Articles Posted in Limited Liability Companies

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Corporate merger and acquisitions are highly technical transactions with a lot at stake for all parties involved. It can take thousands of hours of dedicated work to finalize this type of deal and the last thing you want is to commit time, energy, and money to the process only to have one party back out at the last minute. For this reason, the early stages of any merger and acquisition should involve a carefully drafted and negotiated letter of intent (LOI) that is signed by all parties.

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What is a Letter of Intent?

Before you begin the merger and acquisition process, both parties should be on the same page regarding the basic terms of the transaction. These terms are set out in a letter of intent that the parties can review and negotiate to ensure they are in general agreement regarding the basic terms of the final agreement before they commit resources to the transaction. Though you want the terms of a letter of intent to be attractive to the other party, you should also always be realistic.  Disputes can arise later in the M&A process that can halt the process and you could even be accused of acting in bad faith.

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If you are looking into ways to market your business online, you have undoubtedly come across articles extolling the virtues of social media marketing. Sites like Facebook, Twitter, and LinkedIn allow businesses to target certain groups of consumers with pinpoint accuracy, interact with them directly, and build brand recognition. Furthermore, there are often no costs associated with creating social media presence for your business and there are certainly ways to engage in social media marketing without spending money on paid ads. If your business posts a piece of content that goes viral, it could easily result in millions of views from individuals who may become paying customers or clients.

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Unforeseen Liability

Before you rush out to join the social media marketing frenzy that is in progress, you should consider some of the legal issues that may be implicated. The good news is that it is completely possible to engage in social media marketing without incurring legal liability; it is important, however, to determine whether there are any legal problems that could potentially arise. Here are some of the potential issues to consider:

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Foreclosure of a Charging Order

Limited liability companies (LLCs) provide their owners (members) a number of protections that do not exist for partnerships or sole proprietorship’s. One critical protection is limited liability protection.  Because an LLC is considered a separate legal entity and its assets and debts are separate and distinct from any assets or liabilities that its owners may have, a creditor of an LLC member typically cannot reach or interfere with the LLC and vice versa. However, California law does provide a tool for creditors to try to reach a judgment debtor’s LLC interest. The tool is called a charging order.

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A charging order is roughly akin to a wage garnishment, but instead of directing an individual’s employer to pay over a portion of the individual’s salary to the creditor, it directs an LLC in which the individual judgment debtor has a membership interest to pay over any distributions that would otherwise be made to the member to the creditor. Notably, a charging order ordinarily cannot compel an LLC to make a distribution to a member and does not confer any management rights, instead extending only to distributions made to a member. For this reason, charging orders do not always result in payment to the creditor. Nonetheless, a charging order can still be effective because they can cut-off an LLC member’s rights to receive any distributions from the LLC and may impact the member’s dealings with the LLC and its other members.

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A startup or entrepreneur looking to raise capital is willing to do almost anything to accept capital from an investor.  As a corporate and business law attorney, experience with more successful clients has led to some observations about what an entrepreneur might also want to look for or consider in an investor besides capital only.

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Consider the following observations when looking to attract investments.

Build Friends Not Just Investors

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When the shareholder of a corporation files bankruptcy, the shareholder’s stock becomes part of the debtor’s bankruptcy estate and will generally be subject to liquidation by the bankruptcy trustee for the benefit of the debtor’s creditors.

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However, when a limited partner in a limited partnership (LP) or a member of a limited liability company (LLC) files bankruptcy, the debtor’s ownership interest may well be treated differently because interests in LPs and LLCs are typically considered and treated as more contractual in nature.

Membership Interests in LLCs

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The purchase and sale of goods and services at a storefront is rarer these days. Information technologies make online transactions more efficient and convenient. However, those same transactions expose businesses to greater risk and liability when receiving and using customer information. Information technology companies must not only must safeguard their electronic transactions, but also secure sensitive information and proactively combat data breaches. Failure to do so can lead to a huge economic loss for the customers and the company.  Structure Law Group, LLP advises companies engaged in e-commerce on privacy and security issues, how to safeguard against the inadvertent data breaches and counsels them on the necessary steps to take if such an unfortunate event occurs.

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California law protects the individual’s right to the safety and integrity of his/her personal information. California’s Information Security Act defines personal information as any information that could identify or describe a person. Personal information includes a person’s name, address, social security number, license number, medical information, and the like. If your website collects such information, then you are required by law to take reasonable steps to prevent disclosure of such personal and private information. California law obligates businesses to implement security measures reasonably designed to protect the integrity of the such information. Every business entity, from a sole proprietorship to a multi-national corporation is subject to the Information Security Act.

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Many people will say that your business is only as good as your best employees. In fact, you may have one or more top employees who are absolutely integral in building and maintaining the success of your company. While having talented employees is a benefit to any business owner, it also tends to draw the attention of your competitors.

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Your company may have some employees who could leave with only minimal interruptions to your business operations. On the other hand, there may be a select few whose absence may substantially harm your bottom line. Identify the top performers in your company through performance reviews and other tools and focus on keeping them satisfied. After all, your competitors will not be actively seeking your “benchwarmer” employees – they will be looking to take your Stephen Curry.

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Businesses are moving away from the traditional storefront and are instead setting up shop online. Both the internet and apps connect individuals across the globe, providing businesses with greater and more innovative ways to reach new customers. For example, on Black Friday 2016, the busiest shopping day of the year for most retailers, online sales rose 21% year-over-year for a total of $3.34 billion. A full one-third of that figure was just from mobile sales.  On Cyber Monday 2016, the largest online shopping day, online sales rose over $3 billion with 26% of sales just from mobile devices.

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As a greater number of businesses devote their focus to the development of an online presence and using e-commerce to conduct their business, businesses must pay more attention to properly establishing and operating their online business.

Starting Your Business

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When a shareholder of a corporation believes that he or she has been wronged, the shareholder generally has two options to file a lawsuit.  The shareholder may either bring a direct action or a derivative action, depending on the facts of the case.  In many instances, it is only appropriate for the shareholder to bring one of these two types of actions against the company.   Below is a general explanation of how a corporation is set up, and a discussion of the differences between the two types of shareholder actions.

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Let’s say that you decide to open a lemonade stand by yourself as a simple business.  In a simple business, you would own the lemonade stand.  If the lemonade stand did well, you would make more money, and if it did badly, you would not.  In addition to being the owner, you would also run the lemonade stand.  You would make day-to-day decisions about the lemonade stand, like how where to order to the lemons from, what equipment to use, and how much customers should pay for the lemonade.  To sum up, you alone would both own and run everything.

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The State of California protects consumers of retail goods by limiting warranty disclaimers on products sold in the state. California’s warranty protection extends to manufacturers, distributors, and retailers alike.  The warranties apply to both the sale and lease of consumer goods. The seller can disclaim the warranties by following very specific and highly detailed statutory requirements. Failing which, the seller cannot disclaim the warranties implied in every consumer sale. The sale of a service contract at the time of or within 90 days of the sale of the goods adds another aspect to the seller’s ability to protect themselves after the sale. San Jose’s preeminent business attorneys at Structure Law Group, LLP possess a high level of experience and skill drafting warranty disclaimers for businesses.

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The implied warranty of merchantability protects consumers in every sale of goods in California. Specifically, the implied warranty of merchantability extends to the retailer, distributor, and manufacturer of goods. The retailer is indemnified by the manufacturer for the full amount of liability. Merchantable goods must either conform to the contract description or be of acceptable quality in the trade or business. In addition, the goods must be fit for their ordinary use, rather than for a specific purpose. The goods must also be identified, labeled and packaged appropriately. Lastly, the goods must conform to the promises made on the label or packaging. Goods are non-conforming if the goods fail to satisfy any one of the necessary requirements set forth above.

A second implied warranty arises in specific circumstances. This warranty is the implied warranty of fitness for a particular purpose.  The warranty of fitness for a particular purpose attaches to the sale of goods when the retailer, distributor or manufacturer knows or has reason to know that the consumer is relying on the goods to perform a very specific purpose. Additionally, the buyer is relying on the seller’s expertise and advice that the goods purchased are sufficient to satisfy the particular purpose.  Additionally, the seller must know or have reason to know that the buyer is relying on the seller’s expertise and judgment. The goods must conform to the seller’s expectations, i.e. the particular reason the consumer purchased the goods.

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