Lawyer Monthly - September 2023

of limited liability partnerships are only available to certain categories of licensed professionals, including attorneys. Related to the above, what potential legal pitfalls exist for business owners during formation? In my experience, the most common legal pitfalls that exist are failure to understand the required formalities when forming the business and attempting to form the business by using general forms that are not state-specific. As to following required formality, it is extremely common for clients to bring me a binder for their corporation that looks great on the outside, but is blank inside – no minutes, no operating agreement and no share ledger or log. There is no written record of who owns shares and when those shares were acquired. Failure to keep records exposes business owners to potential personal liability for corporate debts and damages. In addition, there are many small and medium-sized businesses that form corporations online and believe there is nothing more to do once they have become a recognised entity on the Secretary of State website. For example, the California corporations code requires that there must be documents filed, shares registered, taxpayer identification numbers obtained, shareholders meeting held, minutes written and approved and recorded, and an actual transfer of shares to shareholders. It is not sufficient with any business entity to merely ‘form and forget’. It is also very risky when forming a business to do so without an operating agreement or corporate by-laws that provide the rules and guidelines for the business’s operations and governance. Any business in California should have a valid operating agreement, corporate by-laws or shareholder agreement that is specifically tailored to their business entity and which specifically addresses items such as (a) the number of shareholders, directors, or officers, (b) the voting rights and ownership rights of shareholders, and (c) procedures in place upon the death, incapacity, removal, resignation of officers or directors, or (d) how to deal with owner misconduct. Absent a governing agreement of the appropriate type, the business can be forced to deal with the draconian California Corporations Code at a time when the company may already be going through difficulties. The California Corporations Code is a baseline guide to governing a business and outlines the bare minimum. An operating agreement, partnership agreement or corporate by-laws (depending on the type of business you form) are recognised by 52 LAWYER MONTHLY SEPTEMBER 2023 Failure to keep records exposes business owners to potential personal liability for corporate debts and damages.

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