Functioning as a
is both rewarding and challenging. Making certain that your business is established and functioning in accordance with the law is an important aspect of protecting both the
business assets and liability of your company
. Educating clients about the pros and cons of
or forming a limited liability company continues to be a part of my legal practice. For many sole proprietors the trade off between the cost of buying more insurance and creating a company with limited liability favors the former rather than the latter. If incorporating appears to be truly beneficial, it’s important for a client to understand how to properly care for a fictitious entity, which involves both maintaining proper documentation of its continued existence and a financial bright line between the entity and the owner/shareholder. One of the motivations for incorporating is often the desire of a sole proprietor to give a trusted employee a “piece of the business.” This is potentially dangerous, and I often advise against it. Most clients believe that they can continue to control the incorporated business if they hold 51% of the stock. This is a misconception. A shareholder owning more than 35% of the stock may force the dissolution of the corporation without any reason. Furthermore, the
California Corporations Code
provides for cumulative voting. A two shareholder corporation must have two directors. In the event of serious disagreement, one of the two shareholders cannot oust the other from the board by electing both directors unless he owns more than 64% of the stock. Increasing the trusted employee’s compensation to maintain his loyalty is usually preferable to making him a co-owner.