Legal Question in Business Law in California

Re: business law

I have no idea. How could I tell without looking at the nature of the business, the operating agreement, terms of ownership, management structure, etc.?

Best,

Daniel Bakondi, Esq.

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Re: business law

Not as long as the change is properly done, documented and filed with appropriate agencies. Feel free to contact me if serious about getting legal review or documentation created.

Re: business law

I'd say that changing the entity under which a business is conducted presents an opportunity for fraud or an innocent mistake that could be damaging either to the business or to the interest of an investor.

One type of possible problem is exclusion of an owner or reduction in his ownership stake. For example, if the corporation is owned by A, B, C, D and E, 20% each, and the business is reconstituted as an LLC in which only A, C and E are members, B and D are defrauded (unless the agreed to be paid off and withdraw voluntarily). This is just an extreme example; a reduction in ownership, control or powers can occur much more subtly.

Another example of damage to your investment might occur if the corporation had a favorable contract to buy supplies or to sell its products or services, and for one reason or another the other party to such contract refused to accept an assignment or delegation of the contract rights from the disappearing corporation to the new LLC. This isn't supposed to happen, because contracts are generally freely assignable and delegable. Howwever, this isn't always so.

Another pssible problem is loss of goodwill. If the business loses its identity and/or moves to a new location, it may not be recognized as the same business by its customers.

Finally, there can be adverse tax consequences from any kind of business reorganization. These often can be avoided, but the business needs tax advice to avoid loss of tax-loss carryforwards, favorable valuations, capital gains recognition, and so on.