Articles Posted in Business Formation & Planning

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According to a recent report issued by the research firm CB Insights, Northern California remains the most active region for startups. In fact, between Silicon Valley and San Francisco combined, start-ups raised over $2 billion in the first three months of 2013. While a number of cities and areas around the country have tried to duplicate the success of the Bay Area start-up scene, none have been able to do so. Now, a new final rule issued by the Securities and Exchange Commission (“SEC”) meant to make it easier for start-ups to attract investors may be doing just the opposite. The move by the SEC, which came about as a result of the Jumpstart Our Business Startups Act (“JOBS Act”), was aimed at loosening restrictions for businesses attempting to raise capital. Prior to the adoption of the rule amending Rule 506, issuers relying on Rule 506 were prohibited from using any form of general solicitation or general advertisement.

The rule, approved on July 10, 2013, permits startups to openly solicit funding from investors, action that was previously prohibited by the SEC. With the passage of the new rule, businesses will now be able to more widely solicit and advertise for potential investors, including on the Internet and through social media. However, this new freedom does not come without a price. Businesses will have to take reasonable steps to ensure that only accredited investors actually purchase securities, which is one reason that investors may not be fully on board with the new rule.

In order to determine whether a potential investor is “accredited” the businesses issuing the securities will have to consider various facts and circumstances, including: (1) the nature of the purchaser and the type of accredit investor the purchaser claims to be; (2) the amount and type of information that the issuer has about the purchase; and (3) the nature of the offering, such as the manner in which the purchaser was solicited to participate and the terms of the offering.
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As the fall semester nears, and students begin looking for internships, the legality of unpaid internships will continue to be an important issue for business owners and employers. This summer, the U.S. District Court for the Southern District of New York struggled over two key issues that will affect the future of the legality of unpaid internships: (1) whether employers must classify entry-level “interns” as employees, thereby requiring that interns get paid at least minimum wage and overtime; and (2) whether class action treatment is appropriate for groups of interns.

First, in May of this year, the court in Wang v. Hearst Corporation held that interns at Hearst Corporation were not necessarily employees under the law. As a result, the jury would have to resolve that issue. The court also ruled that class treatment was inappropriate since the interns’ working conditions were not the same across the group.

However, the following month, in Glatt v. Fox Searchlights Pictures, Inc. the U.S. District Court for the Southern District of New York, came to an entirely different decision, finding that Fox Searchlight Pictures should have classified its interns as employees. More specifically, the court held that unpaid interns on the set of the movie “Black Swan” did not fall under the narrow “trainee” exception to the Fair Labor Standards Act ‘s (“FLSA”) minimum wage and overtime requirements. The court found that this was the case even despite the fact that the interns received academic credit for the internship. Additionally, the Glatt court granted class status to the group of interns.

These two cases bring to the forefront the legality of unpaid internships. At the federal level, the Department of Labor (“DOL”) sets out six criteria for when the “trainee” exception applies. If the trainee exception applies, the FLSA allows interns to work without pay. According to the DOL fact sheet, the trainee exception should be applied only in the following cases:

1. The internship is similar to training that would be provided in an educational environment, even though it may include the operation of the employer’s facilities;
2. The internship must be for the benefit of the intern;
3. The intern must not displace regular employees and must work under the close supervision of the existing staff;
4. The employer must derive no immediate advantage from the intern’s activities, and the employer’s operations may even be impeded by utilizing the trainees or students on occasion;
5. The trainee/intern must understand he or she is not entitled to wages for the services performed; and
6. The intern is not guaranteed a job at the end of the internships.
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On March 8, 2013, the U.S. Citizenship and Immigration Services (USCIS) released a new version of the Form I-9, Employee Eligibility Verification. While employers may continue to use prior versions of the form, dated 02/02/09 and 08/07/09, they may also begin using the newly revised form. Effective May 7, 2013, however, the new Form I-9 is the only version of the form that employers may use.

The Form I-9, which employers are required to fill out for each employee hired, helps employers verify an employee’s identity and employment authorization. While there are no substantive changes to the law relating to the Form I-9 process, the USCIS hopes the revised form will minimize errors and enhance form completion.

Key revisions to the Form I-9 include:

• Changing data fields, including one for the employee’s foreign passport information (if applicable), telephone number, and email addresses;

• More detailed instructions on completing the form and to the list of acceptable documents; and

• Updating the layout of the form, and expanding it from 1 to 2 pages (not including the form instructions and list of acceptable documents)

Notably, if an employer already has a completed Form I-9 on file for a current employee, the employee is not required to fill out a new form. In addition, employers do not need to submit the Form I-9 form to the federal government, but instead are required to keep them on file for three years after the date of hire or one year after the date of the employee’s termination, whichever is later.

Any employer that fails to use the new Form I-9 and/or fails to use the form properly, may be subject to civil penalties.

Aside from the Form I-9, there are a variety of other forms that employers should make sure are filled out after each new hire, including but not limited to the required tax forms and reports of all new hires and rehires.

Report to Your State’s New Hire Reporting Program

All California employers are required to report information about newly hired and re-hired employees to the California New Employee Registry within 20 days of an employee’s start date. This includes all businesses, state and local government employers, nonprofit organizations, and household employers, regardless of the number of employees.

Specifically, the California Employment Development Department (EDD) requires employers to submit the following documents:

• Employer’s business name, contact person name, address, phone number, California employer account number, and Federal Employer Identification Number (FEIN).

• Employee’s full name, social security number, address, and start-of-work date.

There are a variety of reporting formats available to employers reporting new employee information:

1) Submit a Report of New Employee(s) (DE 34) either electronically using e-Service for Business or obtaining a paper copy of the Report and submitting it to the EDD via mail or fax.

2) Submit a copy of the employee’s W-4 form. If you do this, keep in mind that you must add the employee’s start date, your California employer account number, and the Federal Identification Number to the W-4.

3) You may create your own form as long as it contains all of the required information.
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As of January 2013, eleven states, including California, and the District of Columbia, had all passed legislation allowing benefit corporations. Notably, the State of California instituted two new types of stock corporations effective January 1, 2012–a “flexible purpose corporation” and a “benefit corporation” (also referred to as a “B corporation”). These two new types of corporations serve as alternatives to the traditional “C,” “S” or 501(c)(3) corporations.

With the exception of 501(c)(3) non-profit corporations, prior to the additions of the B Corporation and flexible purpose corporation, the primary purpose of corporations had to be to maximize profit for its shareholders. In fact, prior to the advent of these two new types of corporations, a corporation’s shareholders could sue the corporation if the corporation took the environment, community employees, vendors–essentially anything other than maximizing profits–into account when making business decisions.

B Corporations

A benefit corporation is a form of for-profit charity. To qualify as a benefit corporation, a corporation must have a specific purpose: to create a “general public benefit,” which is defined as a “material positive impact on society and the environment.” In addition, B corporations are held to a different standard of accountability. Whereas traditional “C” and “S” corporations must make business decisions based on maximizing profits, directors and officers of B corporations must consider the effect of decisions on shareholders, employees, suppliers, customers, the community, and the environment when making decisions.

Finally, these corporations must maintain certain levels of transparency and public accountability above and beyond the transparency required of traditional corporations. All B corporations must publicly report on their social and environmental performances using established third-party standards. Specifically, a B corporation must publish for public review and inspection a “Benefit Report.” The report must detail its performance over the past year in reaching its mission on both environmental and social dimensions. Existing companies can elect to change into a B corporation with a two-thirds majority vote of its shareholders.

According to the non-profit corporation B Lab, there are currently over 500 B corporations across the United States and Canada, a number that has grown exponentially since 2008. Some current examples of these companies include Bay Area companies Method Products, Inc., Moving Forward Education,, Core Foods, and Bison Brewing Company, and companies with national reach, including Etsy, Ben & Jerry’s, and Patagonia.

Flexible Purpose Corporations

Similarly, a flexible purpose corporation also allows a corporation to identify a legitimate corporate purpose beyond maximizing shareholder value. A flexible purpose corporation can choose a purpose that generally benefits society (e.g., a public or charitable purpose) to identify in its corporate documents, thus allowing it to have its own special purpose. Like a B corporation, a flexible purpose corporation must also publish an annual report disclosing how it is achieving its own special purpose.

The key difference between a flexible purpose corporation and a B corporation is that a B corporation must consider the environment, community, employees and suppliers when making decisions, whereas a flexible purpose corporation can identify one legitimate corporate purpose beyond just maximizing shareholder value.
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California businesses often find themselves needing to investigate potential mergers and acquisitions, along with business formation issues when they decide to start new endeavors. Recently, well-known computer maker Dell announced that it had acquired California-based Gale Technologies Inc., although exact financial details were not released. Additionally, Dell announced the business formation of an Enterprise Systems & Solutions firm that would be focused upon topologies and solutions for enterprise and converged workloads.

Gale Technologies was founded back in 2008. At last report, the company boasted 75 employees, which may seem a small number when compared to the larger firm which acquired it. Dell is actually the world’s third largest manufacturer of computers. Its acquisition of Gale Technologies was the seventh such purchase made by Dell this year. The computer maker seems poised to redesign itself into a firm able to provide a full array of technology services.
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Earlier this year, reports began to surface that businesses were asking job applicants to allow a representative of the business to view the applicant’s Facebook account as part of the interviewing and hiring process. Many citizens value their right to privacy above all and take great pains to keep passwords and other private information safe and secure. At the federal level, a proposed ban on this interview and application practice failed. However, California has recently signed a law protecting individuals’ passwords and social media accounts from exposure under employment contracts.

Further, according to reports from sources, many universities are requiring that one coach or administrator from each of its sports teams be in charge of monitoring the social media accounts and public internet postings of the athletes on that team. Universities apparently derive the authority for this type of monitoring from the fact that the athlete being monitored is similar to an employee and representative of the school through the scholarship they receive from the institution. In fact, many universities have broadened this practice beyond student-athletes to include any and all students attending the school by way of a university or endowment-funded scholarship.
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Companies who are engaged in the business planning process are likely aware of how important lease agreements can be both during business formation and throughout the life of a company. Recently, a California group voted to approve a new lease agreement that would grant USC the authority to supervise ongoing operations for the LA Memorial Coliseum. The master lease must still be approved by multiple state agencies, however. Some lease agreements can take longer to negotiate than originally estimated.

The lease agreement would grant USC the right to manage day-to-day operations of the facility; however, the Coliseum Commission would still act as landlord. Apparently, some groups are not completely in favor of the proposed master lease as it stands. The LA Times and a first amendment group called Californians Aware previously filed suit in court requesting that a new vote be held. According to them, the Coliseum Commission failed to meet state law requirements for holding meetings that were open to the public.
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Regulatory compliance can be an important topic when it comes to business planning. Most California business owners know just how important it is to follow regulatory compliance guidelines in order to avoid potential penalties from governing bodies like the U.S. Securities and Exchange Commission. Sometimes, however, SEC penalties might have a less devastating effect than an unhappy client who leaves–and makes that exit well-known to other clients.

Some investment advisers know this fact all too well. While many focus on the obvious threat of Washington regulators who can make their business lives a lot more difficult in the wake of perceived regulatory noncompliance, the truth is that one dissatisfied custodian for a client can sometimes do far more monetary damage than simple governmental penalties. In a situation where a brokerage firm who acts as the custodian of a client’s securities and sees what they think are too many red flags, the consequences to that adviser could be devastating.
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Companies often face unexpected market conditions that may cause them to change their plans. While it is not always possible to plan for every contingency, it may nonetheless be possible to create a well-rounded business plan that allows a company the flexibility to react quickly and effectively. California-based business startup BrightSource Energy recently experienced this first-hand.

BrightSource is a solar thermal company that builds large solar electric generating systems in desert regions. Currently, its flagship project is a 392-megawatt facility that it is constructing in the Mojave Desert, and which will be the largest solar thermal power plant in the world once construction is finished in 2013. It also recently received a $1.6 billion loan guarantee from the Department of Energy and was due to issue an IPO soon.
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When deciding to start a business, there are number of considerations that may need to be taken into account. For example, there may be business formation issues relating to inventory control, staffing and leases. One California small business, though, decided to ditch all that when they took their bakery and catering business to the web.

Although many small businesses have an online presence these days, they typically do not involve freshly baked produce. However, after examining their options, one Sacramento-based business decided to go the online-only route. They now operate two websites: one that delivers personalized cakes and baked goods overnight to all 50 states, and another that specifically targets the local area and delivers the food directly to a home or office.
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