San Diego Corporate Law

A Cheap LLC May Not Be An Inexpensive LLC -- AVOID ONLINE LLC PITFALLS

2011-11-20T20:43:00.000-08:00

BEFORE FORMING AN LLC WITH AN ONLINE SERVICE, MEET A LOCAL ATTORNEY FOR FREE.

THE CHEAP LLC YOU ARE THINKING OF BUYING FROM AN ONLINE SERVICE MAY NOT BE THE MOST INEXPENSIVE OPTION AVAILABLE.

• Avoid spending HUNDREDS OF DOLLARS PER YEAR for registered agent services.
• Get ALL REQUIRED DOCUMENTS drafted and filed, not just the documents the service is selling.
• Find out how you will be taxed NOW, not when you file your income taxes in NEXT YEAR.
• Learn how to delay the $800 minimum franchise tax until 2013.

CHEAP VERSUS INEXPENSIVE

There are a lot of low-priced LLC options online that offer discounted LLC formation. While finding a reasonably priced LLC is a laudable way to start or continue a business on a budget, a cheap LLC may not be an inexpensive LLC. There are a lot of possible pitfalls you will want to avoid when forming an LLC.

REGISTERED AGENT FEES

The sellers of cheap LLC documents will often tell you a registered agent needs to be listed for every LLC. This is true. What they do not tell you about are all the free options for naming your registered agent. Instead, the online LLC formation business offers to act as your agent for anywhere from $99 to $199 per year, which may cost thousands of dollars over the life of your LLC.

INCOMPLETE FORMATION

In an effort to reduce LLC formation costs for those seeking an economical LLC formation, many unlicensed, unbonded businesses advertise heavily online offering low-priced LLC document preparation and filing. BEWARE! Choosing a $25 LLC formation may only provide part of the LLC formation process, usually just the filing of Articles of Organization with the Secretary of State. While the filing of articles is the first step in forming an LLC, there are several more steps the bargain LLC company may not tell you about. You will not actually receive the LLC protection you are hoping for unless all the legally required documents are drafted and filed.

INCOME TAXATION

Not every LLC is taxed in the same way. If you plan to be the only owner of the LLC, your cheap LLC will most likely be disregarded for purposes of state and federal income taxation, subjecting you to SECA self-employment taxes of approximately 15% of each dollar of net profit you earn. Since no online service can legally provide you with income tax advice, these online services will talk about the tax advantages an LLC may provide and not about the tax advantages your LLC will actually provide. The time to find out exactly how your LLC is going to be taxed is now, not when you file your tax returns in April 2013.

OUT-OF-STATE FORMATION ADVANTAGES

Some online LLC formation services push out-of-state formations. There can be tax advantages derived from forming a Nevada LLC, Wyoming LLC, or Delaware LLC. However, an out-of-state LLC may also drastically increase the filing fees and franchise taxation you will pay upon formation and annually. These increased fees and taxes may cost more than the income taxes saved. Only a licensed professional will is legally allowed to advise you when out-of-state LLC formation is appropriate and advantageous.

DEFERMENT OF FRANCHISE TAXATION

Many sellers of online LLC formation services sell LLCS exclusively. Very few of these sellers will inform you at the point of sale that you will owe a minimum of $800 in California Franchise Taxes within a couple of months of formation, even if you form a Nevada LLC. There are alternatives providing for equivalent limitation on liability and similar (usually better!) tax advantages without the need to pay the $800 minimum franchise tax until April 2013.

CONCLUSION

You and your business deserve better than the LLC online services. The right attorney can provide you with LLC documents and services superior to that of any online LLC service at a lower total cost to you.

Warm Regards,

Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

NOW IS THE TIME TO PURSUE INVESTORS

2011-11-20T20:28:00.000-08:00

For many small business owners, the thought of bringing investors into their business evokes emotions of both hope and fear. Yes, the dreams of capital to expand into new markets or finally develop the product that for years now has been stuck in R&D limbo would be great. But what price must be paid in return? Business lore is rife with stories of investors seizing control and firing the founder or suing the board of directors when dividends shrink or stagnate.The truth, however, is that in many cases it is possible to have all the benefits of investor dollars while at the same time minimizing the risks posed by investors.

NOW IS THE TIME

As banks have tightened their lending requirements in the last couple of years, any owner of a small business who has sought a loan to keep their business from sinking has learned that the time to establish a line of credit is NOT when the line of credit is needed. That general axiom applies to seeking investors as well. Investors want to invest in businesses that are succeeding. Investors will largely avoid making investments in businesses which are currently troubled, and if an investment is offered, it is usually on terms that the business owner should refuse flatly. Right now, while your financials look good, is the time to seek out investors to help you grow your business and/or keep your business competitive.

DEFINE THE GOAL

First and foremost, decide what you would do with investment dollars, and incorporate these expenditures into your business plan. Investors will not invest in your business just so you can pay off the corporate credit cards or catch up on your delinquent accounts payable. Investors will insist their dollars be incorporated into your business such that the business will realize a return on the funds expended. In general, this means selling existing products to new clients (e.g., opening a second location), selling new products to existing clients (e.g., expanding your product line), or the best of both worlds, doing both (e.g., opening a second location and expanding your product line).

DEBT VERSUS EQUITY

It is possible to take on investors while retaining 100% control of your business through the use of debt financing. However, selling debentures to investors requires you to make regular interest payments to the investors and eventually return all the principle to the investors. This essentially makes the investors your creditors, and differs only in execution from borrowing money from a financial institution.In most cases, it is better for a small business to sell equity interests in the business in the form of stock for corporations or membership units for limited liability companies. In this way, the investors are not creditors, but co-owners, and their interests are aligned with that of the other owners. While not all equity investors will be interested in taking an active role in the business, many will be willing to lend their business expertise by assuming a seat on the board of directors. Whether you choose to seek an actively involved investor or a more passive investor is up to you, but just be sure that the investor's role is well defined in advance.

MINIMIZE THE RISKS

There are a couple of things you can do to help reduce the risks investors pose to you and your business:

1. Convert to Delaware. In case you ever wondered why so many corporations use Delaware as their state of incorporation, the reason is Delaware's Court of Chancery, which oversees Delaware's very pro-business corporate laws. Conversion of a California business entity to a Delaware entity is a relatively simple process, and the potential benefits make such a conversion worth considering.

2. Buy D&O Insurance. Directors and Officer's insurance protects against criminal, administrative, civil, and regulatory proceedings based on actual or alleged acts, errors, omissions, misstatements, neglect, or breach of duty committed or allegedly committed by a director or officer. A nice policy to have before you bring on investors who may decide to sue if everything does not go according to the best laid plans.

3. Sell the Right Amount. If you do not raise enough capital, you will be unable to accomplish your goals. If you raise too much capital, you will not have enough places to invest the funds, leading to a smaller returns (and less enthusiastic) investors. Figure out how much you need to raise in order to accomplish your goals, and only sell enough of the business to raise that capital.

4. Read Your Documents. Read your founding documents, or have an attorney read them for you. Operating agreements, articles of incorporation, and bylaws are just a couple of the documents that spell out your rights and the rights your investors will have. Before you sell a single share, be sure you know how you will maintain positive control over the corporation even after your investors take co-ownership.

GET PREPARED

Securities laws are designed to protect investors. Thus, any discussion of seeking out investor capital would not be complete without at least a mention of the regulatory requirements a business must comply with before it starts speaking with potential investors.Depending upon the total size of the investment offering, the financial wealth and sophistication of the investors, the investors' past personal and/or business relationships with the small business or its owners, and other factors, compliance with federal and state securities laws may not be a cost-prohibitive deal-killer. More than likely, such an investment plan will not require registration/qualification with the Securities and Exchange Commission or the California Department of Corporations, and may be accomplished through the use of exemptions and exemption notifications. With certain classes of investors, lengthy and expensive disclosure documents may not even be necessary (but are well advised even if not legally required).Always consult an attorney before speaking to potential investors.

CONCLUSION

Taking on investors does not have to be a scary experience. Investors most likely have the money to invest because they have made wise business decisions in the past. If they wisely choose to invest in your business, make smart business decisions of your own so you may enjoy sharing in the advantages of taking on investors while minimizing the risk of doing so.

Warm Regards,

Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

Choose a Business Name

2011-05-31T16:43:00.000-07:00

One of the most important decisions made in organizing a startup is selecting a name for the business. Entrepreneurs spend dozens if not hundreds of hours developing the name of each new business they start to ensure the name will represent the business well and evoke in consumers the feelings or emotions the business seeks to induce (e.g. trust, reliability, fun, etc.). Creative brainstorming is, however, only the first step to naming a business. Once a few prospective business names are selected, there are several more considerations before time and money are spent officially adopting one of the prospective business names.

DOMAIN NAME AVAILABILITY

In order for a potential business name to be worthy of adoption, there must be an internet domain name available which is closely related to the prospective business name. If the name chosen is "ABC Bakery" and abc.com is taken, and abc.com is not a bakery, something like abcbakery.com or similar must be available.

It is not a good idea to buy into any series of domain names if the dot com domain is not available. Thus, if abcbakery.com is taken, abcbakery.net, abcbakery.us, or abcbakery.info are not acceptable replacements. When a new customer hears about ABC Bakery and wants to find store locations or hours, that customer is not likely to search for a dot net or dot info website, but go straight to the dot com domains. A business website should always be easy for its customers to find.

LOCAL AND STATE REGISTRATIONS

If the prospective name is to be used in naming a business entity (e.g. Corporation, S-Corp, LLC), check with the secretary of state to see if the name is already in use. Following on with the bakery example, if the secretary of state already has an ABC Bakery, Inc., registered in its database, then using ABC Bakery, Inc. will not be possible, however ABC Bakery, LLC might be possible if there is no entry for ABC Bakery, LLC.

If the corporate or LLC name is taken, or if the business is to be operated as a sole proprietorship, check with the county recorder's office to see if the name is available as a fictitious business name (commonly referred to as a DBA, short for Doing Business As). If available, it may be possible use a DBA to legally operate as John Smith, Inc., d/b/a ABC Bakery or John Smith d/b/a ABC Bakery.

FEDERAL, STATE, AND COMMON LAW TRADEMARKS

The United States Patent and Trademark Office provides internet access to its "TESS" database allowing anyone to search all trademark applications and registrations, and most states provide online access to the trademarks registered in state. Searches of these databases will yield the uses of registered trademarks. However, ownership over trademark rights is established via bona fide use in commerce, and no federal or state registration is required for trademark ownership. Therefore, it is a good idea to conduct a common law trademark search in addition to searches of the federal and state databases. Researching common law trademark use may be accomplished in one of several ways, the most frequent utilized being a search engine query followed by a careful review of the results returned.

Searching federal, state, and common law databases of registered trademarks is not as straight forward as searching for business entity names and DBA filings. In business entity or DBA research, an exact match between a potential business name and the database of existing business names is sufficient. However, trademark law is based on a legal theory known as "likelihood of confusion" and not exact matches. A potential business name need not be an exact match to an existing trademark in order to infringe upon that existing trademark, but merely create a likelihood of confusion in the minds of consumers. When evaluating your potential business name to a database of trademarks, it is always a good idea to consult an attorney who is knowledgeable in trademark law. The same trademark attorney will also be able to assist you in registering the prospective name as a trademark once it is used in commerce.

FOCUS GROUP TESTING

In the search for uniqueness, business names can end up being obscure. Put a focus group together and test the focus group on the spelling, pronunciation, and overall impression of the potential business name. If a traditional focus group is too expensive, test the name on friends and relatives, encouraging them to be brutally honest about the their opinions.

If a name is too difficult to spell or pronounce, it will likely lead to less referrals and many misspellings in internet searches. Remember, customers need to be able to find a business website easily.

CONCLUSION

When a prospective business name is found which has domain name availability, is not registered with the secretary of state or the county recorder's office, is not used in commerce as a trademark, and is well received under focus group testing, the time and money required to adopt the business name will be well spent.

Warm Regards,

Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

Determining the Proper Classification of Workers

2011-03-06T17:24:00.000-08:00

Last month we discussed several ways to increase the profitability of your business by reducing operational costs. One of the cost cutting methods I suggested was to trim from your payroll any employee who did not either make or save money for your business. Based upon this advice, I received several inquiries asking about the use of independent contractors in place of employees. I even got a question regarding the utilization of unpaid interns as a labor source.

Why use independent contractors?

When legal, it is almost always advantageous for a business to classify its workers as independent contractors. Independent contractors are liable for 100% of the employment taxes owed on their income and they are not eligible to receive paid time off, healthcare benefits, or retirement benefits. In addition, the tortious actions of independent contractors are not the vicarious liability of the business for which they work.

Sign me up, I want all my employees to be independent contractors!

Establishing that a worker is an independent contractor is rarely simple, and not always possible. By default, every worker is an employee unless the business can show a principal/contractor relationship rather than an employer/employee relationship. Misclassifying an employee as an independent contractor also carries stiff penalties from the IRS and state taxing authorities, not to mention civil liability to the employee.

The IRS formerly used what was known as the “Twenty Factor” test to determine if a worker could be properly classified as an independent contractor. Under pressure from Congress and business and labor representatives, the IRS recently attempted to refine and simplify the test by condensing the twenty factors into three groups of eleven factors. As you might imagine, the test did not really become more simple, as each of the eleven factors must be examined and weighed, and there is no clear way for an average employer to decide which factors will weigh more heavily than others.

The independent contractor test.

The three groups into which the eleven factors used to determine if a worker may legally be classified as an independent contractor are (1) behavioral control, (2) financial control, and (3) relationship type. While a detailed analysis of each factor is beyond the scope of this discussion, the general idea of each group is as follows:

Behavioral Control

The idea behind behavior control is to examine how a worker completes his or her tasks. Independent contractors must not be subject to the direction and control of their principals. If the business has the right to direct how the worker completes tasks, the worker is likely an employee. Even if the business does not actually control the way work is done, having the unexercised right to direct and control is sufficient to establish behavioral control.

Another form of behavioral control is training. Independent contractors are not permitted to receive training from their principals. If a business gives training to a worker, it establishes that the business wants the worker to complete tasks in a specific manner, which is indicative of the behavioral control an employer exerts over an employee. If periodic or continuing training is provided by a business, this provides an even stronger indication of an employer/employee relationship.

Financial Control

Independent contractors frequently make significant investments in the tools and instrumentalities used to perform tasks. Employees, to the contrary, are usually supplied with everything needed to complete their work by the employer. There are no set investment figures by which to judge the significance of a worker’s investment, and this factor alone is never dispositive, but independent contractors generally have their own computers, their own software, and other similar tools. A worker using the tools of a business is likely to be considered an employee.

The opportunity for profit or loss is another consideration of financial control. Independent contractors are usually paid by a flat fee for a job, while employees are guaranteed a regular wage amount for an hour, week, or other period of time. Most expenses are reimbursed to employees, while independent contractors generally pay their own expenses. If costs increase, an independent contractor may be paid less than the cost of completing a task and lose money, shifting the loss to the employer. Showing an opportunity for profit or loss is a great way to support an assertion that a worker is an independent contractor.

Type of Relationship

A worker might contractually agree to independent contractor status in writing, but the IRS is not required to follow a contract stating that a worker is an independent contractor. Instead, the IRS will look at how the business and the worker interact.

Independent contractors usually work on a specific project or for a specific period of time, whereas an ongoing relationship is indicative of an employer/employee relationship.

The importance of the worker’s role in the business is also examined. If a worker provides services key to the success of a business, these services are more likely to be performed under the direction and control of the business, meaning the worker is an employee and not an independent contractor.

Interns. Did someone say free labor?

I gained a tremendous amount of legal experience as a law student toiling away in windowless rooms with five other unpaid interns just to have the honor of doing “real work” for an actual attorney. You probably have your own internship horror stories. Unfortunately, federal labor laws were drastically changed in January 2010, and the internships we all remember with such fondness are much more heavily regulated.

The current state of the Fair Labor Standards Act (FLSA) defines the term “employ” very broadly. Covered and non-exempt individuals who are “suffered or permitted” to work must be compensated under the law for the services they perform for an employer. However, there are some circumstances under which individuals who participate in “for-profit” private sector internships or training programs may do so without compensation.

The Supreme Court of the United States has held that a person whose work serves only his or her own interest need not be compensated. This may apply to interns who receive training for their own educational benefit if the training meets certain criteria. The determination of whether an internship or training program meets this exclusion depends upon all of the facts and circumstances of each such program, but the following six criteria must be applied when making this determination:

1.The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
2.The internship experience is for the benefit of the intern;
3.The intern does not displace regular employees, but works under close supervision of existing staff;
4.The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
5.The intern is not necessarily entitled to a job at the conclusion of the internship; and
6.The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

Unlike the test for determination of employee versus independent contractor status, which is a balancing test, ALL THE CRITERIA listed above must be met for an employment relationship to not exist under the FLSA’s minimum wage and overtime provisions. If even one of the six criteria are not met, the intern must be a paid employee.

Conclusion.

It is possible for a business to replace certain employees with independent contractors in order to reduce costs. However, a business needs to be very careful in selecting which positions might be good candidates for the use of independent contractors, and which positions should continue to be filled by employees.

Furthermore, while I always felt that trading my time for experience and a few extra lines on my resumé was a worthwhile exchange, it seems the federal government now disagrees.

Before classifying workers as independent contractors or bringing unpaid interns into your business, always speak with a trusted advisor who is knowledgeable in federal and state labor and employment laws.

Warm Regards,

Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law
www.sdcorporatelaw.com
leonard@sdcorporatelaw.com
858.483.9200 (phone)
858.605.6766 (fax)

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

Increase Net Income by Reducing Costs

2011-01-06T13:04:00.000-08:00

With this being the first week of a new year, it is a good time for business owners to think about how to increase net income in 2011. The knee-jerk answer is to increase gross income by increasing sales. This thinking is not flawed, as more sales should lead to higher net income. However, simply increasing sales is a one dimensional approach to increasing the bottom line. On a profit and loss statement, between the gross income and net income, there are a lot of costs. Decreasing these costs allows each sale to generate more net income, making it entirely possible to increase net income even on stagnant or shrinking sales. Cutting costs while increasing sales is even better for the bottom line.

The following are some of my suggestions for increasing net income by reducing costs.

START WITH GOOD FINANCIALS

Good financials not only show how much money is coming in and out of a business, but in great detail show WHERE the money is coming from and WHERE the money is going. Without good financials, it will be impossible to know which cost cutting efforts will significantly cut into sales and which will have little or no effect on sales.

Start looking at the financials. If good financials are not available, hire a bookkeeper or accountant to set up a proper accounting system and generate them. Financials will only cost a couple hundred dollars per month for most businesses, and this investment could be worth thousands of dollars per month if the information is used properly.

If you do not currently use an accountant or bookkeeper, call me or send me an email and I will gladly suggest a few professionals I trust.

ONLY KEEP THE RIGHT EMPLOYEES

Employees are the usually the largest single business expense. While most businesses cannot survive without employees, cutting costs while increasing sales is about having the right employees in the right positions, and not necessarily just fewer employees.

Every person drawing a check from a business needs to be doing one of two things: (1) Making the business money; or (2) Saving the business money. Identify how each employee is either making the business money or saving the business money. It is not always obvious.

For example, do not fire a receptionist doing tasks for $10 per hour when other staff will have to do this work at $25 per hour. The receptionist is saving the business money.

A contrary example is that of a salesperson who does not up-sell or cross-sell. This salesperson is not making the business money because anyone can answer simply answer a phone and take orders from customers. Replacing this salesperson with another, more motivated salesperson who actively seeks out new sales and works to increase the amount of goods or services sold in each sales transaction is an example of a salesperson who makes money for a business.

ADVERTISE WITH A NARROW FOCUS

Advertising is another typically large business expense. Advertising smarter by narrowing the focus of distribution will reduce costs while giving a greater return on investment for each advertising dollars.

Figure out where customers are located and direct advertising there. Is a client going to drive from their home or office to a frozen yogurt shop miles and miles away, or will they just go to the closest place to get what they want?

Also think about the media in which advertisements are placed. Do not advertise hearing aids on the internet or snow boards in a newspaper. Understand how to best reach customers, and quit wasting money advertising in the wrong media.

If it is unclear where clients are coming from or how they learned of the business, just ask them at the first contact or point of sale.

FASTER INVENTORY TURNOVER

Streamlining procurement is another way to save big money and free up capital. Many businesses get sucked into buying too much product from distributors offering price breaks on quantity. Yes, a 10% price break might be extended for restocking in bulk, but if the inventory does not turn at least every 30 to 90 days (this is industry dependent), too much capital is tied up in inventory and increases costs in several ways.

Costs associated with slow inventory turnover include spoilage, obsolescence, cost to insure inventory, and cost to warehouse inventory. Spoilage and obsolescence will cause inventory to be discarded or sold at deep discount, while high insurance premiums and high rental rates also create unnecessary drains on gross income. If too much of a perishable or trendy item is stocked, when the perishable spoils or when yesterday’s trend is no longer selling, that inventory must be sold at a deep discount (if you are lucky) or thrown in the dumpster; a costly waste of your money.

Consider using necessities or options contracts to secure the ability to purchase at a discount and never run out of inventory while at the same time not purchasing more inventory than necessary at any given time.

PAY LESS TAXES

Every business needs a solid strategy to deal with taxes. While paying taxes is unavoidable, there are options available to businesses to reduce tax liability.

Classification of a worker as an independent contractor rather than an employee passes the duty to pay employment taxes and workers compensation insurance to the independent contractor. While this savings is significant for the business, not every worker is eligible for classification as an independent contractor and improper classification of a worker as an independent contractor can result in expensive fines and other penalties from the Internal Revenue Service, so get some professional advice before reclassifying any employees.

The type of business entity used to conduct business can also have a significant impact on tax liability. For example, sole proprietorships are typically more heavily taxed than corporations organized under Subchapter “S” of the Internal Revenue Code. These “S-Corps” allow the business owners to split income between salary subjected to employment taxes and net income not subjected to employment taxes; a difference of 15.3% in tax liability.

A business attorney can help determine which business entity will be best suited for reducing tax liabilities in a given situation.

CONCLUSION

If you have any questions about the above ideas for improving your bottom line, I welcome you to give me a call or send me an email for a clarification or more details. I wish you all the best in 2011, and hope it will be your most profitable year yet.

Warm Regards,

Michael J. Leonard, Esq.
Attorney at Law
San Diego Corporate Law
www.sdcorporatelaw.com

Find me on Facebook: http://www.facebook.com/SanDiegoCorporateLaw

Beware of Asian Domain Name Registration Scams

2010-01-19T13:23:00.000-08:00

A very valued and business savvy client called me this morning for my assistance with a domain name and trademark dispute that had been brought to his attention via email by a person claiming to represent a "domain name registration organization" in Hong Kong.

While not as prevalent or well known as Nigerian Bank Scams or other Advanced-Fee Frauds, there are a lot of Asian Domain Name Scams being emailed lately. ANY EMAIL RECEIVED BY THE OWNER OF AN INTERNET DOMAIN WHO RECEIVES AN EMAIL PURPORTING TO OFFER PROTECTION OF HIS/HER DOMAIN NAME AND/OR TRADEMARK RIGHTS SHOULD MEET THAT EMAIL WITH SUSPICION.

HOW THE SCAM WORKS

You will receive an email will read something like:

Dear President,

We are a domain name registration and dispute organization in Asia, which mainly deal with the global companies' domain name registration and internet Intellectual property right protection in Asia. On the Jan. 19, 2010, we received an application formally from "SOME BUSINESS YOU HAVE NEVER HEARD OF" who applied for the Internet Keyword"SOMETHING CLOSE TO YOUR DOMAIN NAME"and some domain names relevant to this trademark from our organization.

According to our procedures and in order to protect your intellectual property rights, we need to send this email to the original company for confirming the actual relationship with this company. If you do not know this company, we doubt that they have other motivation to register these domain names and probably want to do some cybersquatting. Currently, we have postponed this application of this company temporarily already. In order to deal with this issue better, please contact us by telephone or email as soon as possible.

PS:If you are not in charge of this matter,please transfer this email to appropriate dept. Have a nice day!

Best Regards,

A FAKE NAME

A FAKE TITLE
SCAMMER'S COMPANY NAME
Tel: +###-#### #### Fax: +###-#### ####
Email: SCAMMER@SCAM.NET
Web: www.SCAMCOMPANY.org

HOW THE SCAM WORKS

The business owner receiving the email responds to the person listed in the email by phone, fax or email and of course wishes to block someone from registering a domain using his or her corporate identity or trademark. Invariably, the representative of the "domain name registration organization" will tell you that the best way to block the registration is to buy the domain names in question for yourself. Naturally, if the domain names in question are purchased, the price per domain name will be artificially inflated by the "domain name registration organization" who is "protecting" your corporate identity and trademark.

HOW TO COMBAT THE SCAM

The best way to combat this scam is to do what my client did this morning: forward the email to corporate counsel or the law firm which represents your business and ask how to proceed with the information. San Diego Corporate Law advises its clients to forward any and all communications offering services or business deals which our clients do not fully understand. In this case, we investigated the correspondence and identified the scam it was intended to perpetrate, potentially saving our client from purchasing thousands of dollars worth of internet domains which might be truly worth less than one-hundred dollars if procured from a reputable source.

A strategy for protection of corporate identity might entail purchasing several domain names for your business (in addition to www.sdcorporatelaw.com, I also own www.sdcorporatelaw.biz, www.sdcorporatelaw.info, www.sdcorporatelaw.me, www.sdcorporatelaw.mobi, www.sdcorporatelaw.net, www.sdcorporatelaw.org, www.sdcorporatelaw.us, and www.sdcorporatelaw.ws). However, the time and place to purchase additional domains for your business is NOT when you are being held hostage by a supposed "domain name registration organization" asking for unrealistic prices.

WHO IS RUNNING THE SCAM?

While not intended to be an inclusive list, here are the domain names of some companies reportedly running the Asian Domain Name Scam:

http://www.alg-tech.com

http://www.anwins.com

http://www.asiaao.cn

http://www.asiadm.org

http://www.asiadnr.hk.cn

http://www.asiadnr.net

http://www.asiadnr.org

http://www.asiaip.org

http://www.asianetwork.ws

http://www.asianetworkonline.com

http://www.asiaregistrar.org

http://www.beijing-anwins.com.cn

http://www.bj-hk.asia

http://www.bj-hkzc.com.cn

http://www.bjhknet.cn

http://www.china-domainsolution.org.cn

http://www.china-net.hk.cn

http://www.china-net.hk

http://www.chinasps.net.cn

http://www.chinasps.org.cn

http://www.chooke.com.cn

http://www.chuk.com.cn

http://www.cnbcgov.org.cn

http://www.cnnet.hk

http://www.cntl.hk.cn

http://www.dnrnic.net

http://www.domainaudit.org.cn

http://www.domaininasia.com

http://www.domaininasia.org

http://www.erimut.com

http://www.europaregistry.net.cn

http://www.europaregistry.org

http://www.europatech.com.cn

http://www.europetech.com.cn

http://www.fexon.hk

http://www.firetrust.org.cn

http://www.govisp.cn

http://www.ha-zd.com.cn

http://www.ha-zd.comhttp://www.ha-zd.org

http://www.hkstareast.com

http://www.hkstareast.net

http://www.idci.org.cn

http://www.inveis.com.cn

http://www.inveis.com

http://www.inwis.cn

http://www.netinasia.com

http://www.netinchina.hk

http://www.netservice.hk

http://www.shanghainic.org.cn

http://www.shnetnic.cn

http://www.shundajishu.com.cn

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Third Party Beneficiaries May Not Enforce Benefits Beyond Those Contractually Owed to Promisee

2009-12-11T16:53:00.000-08:00

Doe v Wal-Mart Stores, Inc., 572 F3d 677 (9th Cir 2009)

Foreign suppliers contracting with Wal-Mart Stores are subject to a code of conduct Wal-Mart calls "Standards for Suppliers". Among the standards Wal-Mart requires is that suppliers must adhere to local laws and local industry standards in dealings with the supplier's employees. The suppliers are subject to on-site inspections by Wal-Mart to ensure compliance with the code of conduct.

Employees of Wal-Mart suppliers in China, Bangladesh, Indonesia, Swaziland, and Nicaragua brought a class action lawsuit against Wal-Mart suit in California superior court alleging inadequate compliance with the code of conduct, asserting that the employees of the suppliers were joint employees of both Wal-Mart and the suppliers, that the employees were third-party beneficiaries of the code of conduct, and that Wal-Mart breached its duty to conduct on-site inspections for the protection of the employees.

The district court hearing the case dismissed the case for failure to state a claim.

On appeal, the appellate court found that Wal-Mart's statement, "will undertake affirmative measures … to implement and monitor" did not create a duty for Wal-Mart. Wal-Mart was not promising to ensure its suppliers compliance with employment laws, and a third party beneficiary may not assert rights in excess of those contractually agreed upon. Marina Tenants Ass'n v. Deauville Marina Dev. Co., 181 CA3d 122, 132 (1986). Since Wal-Mart did not have a duty, the supplier employees could not rely upon their standing as third party beneficiaries to bring a cause of action. Further, without a duty, Wal-Mart cannot be negligent.

The appellate court affirmed the district court's dismissal.

Dealers of investment contracts forced to disgorge sales commissions.

2009-09-15T20:41:00.000-07:00

Warfield v. Alaniz, US App Lexis 13531 (2009)

The Mid-America Foundation, controlled by Robert Dillie, sold annuities promising to provide income for the life of a person in being, with the remainder delivered to the charity of their choosing after death. After $55 million in sales, and no charity ever receiving a benefit, Mid-America was outed as a Ponzi scheme. Upon the Security and Exchange Commission's filing a complaint against Dillie, Lawrence Warfield became the court appointed receiver of Mid-America.

Warfield successfully sued those who sold the annuities and recovered the commissions earned on the sales of Mid-America annuities. The defendants appealed, and the appellate court reviewed the trial court determination that the annuities were investment contracts. The court relied upon SEC v. Rubera, 350 F3d 1084, 1090 which defines an investment contract as, "(1) an investment of money; (2) in a common enterprise; (3) with an expectation of profits produced by the efforts of others." The Mid-America annuities fit into this definition and were held to be investment contracts, and the appellate court affirmed the trial court's decisio, disgorging the sales commissions from the annuity salespersons.

Broker-dealers, beware. Know what you are selling and for whom you are selling.

Proving a breach of fiduciary duty by a securities broker-dealer becomes easier.

2009-09-15T19:17:00.000-07:00

Oravecz v. New York Life Ins. Co., 174 CA4th 174 (2009)

Court of Appeal of the State of California

Second Appellate District

Division One

Oravecz bought investment securities in Tradex through broker-dealer Steve Roth, allegedly an employee of New York Life Insurance Company. What Oravecz believed to be an offshore trading fund was actually a Ponzi scheme. When the Ponzi scheme collapsed, and Oravecz had lost the money invested in Tradex, Oravecz sued New York Life alleging several causes of action, including breach of fiduciary duty.

New York Life successfully demurred on each of Oravecz's causes of action and was awarded summary judgment. The trial court based its decision to sustain the demurrer on the breach of fiduciary duty cause of action because, under federal law [e.g., Independent Order v. Donald, Lufkin & Jenrette, 157 F3d 933 (1998)], a fiduciary duty only arises when the investor gives discretion to chose investments and control trading authority.

Oravecz appealed, and the appellate court held that the trial court had correctly ruled on the existence of summary judgment under the federal law, but under California common law the investor need not provide a showing of discretion or control by the securities broker. As such, the trial court erred in finding that Oravecz's allegations did not sufficiently allege a claim for breach of fiduciary duty.

The federal requirement that a broker-dealer have discretion and control over an investor's assets for a breach of fiduciary duty to be owed is a reasonable standard. If not for such a duty, negligent and careless decisions by broker-dealers failing to conduct reasonable due diligence would carry few consequences. That California has no such requirement of discretion and control in effect makes each broker-dealer a babysitter for each investor, and begins a shift of responsibility to conduct due diligence away from the party making investment decisions and onto the broker. The slope is steep and icy, broker-dealers, be careful where you step.

Prejudgment interest may be awarded under the Song-Beverly Consumer Warranty Act.

2009-09-14T18:21:00.000-07:00

Doppes v. Bentley Motors, Inc. 174 CA4th 1004 (2009)

Court of Appeal of the State of California

Fourth Appellate District

Division Three

In 2001, Doppes bought a new Bentley Arnage from Newport Auto Center. Shortly after taking delivery of the vehicle, Doppes noticed an "obnoxious odor" inside the vehicle. After 171 days without his new Bentley, which the dealership was unable to deodorize, Doppes requested a replacement vehicle from Bentley Motors. Bentley Motors denied this request.

Doppes successfully sued Bentley Motors and the dealership on numerous causes of action, including the Song-Beverly Consumer Warranty Act. In awarding damages to Doppes, the trial court allowed for prejudgment interest of 7% per year from April 2002 when the vehicle was purchased until the entry of judgment. Eight months after the judgment was entered, Bentley moved to set aside the judgment under California Code of Civil Procedure § 473(d). Bentley based its motion on the argument that the Song-Beverly Consumer Warranty Act does not allow prejudgment interest, and thus the award exceeded the jurisdiction of the trial court. The trial court overruled Bentley's § 473(d) motion, and Bentley appealed.

The appellate court affirmed the overruling of the § 473(d) motion on the grounds that California Civil Code § 3287 allows for any person awarded damages to recover interest on those damages "from any such debtor" and the Song-Beverly Consumer Warranty Act at California Civil Code § 1794 allows a customer damaged by violations of the Act to bring an action for damages, costs, expenses, reasonable attorney fees and civil penalties.

This decision is important for all business owners because the Song-Beverly Consumer Warranty Act potentially applies to every sale of consumer goods sold at retail in California. The Act is very strict about the type of formalities with which a manufacturer, distributor and retailor must comply to circumvent the implied warranty of fitness, less any party in the stream of commerce be liable not only for damages, but prejudgment interest on those damages.

CAVEAT VENDITOR; LET THE SELLER BEWARE.

Banks may charge fees on accounts containing public benefit money.

2009-09-13T23:00:00.000-07:00

Miller v. Bank of America, 46 CA4th 630 (2009)
Court of Appeal of the State of California
First Appellate District
Division Three

In this class action lawsuit, class representative Miller was a recipient of Supplemental Security Income (SSI) and other public benefit money which was directly deposited in his Bank of America account. In January 1998, Bank of America erroneously deposited $1,799.83 into Miller's account. Upon realizing its error in April 1998, Bank of America debited Miller's account for the $1,799.83, leaving a negative balance in Miller's account. The bank took funds from Miller's May SSI direct deposit to settle the negative balance, leaving Miller unable to pay his rent and other living expenses.

When Miller objected to Bank of America's actions, the bank opened a second account for Miller's SSI direct deposit, and credited the new account for the May SSI payment it previously captured, but also informed him that Miller he was still responsible for the first account's negative balance. In June and July, Bank of America again seized and later restored SSI funds from Miller's second account to satisfy the negative balance in his first account. Bank of America also charged Miller's second account with Non-Sufficient Funds (NSF) fees related to overdrafts caused by fund seizures.

Miller sued Bank of America in 1998 bringing a host of allegations, including violation of the Consumers Legal Remedies Act (CLRA). Relying upon Kruger v. Wells Fargo Bank, 11 CA3d 352 (1974), the jury awarded $75 million in compenatory damages to Miller and the other class members on a finding that Bank of America violated CLRA by falsely representing the right to use public benefit money to pay overdraft fees.

On an appeal upheld by the Supreme Court of California, Kruger was found to not apply to debits of overdrafts and charging NSF fees because the instant case was distinguished from Kruger in that Miller's debt was not a past debt but arose from activity in a single account. Further, under California Financial Code 864, "debt" is defined to exclude "charge for bank services or...for an overdraft of an account."

This case is a victory for businesses in California. It is hard to believe Miller "did not notice" almost $1,800 extra in his account while he required SSI pay his rent and living expenses. That he did not call the extra money in his account to the attention of his banker is one thing, but that he spent the money and then complained when Bank of America corrected the error is another. When banks take losses on deadbeat accounts, the true victims are the account holders with positive balances who pay higher fees fees and earn less interest to offset the bank's loss.

Securities professionals are criminally prohibited from indicating specialization in serving senior citizens in a misleading manner.

2009-09-13T21:58:00.000-07:00

California Corporations Code § 25243.5

California Corporations Code § 25243.5 became operative on July 1, 2009. Under the provisions of §25243.5, securities professionals are criminally prohibited from using a certification, credential, or professional designation which indicates specialization in serving senior citizens and retirees in a misleading manner.

Under § 25243.5, the prohibited use of these certifications, credentials, or professional designations includes, but is not limited to, the use of a certification, credential, or professional designation:

By a person who has not actually earned or is otherwise ineligible to use the certification, credential, or designation;

That is nonexistent or self-conferred;

Indicating or implying a level of occupational qualifications obtained through education, training, or experience that the person using the certification, credential, or professional designation does not have.

Obtained from a designating, credentialing, or certifying organization where: (1) The organization is primarily engaged in the business of instruction in sales marketing; or (2) The organization does not have reasonable standards or procedures for assuring the competency of individuals to whom it grants a certification, credential, or professional designation; or (3) The organization does not have reasonable standards or procedures for monitoring and disciplining individuals with a certification, credential, or professional designation for improper or unethical conduct; or (4) The organization does not have reasonable continuing education requirements for individuals with a certification, credential, or professional designation in order to maintain the certificate,credential, or professional designation.

All businesses, not just brokers, should be keep informed of changes in laws regulating their industry. What might have been standard operating procedure yesterday might today be the commission of a crime.

Any person who claims to have been denied the right to vote may challenge the election of a director.

2009-09-13T18:48:00.001-07:00

Haah v. Kim, 175 CA4th 45 (2009)
Court of Appeal of the State of California
Second Appellate District
Division Four

Many of the facts in this case were contested at trial, but based solely on the appellate court's decision the story is that Galleria Plus, Inc. (GPI) was formed by incorporating attorney Yoon Han Kim on behalf of Francis Key. Key sought to own and operate a supermarket with GPI. Yoon Han Kim prepared, and Se Heon Yoon signed, a statement of information naming Se Heon Yoon the sole director and officer of GPI. Later, Se Heon Yoon left GPI, and Yoon Han Kim prepared another statement of information, this one naming Donghyuk Kim sole director and officer of GPI. Donghyuk Kim signed this statement of information. When Key's supermarket project encountered financial trouble, Key gave 25% of GPI's stock to Stephan Haah in consideration for finding investors to purchase other blocks of GPI stock.

After Haah successfully found investors and Key sold blocks of GPI stock to these investors, Key requested Yoon Han Kim sign an action naming Key as director of GPI. Soon after, Key asked Stephan Haah to act as sole director. Haah agreed, but protested when Key modified the action naming Key as director to with correction fluid so the document read as an action naming Haah as director. Later during the same day, Key produced another action naming Haah as the sole director of GPI, and appearing to be signed by Yoon Han Kim.

Haah acted as GPI's sole director until Key died, and Donghyuk Kim disputed Haah's directorship, alleging that the Yoon Han Kim's signature on the action appointing Haah as director was a forgery. Haah agreed to step down, allowing Donghyuk Kim sole directorship of GPI, on the condition that Donghyuk Kim honor some agreements Haah had entered into on behalf of GPI. Donghyuk Kim did not honor the agreements as promised, and Haah had Yoon Han Kim void the action he had signed making Donghyuk Kim a director.

Unfazed, Donghyuk Kim continued to act as GPI's director, and Haah began holding his own shareholder meetings. At Haah's shareholder meetings, Donghyuk Kim's directorship was renounced and Haah and others were elected directors.

Haah filed suit under California Corporations Code § 709 Donghyuk Kim appealed the trial court's decision on the grounds that:

The court erred in overruling his demurrer;

Haah lacked standing to bring the cause of action;

The trial court abused its discretion by appointing directors.

The appellate court noted that the California Code of Civil Procedure does not contain a provision allowing a party to join in a demurrer, and as such Donghyuk Kim may not challenge the trial court’s overruling because the demurrer was not his motion, and his one-page “joinder” was merely “a cheerleading effort” in support of the motion.

The legislative history of § 709 was considered by the appellate court in evaluating Donghyuk Kim’s argument that Haah lacked standing to bring the cause of action under § 709. The appellate court found an action may be brought under § 709 by, “any shareholder” and “any person who claims to have been denied the right to vote.”

Finally, in regard to Donghyuk Kim’s assertion that the trial court abused its discretion in appointing directors for GPI, the appellate court pointed out that no objection was made by Donghyuk Kim or Donghyuk Kim’s counsel at the hearing to appoint directors, thus waiving the right to appeal.

Clear documentation of stock transactions, including clear specification of transaction effective dates, could have saved everyone involved in this case from years of costly litigation. While corporate formalities often take a back seat to more "pressing" demands on the time of business owners, this case and its tale of two, self-appointed boards of directors is a fine illustration of why keeping up with those formalities is so important.

Foreword

2009-09-13T17:23:00.000-07:00

Welcome to the San Diego Corporate Law blog. Since I read most of the federal and California court decisions related to business law, I thought it might be useful to summarize some of those decisions for general dissemination.

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2009-09-11T23:53:00.000-07:00

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