Federal law provides substantial tax benefits to certain nonprofit organizations established as exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code.  However, even after the exempt-status has been established, the charity’s officers, directors, employees and volunteers still have ongoing responsibilities to ensure that the tax-exempt status can be maintained. 

In order to maintain its tax-exempt status, a public charity must limit its participation in certain activities and cannot participate in other activities. 

 LOBBYING

 Public charities may engage in lobbying activities only to the extent that they are not substantial.  A public charity that engages in substantial lobbying is likely to have its tax exemption denied or revoked. 

 There is no black and white formula for defining “substantial.”  The Internal Revenue Service (“IRS”) considers a variety of factors, including the extent of lobbying in relation to the percentage of total funds expended in a designated period of time.  Of course, the IRS may also simply look to the impact on a legislative process to make its determination.  The IRS looks at each situation on a case-by-case basis.        

In the alternative, most public charities may elect to use the “expenditure” test by filing Form 5768, Election/Revocation of Election by an Eligible Section 501(c)(3) Organizations to Make Expenditures To Influence Legislation.  This allows a nonprofit to engage in a certain amount of legislative activities by allowing a certain percentage of expenditures to be spent on lobbying, depending on the size of the organization. 

PRIVATE BENEFIT AND INUREMENT

A public charity may not allow more than an “insubstantial” accrual of private benefit to individuals or organizations.  This limitation is to ensure that the nonprofit serves a public interest, not a private one.  A private benefit can be many things, including the payment of unreasonably high compensation to a director or employee.  

 POLITICAL CAMPAIGN INTERVENTION

Public charities are prohibited from engaging in virtually all political activities.  This includes any political campaign on behalf of a candidate for public office.  If a public charity engages in any political campaigning, its tax-exempt status will be taken away and it must pay taxes that it would not otherwise been required to pay. 

 Nonprofits must work hard to maintain their tax-exempt status.  If you have questions about acquiring tax-exempt status or maintaining it, please contact Susan E. Bishop at (408) 369-0800.

No matter what type of business you are preparing to start, one of the first decisions you need to make is what you’re going to name your business. Choosing a name is often something that business owners don’t realize needs more research than just finding a name that is memorable and will appeal to both them and their clients.

 Why go to all this effort?

You’re opening your business with plans of success, knowing you will be investing yourself, your time, and your effort into growing your business. Generally, you won’t be notified of any disputes related to your name until your business has grown and become successful, after you have spent time and energy getting your name known. Don’t lose this valuable piece of your business when it really means something to you because you didn’t research whether you could use it at the beginning. Trademark litigation is costly; a search determining whether you name will be rightfully yours is not.

 1. Type and Scope of Your Business

 The type and scope of your business will normally define how much work needs to be put into research surrounding your proposed business name. For example, if your new business is going to be the local diner branding your name, with no plans to expand outside your neighborhood, that should justify sticking to just your city and county. If you’re planning on selling party supply goods through a mail-order or internet catalogue, that may call for a full scale search of local and national usage since you’re be selling nationally.

At a minimum, your search should include every county in which you plan to do business. At the other end, your search may end up involving a complex multi-jurisdictional search of other business names in various jurisdictions of trademarked or protected intellectual property interests.

 2. Fictitious Business Names Registries

If your business is going to be a local one, check the fictitious business name registry with the county clerk for each county your business is likely to do business in. This includes counties you may expand to if your business will be a success. I do not know of any integrated database that has listings of fictitious business names for every county; a search must be done on a county-by-county basis.

 3. Business Name Search with the Secretary of State

The California Secretary of State maintains a listing of certain business names. You can check their website with their search function to see if there is already a corporation, limited liability company, limited partnership or limited liability partnership with a name that is confusingly similar to what you are hoping to use. Picking a name that is confusingly similar to another registered name may lead to a protracted tradename dispute down the line.

 4. Federal and State Registrations

Filing a fictitious business name required by California Business & Professions Code Section 17910 establishes a rebuttable presumption that the registrant has the exclusive right to use that name as a trade name in the county where the statement was filed.

What happens when there are two of you using a similar name? If you have a fictitious business name registration (a “dba”) and there is a corporation or limited liability company in the same county with a name similar to yours, whichever one filed first and is actually engaged in a trade or business using the name is entitled to the presumption of priority against the other.

 5. Specific Entity Name Requirements

 If I’m not a corporation, can I put an “Inc.” or “Incorporation” or “Corp.” or “Corporation” after my name?

 No. You’re not allowed to use a name that may be confusing to the general public.

 What about “LLC” or “Limited Liability Company” for my sole proprietorship?

 No. Only a limited liability company can use “LLC” or “Limited Liability Company” or “L.L.C.”

 You’re not allowed to pick a name for your business that will end up confusing people who look at your business name.

6. Reserve Your Business Name if There Will be a Delay in Filing Your Formation Documents

Reserving your name with the Secretary of State is a simple and inexpensive matter. Ideally, when you decide on a name after conducting the research I’ve described above, you should go through the effort of reserving with the Secretary of State. If you anticipate doing business in states other than California, reserve your name there as well.  The Secretary of State will issue a certificate of reservation which should provide sufficient time to finish your business formation.

 7. Will a Fictitious Business Name Statement Be Required?

A fictitious business name statement must be filed with the county clerk if you are regularly doing business under a fictitious business name (or a “dba”). You can file a fictitious business name statement in the county that your business has its principal place of business, within 40 days of the date you first began conducting business under that name. You may also wish to file a fictitious business name statement in other counties where you will transact business now and in the future.  Once you filed the fictitious business name statement with the county clerk, you must publish the name with a newspaper in the same county within 30 days of filing the statement, once a week for 4 consecutive weeks, with five days between each date of publication. Most metropolitan areas have papers that do this for a nominal sum. Afterwards, you must file an affidavit of publication with the county clerk within 30 days after completing your publication run. A fictitious business name statement will expire five years after the date you first filed it in the county recorder’s office, at which point you’ll need to refile.

What legal requirements apply to all businesses?

*Annual statement of information (officers, directors, and agent for service of process) and filing fee to the secretary of state (except sole proprietors and general partnerships).

*Taxes – annual franchise tax fee (except sole proprietor and general partnership), state and federal tax returns, employment taxes, sales and use taxes, personal property taxes.

*Local business license, professional licensing

*Federal Employment Identification Number

*Insurance – unemployment and workers’ compensation, liability, etc.

*Qualification to do business in other states if you do business elsewhere.

How to avoid personal liability?

1. Form an entity.
2. Avoid personal guarantees.
3. Observe appropriate formalities for the entity.
4. Remit all taxes withheld or collected.
5. Carry insurance.

Protecting Intellectual Property

1. Identify trade secrets and take steps to protect them.
   1. Trade secret defined as “(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and (2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 
2. Identify and protect creative works through copyrights.
3. Identify and protect distinctive phrases, logos and branding items through trademarks (or service marks). 

Buy-Sell Agreements

An agreement document how you or another owner can leave the business if one of you moves out state, goes to a new line of work, becomes physically or mentally disabled, dies, wants to sell to an outsider, or seeks to buy out a co-owner’s interest. 

What can happen if you don’t have a buy-sell agreement?

            *You may be forced to work with and share control of the company with someone you don’t know.

            *You may end up working with a family member of a deceased or divorced owner.

            *If you die, your survivors may end up stuck in a business they don’t want.

            *You may end up arguing with a co-owner on the price of the company.

Business Contracts

What makes a valid contract? An agreement, consideration and acceptance, and sometimes a writing.

Things to include in the contract:

            *Names and addresses of the parties

            *Date the contract is signed

            *Short preamble, i.e. background or recitals

            *What each party promises to do

            *When the work will be done or the product delivered

            *How long the contract will remain in effect

            *The price – or how it will be determined

            *When payment is due

            *Warranties

            *Conditions on how you can terminate the agreement

            *Liquidated damages if performance is delayed or defective

            *Whether or not a party can transfer their interest in the contract to another

            *Resolution of disputes through arbitration or mediation

            *Who will cover attorney’s fees and costs if a party breaches

            *Where notices of default and other communications can be sent

            *What state law applies if questions about the contract arise. 

Choosing an entity

Do the parties need limited liability?

Do the parties want profits and losses to pass through to their personal income tax returns?

Will all of the parties be actively involved in management?

If you are a small business owner with consistent legal needs, our Virtual In-House Counsel services are a cost-effective option for your business.  You can have the benefits of an in-house legal team, without the expense and overhead.

We will manage your legal affairs so that you can concentrate on running your business.  We provide personalized and responsive legal advice that may be customized and adapted to the issues your company is facing.

This service is set up on a quarterly payment basis.  You can receive continual access to an attorney and still stay within a predetermined budget.  Signing up for the Virtual In-House Counsel service will allow you to receive legal advice at a 25% discounted block rate for anything from transactional matters, contract review and drafting, risk management, and litigation strategy.

This flexible approach allows us to combine traditional legal services that keep a business owner’s budget in mind.  It allows you to have an attorney familiar with your business, who is just a phone call or email away.  Our attorneys are well-versed in varied areas of law, including:

- Business transactions,

- Corporate governance,

- Employment law

- Real estate law,

- Lending and collections,

- Insurance issues,

- Litigation, and

- Non-profit law.

If you are interested in learning more about this service and whether it would be a good fit for your small business, please contact us at (408) 369-0800.

Elena Rivkin Franz, attorney and counselor-at-law, is licensed to practice in all California court and the United State District Court of Northern California. During law school, she was a judicial extern for Judge James Ware of the Federal District Court in the San Jose Division.

To lean more about Elena’s specialties of law, please view her profile under attorneys. If you would like to speak with Elena, please call 408-369-0800.

If you would like to speak to one of our attorneys specializing in this area of law, please call us at 408-369-0800 or click on “contact” to send us an email message. We look forward to hearing from you.