California’s New Overtime Exempt Minimum Increases to $41,600 and Minimum Wage Set to Increase to $15 per Hour

Many of our business clients are still adjusting to the new California minimum wage, which increased to $10.00 per hour as of January 1, 2016. This state-wide increase has also resulted in a surge in the annual amount California employees must earn to satisfy the “salary test”—the first of two prongs in the test to determine whether an hourly employee is exempt from applicable overtime laws–to $41,600 annually. If both prongs of the test are met, then the employee may be paid a flat salary, without overtime pay. For information on the various exempt classifications which set out the requirements for the second prong of thetest, called the “duties test”, click here.

Failure to pay overtime pay to an employee who does not qualify as exempt can be costly, even if the employee works just an hour of overtime per day. Say an employer mistakenly misclassifies an hourly worker as exempt from overtime.If that misclassified employee works just an extra 60 minutes per day at $40,000 a year, he or shewill accrue an overtime amount due of $7,500 per year. Given that California law permits employees to reach back four years under the applicable statute of limitations, an employer’s liability for just one misclassified employee could reach $30,000 over four years for this one hypothetical worker.

If the same mistake is repeated for other employees, an employer could face a potentially devastating judgment against them for overtime pay owed, not to mention the costs of defending such a claim. The applicable statutes provide for a recovery of attorneys’ fees and costs from an employer if an employee prevails on an overtime claim, which: a) provides ample incentive for employees and attorneys to pursue such claims, resulting in a proliferation of such claims against employers; and, b) significantly heightens the exposure of employers to liability.

Minimum Wage Increases Yet to Come

As one of our employment law attorneys discussed in a previous article titled, Economic Justice or Economic Devastation: What Does the Proposed Minimum Wage Hike to $15 an Hour Mean to Your Business?, a recent bill signed into law by California Governor Jerry Brown will continue to raise the state minimum wage until it reaches $15 per hour. The potential cost to employers for misclassifying a worker makes it imperative that employers remain informed as to any corresponding increases to the “salary test” amount for determining exemption from overtime pay as the minimum wage rate continues to escalate under this law.

The additional increases to the minimum wage for employers who employ 26 or more employees are:

1. On January 1, 2017, the minimum wage will increase to $10.50 per hour.
2. On January 1, 2018, the minimum wage will increase to $11 per hour.
3. On January 1, 2019, the minimum wage will increase to $12 per hour.
4. On January 1, 2020, the minimum wage will increase to $13 per hour.
5. On January 1, 2021, the minimum wage will increase to $14 per hour.
6. On January 1, 2022, the minimum wage will increase to $15 per hour.

There is a short respite for employers with fewer than 26 employees; the scheduled increases are delayed at each step by one year for such employers.[1]

Conclusion

Given that overtime claims have continued to proliferate, it is critical for business owners of all sizes to ensure they are compliant with applicable overtime laws. Whether you are an employer or an employee, the attorneys at Gehres Law Group have the knowledge and experience to assist in protecting your employment law interests. Contact us for a complementary evaluation to discuss how we can help, or browse our website for more information.

[1] This article does not discuss minimum wage laws applicable to public employers, which must abide by a more complex set of rules than private employers.

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California’s “Good Faith Settlement” Law: An Example From a Recent Case

Lawsuits are expensive, as we all know, and as experienced business law litigators, we frequently find ourselves advising our business clients to settle their claims, usually at some reduced value, rather than pursue expensive, distracting litigation.  But sometimes, even where your adversary is willing to agree to pay a reasonable settlement amount, filing a lawsuit may be advantageous.  One reason for doing so, as we have discussed in a prior article on this blog, (“Suing for an Enforceable Settlement”), is that once you have lawsuit on file, you can secure any settlement involving payment over time with a stipulated Judgment which, if payment is not made as promised, you can immediately move to enforce.

Another reason for preferring a lawsuit, whether you are a plaintiff or defendant, is to take full advantage of California’s “Good Faith Settlement” statute, Code of Civil Procedure Section 877.6, (CCP § 877.6).  This statute provides a procedure to assure a settling party that they will not be dragged back into litigation on indemnity or contribution claims by another party sued for the same claim.  From the plaintiffs’ prospective, this can help encourage defendants to settle, knowing that they can be relieved of possible cross-claims for indemnity by Court order affirming their “good faith” settlement.  From the defendant’s point of view, likewise, it allows for certainty that they will not be dragged back into the matter by a non-settling party.

CCP § 877.6 applies both to contract and tort claims, as is clear from the initial paragraph of the statute:

a)(1) Any party to an action in which it is alleged that two or more parties are joint tortfeasors or co-obligors on a contract debt shall be entitled to a hearing on the issue of the good faith of a settlement entered into by the plaintiff or other claimant and one or more alleged tortfeasors or co-obligors, upon giving notice in the manner provided in subdivision (b) of Section 1005. Upon a showing of good cause, the court may shorten the time for giving the required notice to permit the determination of the issue to be made before the commencement of the trial of the action, or before the verdict or judgment if settlement is made after the trial has commenced.

The effect of a finding of “Good faith settlement” is set forth in paragraph 2(c) of the statute:

1. c) A determination by the court that the settlement was made in good faith shall bar any other joint tortfeasor or co-obligor from any further claims against the settling tortfeasor or co-obligor for equitable comparative contribution, or partial or comparative indemnity, based on comparative negligence or comparative fault.

A REAL LIFE EXAMPLE:

THE PEST CONTROL COMPANY SETTLEMENT

Our firm was recently approached by a husband and wife who were traumatized when an employee working for a pest control fumigation company was found to have engaged in lewd acts in their bedroom, captured in ugly detail on their home security camera.  They felt violated and fearful, and wanted compensation and retribution, but also desperately hoped to avoid the embarrassment and public spectacle of a lawsuit on such sensitive matters.  We agreed to take the case.

Aside from the deviant employee, there were two separate pest control companies potentially liable to our clients, i.e. the prime contractor and a subcontractor.  The prime contractor (Company “A”) was eager to settle promptly, while the subcontractor (Company “B”) was stubbornly refusing to make any significant settlement offer.  Both Company “A” and Company “B” had potential liability for negligence, and if they were both found liable for negligence after trial they would be considered “joint tortfeasors”, and would be entitled to have their liability apportioned based on their proportionate degree of fault.  Thus, if our clients’ damages were found to be $150,000, and both company “A” and “B” were found equally liable, and they both were solvent, they would each have to pay $75,000; and if one paid more than $75,000, they would be entitled to pursue the other to contribute their fair share.

Company “A”, as noted, wanted to settle promptly. We finally agreed to accept their offer, in a significant compromise of our initial demand, based on some strong technical defenses they had as the prime contractor not responsible for the subcontractor’s employee.  But Company “A” also wanted,as part of the settlement agreement, a guarantee that, after paying that settlement, they would not be dragged back into litigation on a cross-complaint for indemnity, if and when we actually filed suit against Company “B”.  This was a problem because, without a “good faith settlement” ruling by a Court, we could not guarantee that Company “B” would not later come after Company “A” to indemnify Company “B” for any liability they might incur.  Since we had not yet filed a lawsuit, we could not get a “Good Faith Settlement” ruling from any Court.  And our clients strongly preferred, if at all possible, to settle with both Company “A” and Company “B” without filing a lawsuit, which is a matter of public record.  This complication delayed our settlement negotiations with Company “A” for several weeks, but we finally convinced them to settle without the finding of “Good Faith Settlement”.

It should be noted, however, that even though we refused to make our settlement with Company “A” contingent on a finding of “Good Faith Settlement” under CCP § 877.6, Company “A” could still ask a Court for such a finding, if and when a lawsuit was filed and Company “B” brought them in on a cross-complaint.  As a practical matter, moreover, the Courts tend to be very lenient in finding that settlements have been made in good faith under CCP § 877.6.  If we had ultimately pursued a lawsuit against Company “B”, and they cross-complained against Company “A”, the very strong likelihood is that Company “A” would prevail on having that cross-complaint dismissed on a finding of “Good Faith Settlement” under CCP § 877.6.

CONCLUSION

The protections afforded settling parties under CCP § 877.6 are very significant and must be considered when determining settlement strategy in any matter which may involve multiple wrongdoers/possible defendants.  The statute applies both to tort and contract claims, including many tort and contract claims which arise in the business context.  A knowledgeable business litigation attorney can help your business evaluate the best strategy for settling such claims, whether you are the claimant or the target of the claim.

At the Gehres Law Group, our litigation attorneys are knowledgeable and experienced in such matters, and we look forward to helping you and your business.Contact us today for a complementary evaluation.

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GUARDING AGAINST PERSONAL LIABILITY FOR RENTAL PROPERTY OWNERS IN CALIFORNIA

Big rewards can be reaped by owning investment properties, but so too can big risks. One common threat real estate investors wish to avoid is personal liability for judgments resulting from a lawsuit. Even the most conscientious owner may one day find him or herself embroiled in a costly legal battle. While it is impossible to prevent lawsuits from being filed—from slip and fall claims to dog bites, environmental contamination claims, and many others–it IS possible for investors to mitigate the costs of such perils. Some of the more common methods of limiting such threats are explored in this article.

Never Hold Investment Property in Your Own Name

Smart investors know that owning rental property in their own name is not the wisest choice when the threat of personal liability is involved, as istypicallythe case with investment properties. It is critical to form and maintain a separate entity to hold title to the properties. While there are many options for holding real estate, including corporations, general and limited partnerships, and limited liability companies (“ LLC’s”), LLC’s are often the preferred choice for a variety of reasons.

A general partnership does nothing, by itself, to protect the owners against personal liability. In contrast, limited partnerships do provide such protection, but only to the limited partners. All limited partnerships must have at least one general partner who is exposed to personal liability for partnership obligations. Although the general partner may be an LLC or C Corporation, this is a more costly method for guarding against personal liability than using an LLC or C Corporation to hold the property since multiple entities must be formed and maintained. However, in some instances, such as when annual revenues exceed $250,000.00, a limited partnership may very well be the best option for investors, in order to avoid the annual LLC fee and franchise tax[1] imposed by the state of California.

For individual investors who anticipate annual revenues below this threshold, a limited partnership is not as attractive as an LLC, which protects all its members against personal liability for company obligations, including lawsuits and judgments, and is generally less expensive to set up and maintain than multiple entities or a C Corporation. LLC’s also have the advantage of avoiding the double taxation which comes with owning a C Corporation.

Many small real estate investors also hold real estate in a trust. Although living trusts are very useful for succession planning and may help protect an owner’s privacy, such trusts do not protect the owner from liabilities arising from ownership of the property, which is the focus of this writing. However, setting up a trust in conjunction with an LLC to hold real estate should be considered since it does add value to the owner in most instances.

What if You Own Multiple Rental Properties?

Real estate investors who own more than one rental property often ask our business law attorneys whether they should hold each of their properties in one LLC, or form a new LLC for each property they own. Although each set of circumstances is unique, our lawyers often advise forming an LLC for each property the client owns.

Here’s why: If someone is injured on just one of the properties owned by an LLC and thereafter sues the company, all of the assets held by the LLC are at risk to satisfy any resulting judgment. For example, ifan LLC owns three properties with estimated values of $500,000.00 each, that’s $1.5 million in assets put at risk by a lawsuit arising from any of the properties, making the LLC a more attractive target to litigants and needlessly exposing all three properties to liability in a lawsuit. By contrast, if each property were held by a separate LLC, only the property held by that particular LLC is generally put at risk, assuming there are no grounds for the injured party to argue that the companies were not properly set up and maintained.[2]In the first example, if a litigant were to obtain a judgment against the LLC, they could place a lien against all three properties until the judgment is satisfied. In the latter situation, where each property is held by a separate LLC, only the property owned by that LLC could be encumbered. As is obvious from this example, the benefit of forming separate entities for each property increases as the value of the properties held by the companies grows.

Another advantage of holding multiple properties in separate LLC’s involves a situation where the investor wishes to obtain a loan against one of the properties. Banks and other lenders often find the prospect of lending to an LLC which owns multiple properties less attractive than separately owned properties since their secured interest (the property being borrowed against) has much more exposure to liability than if they were held separately. In such instances, lenders will often seek a secured interest against all of the properties held by the LLC to ensure their interest in being repaid is well protected.

Conclusion

Owning investment property can indeed be very rewarding. However, smart investors know there are perils to consider before deciding on how to hold such property. With some thoughtful preparation and educated decision-making, investors can reap the rewards of their investment efforts while guarding against the risks.

At Gehres Law Group, P.C., our business law attorneys generally recommend a three pronged approach to limiting personal liability for activities related to investment properties. This approach includes: a) forming an entity or entities to hold title to the properties as discussed above; b) preparing well-drafted contracts in order to shift the burden of any threats to others where possible; and, c) obtaining sufficient liability insurance.

For more information, browse our website, call us locally at (858) 964-2314 or toll free at (877) 333-2420, or contact the author of this article at info@gehreslaw.com.This article does not constitute legal advice, nor does dissemination of this information, which we offer as a courtesy to our users and clients, by itself, establish an attorney-client relationship.

[1]Franchise taxes and fees imposed on LLC’s in California (in addition to any income tax withholding): $800 for LLCs with total gross income of less than $250,000; $1,700 for LLCs with total gross income of at least $250,000 but less than $500,000; $3,300 for LLCs with total gross income of at least $500,000 but less than $1,000,000; $6,800 for LLCs with total gross income of at least $1,000,000 but less than $5,000,000; $11,790 for LLCs with total gross income of $5,000,000 or more.

 

[2]See our article on Piercing the Corporate Veil: Avoiding Personal Liability for Company Debts at http://ift.tt/2cISIAw for more information on the importance of setting up and maintaining an entity properly in order to avoid personal liability for company debts.

 

 

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YOU CAN STOP TRADEMARK INFRINGMENT

You have gone through the painstaking process of starting a business, developing a brand for your business, namely, your business’ trademark, invested significant time and resources into this development, and suddenly you discover another business is using your exact trademark or a similar one. What can you do?

What are the Elements of a Trademark Infringement Claim?

When a competing business is using an established trademark or a confusingly similar one, that business is engaging in unlawful trademark infringement.  Because branding is such an important part of a business’ identity to consumers, the law provides a venue for trademark owners to seek recourse against infringers.  A trademark owner who believes its trademark is being infringed may file a civil lawsuit in either state court or federal court for trademark infringement, depending on the circumstances.  In most cases, trademark owners choose to file federal infringement cases. To support a trademark infringement claim in court, the trademark owner must prove:

1) that it owns a valid mark;

2) that it has priority (its rights in the mark(s) are “senior” to the defendant’s rights); and

3) that the defendant’s mark is likely to cause confusion in the minds of consumers about the source or sponsorship of the goods or services offered under the parties’ marks.

When a plaintiff owns a federal trademark registration with the United States Patent and Trademark Office, there is a legal presumption of the validity and ownership of the mark, as well as of the exclusive right to use the mark nationwide on or in connection with the goods or services listed in the registration, which simplifies the owner’s burden of proof in infringement cases.

What Factors do Courts Consider in Determining Whether Infringement has Occurred?

Courts will typically consider evidence addressing various factors to determine whether there is a likelihood of confusion among consumers. The key factors considered in most cases are:

1) the degree of similarity between the marks at issue; and

2) whether the parties’ goods and/or services are sufficiently related that consumers are likely to assume (mistakenly) that they come from a common source.

Other factors courts may consider include: a) how and where the parties’ goods or services are advertised, marketed, and sold; b) the purchasing conditions; c) the range of prospective purchasers of the goods or services; d) whether there is any evidence of actual confusion caused by the allegedly infringing mark; e) the defendant’s intent in adopting its mark; and f) the strength of the plaintiff’s mark.

Remedies for Trademark Infringement

If the trademark owner is able to prove infringement, available remedies include the following:

1) a court order (injunction) that the defendant stop using the accused mark;

2) an order requiring the destruction or forfeiture of infringing items;

3) monetary relief, including defendant’s profits, any damages sustained by the plaintiff, and the costs of the action; and

4) in rare cases, an order that the defendant, pay the plaintiffs’ attorneys’ fees.

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If you believe someone is infringing your trademark, the experienced and dedicated trademark attorneys at Gehres Law Group have the tools to stop this unlawful behavior. We are committed to providing the highest quality services at affordable rates. Contact us for a complementary evaluation. You’ll be glad you did.

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AN ODE TO HONESTY IN BUSINESS PRACTICES

As a trial lawyer, there is nothing I enjoy more than an honest client with a righteous case.  Hallelujah!  So many people use lawyers as henchmen, to bully their enemies and competitors, with lies.  But when I have a client who has been cheated or harmed, and is truly a victim, a victim of lies!!!!….that is the case I want.  That is, usually…a winning case!

 

The truth is powerful.  It is a powerful advantage.

 

But let’s not be too pollyanish. People can and will lie and prevaricate impressively, especially when they are motivated by money, or spite. And liars DO win in Court, often enough, especially if they have the advantage of more money and better lawyers.

 

As they say, “Court is where people go to lie”.

 

But still, I tell you: there is nothing like the truth.  Righteous truth.  Give me the truth, and I don’t care how fancy a lawyer the liar hires…my client will prevail most often.  The truth is powerful, and hard to hide.  It is consistent.  It resonates, and is recognized.  Jurors and Judges can usually feel it intuitively.

 

Life is complicated, of course, and truth is often subtle, or depends on one’s perspective, one’s point of view, or even philosophy.  Rarely, in any rancorous business dispute, is either side completely“innocent” of prevarication.  People are not, by nature, impartial.  They tend to see the world through their own particular lenses, and this is especially so when it comes to a contentious dispute with someone else.  People tend to see the truth and justice in their side of the argument, and are often blind to the other point of view.  But there are liars and then there are LIARS….capital letter LIARS who know they are lying and trying to cheat and get away with it.  As a business owner, YOU KNOW when you have been cheated by a LIAR. As a trial attorney, those are the ones I want to cross-examine!  I like to catch them in their lies; I feel as though it is my contribution to “justice” in my community.

 

Clients don’t like it sometimes, at the beginning of a case, when I tell them they are going to have to testify honestly and reveal harmful information, if questioned, rather than lie.  But I know from experience that there is nothing more harmful to your case than being caught lying.  At the outset of any case, I like to evaluate it impartially, with my client, acknowledging the weaknesses and building a litigation strategy from there: on the bedrock of “the truth” as we know it, and as we can prove it.

 

By: Stephen Lux, attorney at law

Of Counsel for Gehres Law Group, P.C.

 

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If you are looking for a trusted and highly-experienced trial attorney who handles business litigation matters, look no further. The lawyers at Gehres Law Group, P.C. have excellent reputations for integrity in the legal community. Many judges and other attorneys know this, which is a vital benefit to our clients. Contact us today for a complementary evaluation. You’ll be glad you did.

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Purchasing a Business with Seller Financing

It is often the case that a purchaser of a business does not have the resources for a full cash sale and will request that the seller finance some of the purchase price. This can be advantageous for both parties, but requires that the parties consider a number of issues, as we highlight in this article.

Advantages to the Seller

While many sellers are initially reluctant to consider financing the sale of their business due to the risk that the purchaser will not pay as agreed, sellers who do engage in self-financing deals typically find that they can obtain a higher price for their business. In addition, by financing a percentage of the purchase price, a seller increases the pool of potential purchasers, making it easier to locate a buyer for their business. Finally, some sophisticated buyers will refuse to consider the purchase of a business without some level of seller financing because they want the seller to have some “skin in the game”, which indicates to the buyer that the business is viable.

Advantages to the Buyer

The advantages to the buyer are generally more obvious. First, a seller-financed sale permits the buyer to consider purchasing a business valued at a price point beyond their own immediate resources. If the buyer negotiates a reasonable interest rate, they can avoid unattractive sources of financing, such as use of credit cards or lines of credit to purchase the business. Finally, if the buyer is seeking a bank or small business loan to cover some of the purchase price, the lender will often desire seller financing of some percentage of the costs, which indicates to the lender that the seller believes in the soundness of his or her company.

What Terms do Sellers Typically Desire in Exchange for Financing?

While each situation is unique, a seller’s note often carries an interest rate which is at or below current bank rates, depending, in part, on the perceived level of risk or other assurances that the loan will be paid in a timely manner. In addition, sellers will usually require some or all of the following terms as conditions of seller financing:

• Resumption of control of the business for default on the loan;
• Buyer assets as security, such as real estate;
• Buyer’s personal guarantee.

Since the seller’s obligations are typically fulfilled upon execution of a note, his or her greatest concern when providing seller financing is that of the buyer defaulting on the loan. In order to mitigate the impact of such a situation on the seller, he or she will typically wish to include terms permitting him or her to retake control over the business in the case of default by the buyer. This typically occurs within 30 to 60 days of an uncured default. The seller may also require periodic reports from the buyer with regard to the financial stability of the company until the loan balance is satisfied. For companies which utilize a substantial amount of inventory, sellers sometimes seek provisions requiring that the buyer maintain those inventories at or above specific levels.

When it comes to collateral to secure the loan, sellers are typically most interested in using the buyer’s real estate as security, which allows the seller to foreclose on the property in the event of the buyer’s default. However, if the buyer does not own real estate or has little equity in their property, then stocks, inventory or other assets held by the business are all commonly used as security in seller financed transactions. Some seller financed transactions do not include any assets as security, but may include the owner’s personal guarantee, meaning that if the company defaults on the loan, the owner’s personal assets can be reached to satisfy the debt.

Whether any of these or other conditions are required by the seller will often depend on a number of factors, including the relationship between the parties, the amount of financing being provided by the seller, the length of the loan, and the level of risk to the seller if the buyer defaults. If the seller is financing a fairly small amount of the purchase price, which is scheduled to be paid within a relatively short time frame, and the level of risk of default is fairly low, then the seller may simply rely on his or her remedies at law, such as a breach of contract claim, which could be brought if the buyer defaults. This, along with a provision providing that the buyer pay the attorneys’ fees and costs to pursue such a claim are typically quite effective in preventing a buyer from defaulting on a loan. In general, there are many methods which may be utilized to ensure timely payment on the loan.

Common Legal Documents in a Seller-Financed Transaction

Depending on the circumstances, there are several legal documents that should be drafted in a seller financed sale of a business, including:

• Letter of Intent setting forth the preliminary framework for negotiating terms of the sale;
• Purchase or Sales Agreement including the final negotiated terms of the sale;
• Promissory Note;
• Security Agreement or Deed of Trust if real property is used as collateral;
• Any applicable lease or transfer documents, such as vehicle and real estate title documents;
• Bill of sale transferring title of other business assets to the buyer;
• Non-Compete Agreement if not included in the Purchase or Sales Agreement;
• Bulk Sales documents if inventory is included in the sale; Click here for information on California Bulk Sales Laws;
• IRS Form 8594;
• Employment Agreement if owner remains a consultant or employee of the company following closing of the transaction.

Conclusion

In summary, buyers and sellers both stand to benefit from seller financing. However, it is important for each party to retain experienced business lawyers to assess their situation independently and advise them on how to best protect their interests in such transactions. Even for a simple sale without security, there are many issues to consider which an experienced professional can identify and address. Don’t go it alone, our trusted and knowledgeable business attorneys offer a complementary evaluation for most legal services and work diligently to protect each clients’ interests. Contact us today, you’ll be glad you did.

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When Must an LLC Membership Interest be Registered as a Security in California?

Most business owners and investors refer to corporate stock when discussing “securities”. However, other types of ownership interest fall under the definition of securities pursuant to California law, including a membership interest in a limited liability company (“LLC”). However, not all LLC membership interests fall within the definition of a security, in which case registration of the interest is not required in California. Therefore, it is important to understand if and when your LLC’s interests are subject to registration requirements.

California Corporate Securities Law

The California Corporate Securities Law, § 25019a “security,” in relevant part, as follows:

“‘Security’means any note; stock; treasury stock; membershipin an incorporated or unincorporated association; bond; debenture;evidence of indebtedness; certificate of interest or participation inany profit-sharing agreement; collateral trust certificate;preorganization certificate or subscription; transferable share;investment contract; vertical settlement contract or a fractionalizedor pooled interest therein; life settlement contract or afractionalized or pooled interest therein; voting trust certificate;certificate of deposit for a security; interest in a limited liability company and any class or series of those interests(including any fractional or other interest in that interest), except a membership interest in a limited liability company in which the person claiming this exception can prove that all of the members are actively engaged in the management of the limited liability company…” [Emphasis Added].

A plain reading of this Section of the statute makes it clear that an LLC membership interest is indeed a security, making it subject to registration with the state, unless ALL of the members of the LLC are actively engaged in the management of the LLC. Therefore, where an LLC is manager-managed and not member-managed, or where some, but not all, of its members manage the company, registration of its securities is mandatory.

California Commercial Code

In additional to the Corporate Securities Law, the California Commercial Code also governs whether a membership interest in an LLC is treated as a security. Section 8103(c) of the Commercial Code provides:

“An interest in a partnership or limited liability company isnot a security unless it is dealt in or traded on securitiesexchanges or in securities markets, its terms expressly provide thatit is a security governed by this division, or it is an investmentcompany security. However, an interest in a partnership or limitedliability company is a financial asset if it is held in a securitiesaccount.”

Most LLC’s which operate as a small or family-owned business will not be required to register their membership interests as a security. However, it is important to consider both the Corporate Securities Law and the Commercial Code when determining whether your LLC is subject to registration with the state of California in order to avoid potential penalties and/or legal action by investors.

California Securities Exemption Pursuant to Corporations Code §25102(f)

If the membership interests in an LLC are subject to registration in California because they fall within the definition of a “security” under the Corporate Securities Law, most will qualify for an exemption from federal registration because the interests are not issued through a public offering. In addition, such an issuance will typically qualify for a securities exemption in California under Corporations Code §25102(f). This Section of the Corporations Code provides:

“Any offer or sale of any security in a transaction (other thanan offer or sale to a pension or profit-sharing trust of the issuer)that meets each of the following criteria:

(1) Sales of the security are not made to more than 35 persons,including persons not in this state.

(2) All purchasers either have a preexisting personal or businessrelationship with the offeror or any of its partners, officers,directors or controlling persons, or managers (as appointed orelected by the members) if the offeror is a limited liabilitycompany, or by reason of their business or financial experience orthe business or financial experience of their professional adviserswho are unaffiliated with and who are not compensated by the issueror any affiliate or selling agent of the issuer, directly orindirectly, could be reasonably assumed to have the capacity toprotect their own interests in connection with the transaction.

(3) Each purchaser represents that the purchaser is purchasing forthe purchaser’s own account (or a trust account if the purchaser isa trustee) and not with a view to or for sale in connection with anydistribution of the security.

(4) The offer and sale of the security is not accomplished by thepublication of any advertisement. The number of purchasers referredto above is exclusive of any described in subdivision (i), any officer, director, or affiliate of the issuer, or manager (as appointed or elected by the members) if the issuer is a limitedliability company, and any other purchaser who the commissionerdesignates by rule. For purposes of this section, a husband and wife(together with any custodian or trustee acting for the account oftheir minor children) are counted as one person and a partnership,corporation, or other organization that was not specifically formedfor the purpose of purchasing the security offered in reliance uponthis exemption, is counted as one person. The commissioner shall byrule require the issuer to file a notice of transactions under thissubdivision…”

 

Our business law attorneys will provide more information on this California exemption in future articles. For purposes of this writing, it is important to note that while this exemption will apply to most LLC’s, it does not relieve an LLC from the requirement to register their securities. Rather, a Limited Offering Exemption Notice (“LOEN”) must be filed with the California Department of Corporations within 15 days of the issuance of such securities in order to avoid potential penalties from being assessed by the state.

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The business and commercial law attorneys at Gehres Law Group advise and represent clients on a vast array of laws affecting businesses in California. If you are a business owner, contemplating a new business idea, or have questions about a California company, contact us today for your complimentary evaluation, or feel free to browse our website.

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