Selected Developments In Business Law Courtesy of CEB — Selecting and Forming Business Entities

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications.  This month’s feature is from the April 2019 update to Selecting and Forming Business Entities.  References are to the book’s section numbers.  See CEB’s CLA Section Member Discount Page for special discounts for Business Law Section members.  The most significant legal developments since the last update include developments in such important topic areas as federal  tax law, conflicts of interest, LLP eligibility, and blockchain technology.

April 2019

The California Supreme Court approved a new set of Rules of Professional Conduct, effective as of November 1, 2018. Explanations of and citations to rules throughout this book have been revised and corrected as appropriate. See §§1.2–1.6, 1.9A, 1.16–1.19, 1.40, 3.14, 9.11, 10.7, 10.9, 10.25, 11.227.

The California Supreme Court held that a law firm’s failure to disclose a known, existing conflict violated the Rules of Professional Conduct, even though the client agreed to a blanket waiver, and that therefore an arbitration decision awarding the firm unpaid contractual fees had to be vacated. Sheppard, Mullin, Richter & Hampton, LLP v J-M Mfg. Co. (2018) 6 C5th 59. See §1.4.

The California Legislature has extended the authority for architects, engineers, and surveyors to form professional LLPs until January 1, 2026, and the authority for lawyers and accountants to form professional LLPs indefinitely. 2018 Stats, ch 150. See §2.77, 2.86, 2.107, 7.3, 7.22, 7.25–7.25A.

A California appellate court held that a party pleading a subsequent incorporation of a company as a defense to the existence of a partnership had to plead and prove the incorporation as an affirmative defense. Eng v Brown (2018) 21 CA5th 675. See §2.96.

The IRS has published inflation-adjusted amounts for IRC §199A(d) and (e)(2); for tax years beginning in 2019, business owners with taxable incomes below $321,400 (if married filing jointly) or $160,725 (if single) are permitted to take the special deduction under §199A without regard to the limit for specified service businesses. Rev Proc 2018–57, 2018–49 Int Rev Bull 827. See §§2.205, 10.13.

Noncompliance with statutes requiring filing of a fictitious business name statement does not void or invalidate a contract made using the business name. U.S. v Jacobsen (ND Cal, May 22, 2018, No. 15-cr-00518-MMC-1) 2018 US Dist Lexis 85979. See §3.11.

A forum-selection bylaw adopted by a Delaware corporation headquartered in California without stockholder approval was enforceable in California. Drulias v 1st Century Bancshares, Inc. (Dec. 21, 2018, No. H045049) 2018 Cal App Lexis 1202. See §4.2.

The California Legislature amended Corp C §1601 to permit corporate books, records, and minutes to be open for inspection at the corporation’s principal office in California if the originals have been lost, destroyed, or are not normally located in California; also to permit a shareholder to request these documents by mail or electronically. Stats 2018, ch 76. See §4.2.

The IRS has issued extensive final regulations to provide guidance on the complex provisions of IRC §199A, enacted in 2017 by the Tax Cuts and Jobs Act. TD 9847, 84 Fed Reg 2952 (Feb. 8, 2019). The IRS has also published Rev Proc 2019–11, 2019–9 Int Rev Bull ___, which provides guidance on calculating W-2 wages for purposes of IRC §199A. See §5.17.

The IRS issued final regulations regarding the designation and authority of the partnership representative under the new centralized audit regime for partnerships and LLC tax returns. TD 9839, 83 Fed Reg 39331 (Aug. 9, 2018). See §§5.41A, 5.82A.

Congress enacted the Consolidated Appropriations Act, 2018 (Pub L 114–141, 132 Stat 348), which includes provisions titled Technical Corrections Related to Partnership Audit Rules (Pub L 115–141, Division U, Title II, 132 Stat 348. These technical corrections expand the scope of IRS investigation to include “partnership-related items,” as defined. See §5.17.

California enacted legislation adopting the federal partnership tax audit regime. Stats 2018, ch 729. See §5.17.

The Ninth Circuit affirmed a district court’s finding that certain general partnership interests were investment contracts, and thus securities, and the defendant violated federal securities law by selling them. United States SEC v Schooler (9th Cir 2018) 905 F3d 1107. See §6.8.

A managing partner of an LLC was entitled to attorney fees under CC §1717 in a case against the LLC, which the LLC lost, but in which the managing partner was an alter ego defendant who had obtained a judgment of dismissal and was thus the prevailing party on the alter ego claim. Burkhalter Kessler Clement & George LLP v Hamilton (2018) 19 CA5th 38. See §§7.5–7.6.

In addition, in 2018 Delaware introduced the “statutory public benefit limited liability company” (SPBLLC), a type of limited liability company. 6 Del Code §§18–1201—18–1208. See §7A.1.

The California Legislature has enacted provisions permitting a corporation that does not have outstanding securities listed on major securities exchanges to adopt provisions in its articles of corporations authorizing corporate records to be recorded and kept by means of blockchain technology. Corp C §§204, 2603 (as amended by Stats 2018, ch 889). See §§7A.9, 8.15.

The California Legislature has also added provisions to the General Corporation Law requiring that a domestic or foreign corporation with principal offices in California must have at least one woman on its board of directors by the end of 2019, and, depending on the size of the board, two to three woman directors by the end of 2021. Corp C §§301.3, 2115.5 (as added by Stats 2018, ch 954). See §8.25.

An employee may exclude from gross income up to $265 per month in 2019 for “qualified parking.” IRC §132(f)(2). See §10.12.

The following agency forms have been revised:

• Business Entities Fee Schedule (Secretary of State Form BE FEES). See §2.209.
• General Partnership/Limited Liability Partnership Check Sheet and Partnership Application for Licensure (Board of Accountancy Forms 11L-35 and 11A-19). See §7.41.
• Partnership Application for Licensure (Board of Accountancy Form 11A-19). See §7.42.
• General Partnership/Limited Liability Partnership Name Change Check Sheet and Partnership Name Change Application for Licensure (Board of Accountancy Forms 11-L-42 and 11A-36). See §7.43.
• Architect’s Business Entity Report Form (California Architects Board). See §7.44.
• Secretary of State Articles of Organization Limited Liability Company (LLC) (Form LLC-1). See §11.39.
• Secretary of State Amendment to Articles of Organization of a Limited Liability Company (LLC) (Form LLC-2). See §11.40.
• Secretary of State Restated Articles of Organization of a Limited Liability Company (LLC) (Form LLC-10). See §11.44.