When managing a corporation, overlooking key legal requirements can lead to serious consequences. Mistake #8 highlights the risks of improperly issuing shares or failing to secure valid exemptions from securities registration, potentially costing your business tens of thousands of dollars. Mistake #9 stresses the importance of properly dissolving your business when it ceases operations—failure to do so can result in ongoing liabilities, including unnecessary taxes and legal vulnerabilities. Learn more about these and other common errors to safeguard your business and its future!
TIP #8 : Maintain current records of the ownership, and be aware of potential registration issues.
The consideration for shares constitutes the basic equity funding or capital of the company. A common mistake made by promoters of corporations is the payment or partial payment of shares represented by a promise of future services, or by promissory notes of the purchaser which are not adequately secured by collateral other than the shares being acquired. However, legal consideration may take the form of money paid or past services provided, debts or securities canceled, or property actually received by the corporation.
Unless a valid exemption applies to the sale of a corporation’s shares, the securities may need to be registered with both Federal and State agencies, the cost of which can often exceed $75,000.00. Complex statutory schemes are enacted which provide exemption from registration under various scenarios. Generally, intrastate offerings are exempt from registration under the Federal Securities Act of 1933. However, a corporation must still comply with California’s regulations. In California, most small corporations will elect to avoid registration by seeking exemption under Corporations Code § 25102(f). This exemption allows the sale of shares without registration to 35 or less shareholders (certain qualified investors are excluded from this number).