareholders who received a distribution with the knowledge of the facts of any such impropriety. The shareholder may proceed by filing a cross-complaint in that action or by filing an independent action.

Under the California Unifrom Fraudulent Transfer Act, a creditor can have a fraudulent distribution set aside even if the receiving shareholder has no knowledge of the impropriety. Thus an innocent shareholder might have to return payment for shares sold under a buy-sell agreement if the distribution violated the Uniform Fraudulent Transfer Act.

The sale of shares by a controlling shareholder or member of a control group at an excessive price to transfer control or permit a control group to remain in control may cause the shareholder or member to be liable to the corporation for the amount paid for the shares.

Continue reading "Improper Distributions to Corporate Shareholders" »

Fannie Mae said Monday it may have to ask the government for more financial assistance because the company cannot sell $5.2 billion in tax credits.
The Treasury Department last week blocked the mortgage giant from selling about $2.6 billion in low-income housing tax credits to investors that included Goldman Sachs Group. Because the investors could use the credits to reduce their own tax bills, Treasury said the sale would result in a loss of tax revenue greater than the savings to the government.

Fannie Mae requested $15 billion in financial aid last week after reporting a $19.8 billion quarterly loss, bringing the taxpayers' bill for the mortgage company's rescue to $60 billion.

Fannie said in a regulatory filing that it was evaluating whether it would have to take a charge in the current quarter to reflect the value of the now-worthless tax credits. If so, Fannie Mae's net worth would be reduced by that amount, and it would need more money to shore up its balance sheet.

The Washington-based company and its sibling Freddie Mac were seized by federal regulators 14 months ago. Fannie and Freddie play a vital role in the mortgage market by purchasing loans from banks and selling them to investors. Together, Fannie and Freddie own or guarantee.

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced business attorney and please visit us on-line at www.premierlegal.org,

Even though the economy is still suffering and many small businesses won't be hiring for some time, some companies are thinking about taking on more workers. The question for many is, what kind?

Some business owners will hire full-time or part-time employees, while others will consider going the independent contractor route. Temps are another option.

Each kind of worker has its pros and cons. With an employee who's on the payroll, for example, an owner is responsible for salary, employment taxes and insurance that is required by law, such as workers compensation. At the same time, that employee may have more of a commitment to the company than other types of workers.

Here are the kinds of workers an employer should consider:

EMPLOYEES

An owner has the greatest responsibility for employees who are given staff positions. There are many federal and state labor laws to be aware of, and expenses like employment taxes -- Social Security and Medicare -- and workers compensation insurance to be paid. If the employee is laid off, the company ends up paying for some of the unemployment benefits.

But for many companies, hiring employees is the best way to build for the long term.

The temporary employee, meanwhile, is going to be clocking out at 5, and an independent contractor may be juggling jobs for other companies.

Anyone who has hired employees knows it can be an iffy proposition. When someone doesn't work out, there are issues about how to handle the dismissal, and the search for a successor can take time.

But with the right employee, a company has a chance to grow.

"The person is more readily integrated into the culture of the organization, which can have a hard-to-measure but real impact on the productivity of that person and those around him or her," said Jay Keegan, CEO of Adams Keegan, a Memphis, Tenn.-based human resources management firm.

INDEPENDENT CONTRACTORS

Many small business owners use independent contractors because they can be engaged for a specific project, which means different people for different jobs. And because these workers are self-employed, there's no need to pay the taxes and insurance that go along with a full-time hire. They also don't provide benefits to independent contractors.

Some small businesses ask employees they had to lay off to work as independent contractors. That can be a huge plus, since the worker is already familiar with the company, what it does and what its culture is like.

One of the downsides of an independent contractor is that a business could be competing with others for the worker's time and attention. On the other hand, if they like the work and the pay, they're likely to keep working with you.

There's also a tax caveat to be considered. Because companies don't need to pay employment taxes when they use independent contractors, the IRS is on the lookout for abuses in which a worker is called an independent contractor, but is being treated like an employee.

The key distinction between the two types of workers is control. If an owner has the right to control aspects of the job like the place of work and the hours put in, and if there is too much supervision of the worker, the IRS is likely to consider this an employer-employee relationship.

The IRS has information about the differences between employees and independent contractors on its Web site at www.irs.gov/businesses/small/.

TEMPORARY WORKERS

First, it's important to distinguish between someone you hire temporarily, and a worker who comes from a temporary staffing agency. Someone you hire for a limited time is still an employee under the law, and so you'll have to pay for taxes and insurance. Someone from a temp agency technically is working for the agency and so you don't need to pay that money.

Many companies turn to temp agencies so they can try out a worker before committing to a permanent hire. The worker also gets to give the boss a tryout.

And if the employee doesn't work out, the company doesn't have to deal with severance issues like unemployment insurance.

The minuses with temporary workers include the fact that they may not have the kind of commitment to the job as someone who knows the job is theirs. And co-workers may not work as well with someone who's here now but likely to be gone soon.

Temps can also be expensive, since you're paying fees to the agency. And if you decide to take the worker on full-time, you could be paying a fee in the thousands of dollars.

Continue reading "What Kind of Worker to Hire : Employee, Independent Contractor or Temporary Worker" »

Have you received a "personal and confidential" notice in the mail from the "debt resolution department" at a California law firm offering to help you restructure a debt. Does the letter urge you to call a toll-free number as soon as possible if you wanted to take advantage of the offer?

Such advertisements for debt resolution services are common these days, and government officials and consumer groups have increasingly raised questions about many of them.

In recent years, as consumers have gotten themselves into more debt, for-profit debt settlement, management and negotiation services have popped up to help those in debt lower their payments, interest rates or fees; extend the terms of their loan with new payment plans; or pay off the debt with a lump payment.

But often, according to the Consumer Federation of America, the firms ask for upfront fees without delivering their promised results or don't disclose what effect the services may have on credit scores or debt collector calls, misleading consumers and leaving them worse off.

"People are given false hope," says Steven Peck, a California business attorney located in Van Nuys, California. "The Federal Trade Commission is holding hearing related to the misleading of consumers concerning this issues" Peck says.

The proposed rules currently include bans on both taking fees in advance of successful results and misrepresentations about how the service works and what consumers can expect. The proposals would also require disclosure about service costs and time necessary to achieve results. In addition, the rules say the firms must tell consumers that they may still be contacted by debt collectors. The rules would apply to both sales calls from debt relief services as well as calls consumers make to such services in response to advertisements.

If you're in debt, instead of making such calls initially, it is recommended that you first contact your creditor to see if you can work something out yourself (ask customer service to be connected with someone who can help you renegotiate). "You may be able to resolve the problem yourself," Peck says.

If that doesn't work, check the National Foundation for Credit Counseling's Web site to find nonprofit members in your area who may able to help you determine if you qualify for a debt management plan that could help rework payments for a nominal fee. Such nonprofits are governed by federal legislation.

Finally, if a debt resolution service is your only option, Steven Peck suggests looking for firms that "charge based on success" or just charge a small fee. Also, check with a state or local consumer protection agencies to make sure that the service's advertisements meet any state regulations that may exist. To see if there are complaints about the firm, check with the local Better Business Bureau and sites like Ripoff Report.

Readers, how have you found ways to renegotiate or lower your debt?

As for notices received by clients' unsolicited in the mail, our offices called the firm to find out where the information about my debt came from. An operator and a debt manager I spoke with said it came from public records that might have inaccurate information and that we could just "shred" the notice if we didn't have the debt.

Be very careful of those "upfront retainers". Should you have any questions about debt renegotiation or other business law matters please contact Steven Peck's Premier Legal toll free at 1.866.999.9085 or contact us on-line at www.premierlegal.org.

A Contractors State License Board (CSLB) sting operation conducted in San Clemente l highlights the risks consumers face if they hire unlicensed contractors for home or business improvement projects. CSLB´s Statewide Investigative Fraud Team (SWIFT) partnered with Orange County District Attorney´s investigators and Sheriff´s Department investigators for the operation conducted October 29 and 30, 2009.

SWIFT Enforcement Representatives posed as owners of a commercial suite and warehouse in an effort to catch unlicensed, uninsured suspects who submitted bids greater than $500 for construction projects. California Business & Professions (B&P) Code requires that any job valued at $500 or more for labor and materials be done by a company licensed by the state. Suspects bid on projects such as tiling and painting.

SWIFT investigators targeted those who advertised their construction services online or in local publications. California law requires that all advertisements include a valid state contractor license number or that they are not licensed. Those not licensed by CSLB may only do projects valued at less than $500 (Labor & Materials). Those nabbed in prior stings were also invited to the sting location.

Suspects were issued a Notice to Appear (NTA) at the Orange County Superior Court´s Central Justice Center in Santa Ana on December 15, 2009 to answer misdemeanor charges of contracting without a license and advertising violations. During the two-day sting, 14 NTAs were issued. A 15th person was issued an NTA for allowing another person to fraudulently use his CSLB license number.

"You never know who you might be letting into your home if you contract with someone that isn´t licensed," said CSLB Registrar Steve Sands. "Since 2005, CSLB has conducted background checks on all new applicants, and those adding classifications to their licenses. Those with offenses substantially related to contracting are not granted licenses. Consumers should always ask to see the contractor´s CSLB license and a photo ID to verify that it´s that person."

CSLB uses stings to educate unlicensed contractors on how they can come into compliance with the law, once they´ve paid their fine for contracting without a license. DA investigators used this operation as an opportunity to let them know they could face additional charges in the future if they do not carry workers´ compensation insurance for their employees. Licensees are also required to have workers´ compensation coverage for all employees, and for themselves if they are C-39 roofing contractors, to ensure home owners will not be responsible for a work injury should it occur on their property.

"Consumers might think they´re saving money by hiring the unlicensed, uninsured person who offers a low bid," said CSLB Registrar Steve Sands. "But, if somebody is hurt while working on the project and doesn´t have workers´ compensation insurance, the homeowner could be held liable for any medical expenses, which would undoubtedly prove much more costly."

CSLB urges consumers to remember the following tips when hiring a contractor:

>> Be especially hesitant when approached by someone offering home improvement services door-to-door.

>> Verify the contractor's license by checking online at www.cslb.ca.gov, or via CSLB´s automated phone system at 1-800-321-CSLB (2752).

>> Don't pay more than 10% down or $1,000, whichever is less. There is an exception made for about two dozen licensees who carry special coverage to ensure consumer protection and may ask for more than a ten percent down payment. Those exceptions are noted on the CSLB Web site.

>> Don't pay in cash, and don't let the payments get ahead of the work.

>> Check references, and get at least three bids and a written contract.

>> Contact CSLB if you have a complaint against a contractor.

CSLB offers helpful consumer publications that can be downloaded at www.cslb.ca.gov or www.CheckTheLicenseFirst.com, or ordered by calling, toll-free:1-800-321-CSLB (2752).

In 2009, CSLB, which operates under the umbrella of the Department of Consumer Affairs, marks its 80th anniversary of protecting consumers by regulating California´s construction industry. Today, CSLB licenses about 315,000 contractors. In any given year, complaints are filed against only 3% of licensed contractors. In fiscal year 2008-09, CSLB helped consumers recover nearly $36 million in ordered restitution.

Continue reading "Beware of Unlicensed California Contractors: Rights & Liabilities" »

Commercial bankruptcies among the nation's more than 25 million small businesses increased by 44% from the thirdquarter of 2008 to the third quarter of 2009, according to Equifax Inc. (NYSE:EFX), which analyzes its comprehensive small business database for theon-going study.

Comparing the month of September 2008 to September 2009 shows an increase of
27 percent. There were 9361 bankruptcy filings in September 2009 throughout
the U.S., up from 7386 a year ago, according to the data.

California remains the most negatively affected state with eight MSA's
(metropolitan statistical areas) among the 15 areas with the most commercial
bankruptcy filings during September 2009.

Los Angeles, Riverside/San Bernardino and Sacramento metropolitan areas
continued to lead the nation in small-business bankruptcy filings as they did
at the end of the second quarter. The other MSA's with the most bankruptcy
filings during the month include:

-- Denver-Aurora, CO
-- Santa Ana-Anaheim-Irvine, CA
-- San Diego-Carlsbad CA
-- Dallas-Plano-Irving, TX
-- Portland-Vancouver-Beaverton, OR-WA
-- California (excluding MSA's within the state)
-- Oakland-Fremont-Hayward, CA
-- Oregon (excluding MSA's within the state)
-- Chicago-Naperville-Joliet, IL
-- Houston-Sugar Land-Baytown, TX
-- San Jose-Sunnyvale-Santa Clara CA

-- Atlanta-Sandy Springs-Marietta, GA

"Economic pain is continuing for small businesses across the country. We're
still seeing hefty increases in the number of bankruptcies in a lot of major
metro areas." said Dr. Reza Barazesh head of North American research for
Equifax's Commercial Information Solutions division.

"However, the 69 percent drop and 49 percent decline in bankruptcies in
Charlotte and New York-White Plains respectively, and a 44 percent drop in
Atlanta between the second and third quarters indicates that the East Coast
may be experiencing an earlier recovery from the recession than the West
Coast."

Charlotte - number four in June - dropped out of the top 15 entirely to 39th;
Atlanta dropped from fifth to 15th; and New York - White Plains dropped from
eighth to 24th.

Equally consistent with this east/west difference over the same period, the
11th, 12th and 13th MSAs with the greatest number of bankruptcies at the end
of the second quarter of 2009 -- Santa Ana-Anaheim, Denver and San Diego --
increased in rank to 5th, 4th, and 6th by the end of the third quarter. Santa
Ana-Anaheim increased three percent, Denver was up 13 percent and San Diego
increased four percent.

For its research, Equifax reviewed and analyzed small business data for the
month of September, the most recent month for which complete data is
available, and compared it with results from September 2008. Equifax defines
a small business as a commercial entity of less than 100 employees.

The company's report also listed the 15 metro areas with the fewest
small-business bankruptcy filings. They are:

-- Charleston, WV
-- Trenton-Ewing NJ
-- Tallahassee FL
-- South Bend-Mishawaka IN-MI
-- New Jersey (excluding MSA's within the state)
-- Holland-Grand Haven MI
-- Gainesville FL
-- Baton Rouge LA
-- Wilmington NC
-- Toledo OH
-- Roanoke VA
-- Lubbock TX
-- Lancaster PA
-- Springfield MA

-- Savannah GA

For the analysis, Equifax analyzed Chapter 7, 11 and 13 filings. Chapter 7 is
a liquidation proceeding in which a debtor receives a discharge of all debts;
while Chapter 11 and Chapter 13 are reorganization bankruptcies enabling
individuals and companies to pay off debt over a set period of years.

Continue reading "Commercial Bankruptcies Continue there Increase" »

A shareholder whom receives an improper distribution, knowing of its improprierty, is personally liable to the corporation for the benefit of creditors and shareholders who are entitled to sue.

Liability, though, is limited to the amount received for the shares, plus interest at the statutory legal rate on judgments until paid, but not in excess of (1) the corporate liabilities owed to nonconsenting creditors at the time of the violation and (2) the injury suffered by the nonconsenting shareholders.

To be found liable, the selling shareholder is not required to have knowledge that the distribution was illegal; it is enough if the shareholder knew the facts indiciating the impropriety.

For example, shareholders who knew that the corporation would be likely to be unable to meet its current liabilities would be liable for receiving an improper distribution, even if they did not know of the impropriety of the distribution. Shareholders who are active in the management of a closely held corporation should be particulary careful to structure their buy-sell agreements to avoid liability of a deceased or withdrawing shareholder for improper distributions in redemption of their shares.

Continue reading "Shareholder Liability for Improper Corporate Distributions" »

The directors may be held liable in connection with a buy-sell agreement for failing to act in the best interests of the corporation.

Liability would be based upon breach of fiduciary duty owed by the directors of the corporation.

For example, payment of an excessive price to a withdrawing shareholder to maintain the directors' management position may constitute a breach of the directors' fiduciary duty to the corporation. The sale of shares to the corporation by a controlling shareholder or a member of a control group at an excessive price to transfer control, or to permit a control group to remain in control, may cause the selling shareholder to be liable to the corporation for the premium paid for the shares.

Continue reading "Breach of Fiduciary Relationship: California Corporation Law" »