Q:

I own 55% of stock for my company while my...partner has 45%. When we created the company we both signed a [notarized] letter...stating..."what money she brings in she keeps and what I bring in I keep. After 4 years now I have brought in 90% of what the company produces... I have decided to continue without her. Please let me know how cumbersome detaching myself from her will be and what she will be entitled to as a 45% stock holder... keep in mind she may not want to separate and will fight me o

A:

The fact that she owns 45% likely means that you will have to agree on the value of the good will of the business, if any, and the value of the assets of the business. Assuming you can agree then you would buy her out for a price upon which you agree. Not necessarily 45% of the agreed total value business. It could be more or less. If she states she doesn't want to end her involvement you would have to file a lawsuit to dissolve the business. 

This could be an expensive proposition as the business value would have to be determined. Each side might hire experts to value the business. There are lots of ways to value the business. 

Buy–sell agreements consist of several legally binding clauses in a business partnership or operating agreement or as separate agreement; it controls the following business decisions: Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders); What events will trigger a buyout (the most common events that trigger a buyout are an owner’s death, disability, or retirement. Less common and more problematic events include a desire of one owner to exit the company or an owner getting a divorce) and; What price will be paid for a partner’s or shareholder’s interest in the partnership. 

A buy-sell agreement would have been prudent. Check and see if you guys executed one. It can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan since the business is a corporation. 

You probably don't have one as not having a shareholder agreement which would dictate the purchase price of a departing shareholder is very common with small businesses. People often form a corporation with an online automated company or the like or by using the services of a company they found in a newspaper ad. This can be a disaster. 

Without a plan any shareholder who owns at least a third of the stock in a small corporation (and at 45% she does) could force an involuntary dissolution pursuant to the California Corporations Code. Under such a proceeding, the remaining shareholders (in this case you) would be given the option to buy out the departing owner at “fair value.” “Fair Value” is subjective and has been the source of a lot of legal fees in lots of lawsuits. It is not “fair market value” which is more easily determined, but it is a starting point for negotiation. 

If your company is making good money, then you should separate from her now. And you will likely need to employ a lawyer. If you're not making a lot it might not make sense to spend funds on a dispute. The particular facts of your situation should be discussed with an experienced attorney.

Q:

If a contractor incorporates his business, can the new corporation use the ‘old’ license that had already been issued to the individual?

A:

No.

A new license is required whenever the business entity changes (e.g. switch from a sole owner to corporation, sole owner to partnership, partnership to corporation, etc.) or when specific changes occur in the business structure.  Licenses aren’t transferable from one business to another, even if the qualifying individual is the same for both (Business and Professions Code, Section 7075.1).

Q:

I want to start [insert business type here] company. Is a corporation or an LLC the best route for me? I also heard registering the company in Delaware [or Nevada] is the best way to go since they have the best taxes and so forth, for small businesses. Is this true? I’m aware I should get a lawyer, but I’m on a real slim budget, but I’m motivated and willing to work hard. What should I do?

A:

If you are on a real slim budget but motivated, then you should worry about what you do best first. I assume that you know about or are interested in the [business type]. Focus on that. Focus on the task of marketing and providing excellent goods and/or services. The purpose of corporations, LLCs and other business entities is to provide protection from personal liability for business debts and to memorialize the rights and the obligations of the individuals who are shareholders or members.

If you have no real income. If you’re working by yourself and you have no investors, then you’re jumping the gun worrying about things like the pros and cons of Delaware incorporation versus incorporation in California. To my mind even creating a business entity may be premature. Assuming you do incorporate or form an LLC, to borrow money you will almost certainly have to provide a personal guarantee for the loan. Similarly, most vendors will require that you be on the hook for goods and services they provide. This means that one of the benefits of an LLC or corporation, protecting personal assets from business debts, will not be possible until you have several profitable years.

Having said all that I applaud your interest in laying the ground work for a business. I suggest you go to www.nolo.com and check out the company’s concise, easy to understand books on starting a business and running one as well as books on creating your own LLC or corporation.

A corporation can be expensive to maintain. Corporate books and records must be kept, minimum state taxes must be paid (presently $800) and an annual tax return must be prepared and filed, even if there is a loss. Dissolving a corporation is time-consuming and expensive. And the shareholders are personally liable for any unpaid corporate income taxes.   A limited liability company does not require the corporate formalities that a corporation does; however, both limited liability companies and corporations must pay annual minimum state income tax (presently $800) even if there is a loss.

You don’t need to create a legal entity to do business. But, if you’re going into business treat it like a business. Open a checking account that is used only for business expenses and into which you put seed money and payments. Find an accountant; income taxes on a sole proprietorship are paid via a schedule C on your 1040. Small businesses often trip up on taxes. You’ll also need to access the information relating to registering a business and paying local business taxes in your community which you can do on the internet. Good luck.