If you own or operate a California business under $10 million in revenue, your legal needs are different from a venture-backed startup — and very different from a Fortune 500 company.
But here’s what I’ve seen repeatedly:
- Business owners wait too long to involve counsel.
- Executives sign agreements they don’t fully understand.
- Leases get signed without reviewing the personal guarantee.
- Partners form LLCs using templates that don’t plan for the end.
- And the hard dollar cost of even a small business lawsuit in California ranges from at least $50,000 to $100,000. Complex disputes cost far more.
The good news? Most of these problems are preventable.
Below is a practical legal checklist I use when advising California businesses under $10M.
Part I – Building Your Legal Foundation
1. Choosing the Right Entity Structure
Your entity is not just a filing with the Secretary of State.
It affects:
- Liability exposure
- Tax treatment
- Investor expectations
- Exit strategy
- Governance flexibility
In California, your primary choices are typically:
- LLC
- Corporation (S or C)
- Limited Partnership
- Sole Proprietorship
- General Partnership (not recommended for most)
The right answer depends on:
- Number of owners
- Plans to raise capital
- Industry risk
- Long-term exit goals
A five-minute online filing should not dictate your next 10 years.
2. Operating Agreements That Prevent Partner Disputes
I cannot overstate this:
If you have more than one owner, you need a real operating agreement or shareholder agreement. Not a template.
Your agreement should address:
- Ownership percentages
- Capital contributions
- Management authority
- Deadlock procedures
- Buy-sell provisions
- Trigger events (death, disability, divorce, bankruptcy)
- Valuation mechanisms
Planning for “the end” at the beginning protects both the business and the relationship.
3. Essential Contracts Every Business Needs
At minimum, most California businesses should have:
- Customer agreements
- Vendor agreements
- Independent contractor agreements
- Employment offer letters
- Confidentiality agreements
- Intellectual property assignment agreements
A contract’s complexity should reflect the seriousness of the deal. If you’re signing a one-page agreement for a $50,000 million transaction, that’s a red flag.
4. Protecting Your Intellectual Property Basics
Your brand is an asset. But forming an LLC does not protect your business name.
Trademark protection is federal (via the USPTO), and priority matters.
Before investing in marketing:
- Conduct a proper clearance search
- File an application if appropriate
- Ensure proper ownership of the mark
5. Employee vs. Independent Contractor (California Rules)
California uses the ABC Test under Labor Code and related case law.
To classify someone as an independent contractor, you must show:
A. The worker is free from control
B. The work is outside your usual course of business
C. The worker is engaged in an independent trade
B. The work is outside your usual course of business
C. The worker is engaged in an independent trade
Most small businesses usually fail prong B in that the services the worker is providing are within their normal course of business.
Misclassification penalties can include:
- Back wages
- Waiting time penalties
- Payroll tax exposure
- Civil penalties
Even one hour of unpaid minimum wage can theoretically support penalties approaching $4,056 under certain waiting time provisions.
Do not assume a 1099 or Independent Contractor Agreement solves the problem. Those agreements are not dispositive in determining whether a worker is an employee or independent contractor.
6. When to Update Your Corporate Documents
Update your documents when:
- Ownership changes
- New investors join
- You take on debt
- You expand into new states
- You prepare for sale
Corporate housekeeping is not busywork.
A five-minute oversight can lead to long and expensive disputes.
Part II – The Startup Legal Timeline
Formation Stage
This is when entity choice and founder agreements matter most.
Skipping this step often leads to:
- Equity disputes
- Founder resentment
- Tax inefficiencies
First Major Contract
This is usually when business owners turn to templates. That’s also when I see preventable mistakes.
If the contract:
- Is overly simplistic
- References another state’s law
- Contains internal inconsistencies
- Fails to define key terms
…it deserves review before signature.
First Hire (Employee or Contractor)
Before hiring:
- Confirm classification
- Draft compliant offer letters
- Review wage/hour obligations
- Understand non-compete limitations
California Business & Professions Code §16600 generally voids non-compete agreements, with limited statutory exceptions.
First Dispute
Waiting rarely makes disputes cheaper.
Early legal guidance can:
- Preserve evidence
- Prevent admissions
- Position you strategically
Litigation is expensive. Preventative advice usually isn’t.
Part III – Commercial Lease Red Flags
Commercial leases are often the largest fixed expense for small businesses.
1. Personal Guarantees
Many leases require the owner to personally guarantee rent.
Understand:
- Duration of guarantee
- Release provisions
- Trigger events
2. Hidden CAM Charges
Common Area Maintenance charges may include:
- Property taxes
- Insurance
- Maintenance
- Management fees
Review escalation provisions carefully.
3. Restrictive Use Clauses
Your lease should allow your business to evolve.
If your use clause is too narrow, growth becomes difficult.
4. Renewal Options
Renewal clauses must clearly state:
- Timing
- Rent formula
- Exercise procedures
Missing notice deadlines can eliminate valuable rights.
5. Exit Strategies
Understand:
- Assignment rights
- Sublease rights
- Ongoing liability
Commercial leases are notoriously hard to get out of, so if that is a concern, you need to pay special attention to these issues and/or start with a shorter term for the lease.
Part IV – Executive Employment Agreement Essentials
1. Compensation Beyond Salary
Executive agreements often include:
- Bonuses
- Stock options
- RSUs
- Deferred compensation
Vesting schedules and tax implications matter.
2. Non-Competes in California
Most non-competes are unenforceable in California under Bus. & Prof. Code §16600.
However:
- Confidentiality provisions remain enforceable
- Trade secret protections remain enforceable
Understanding the distinction matters.
3. Termination Provisions
What does “for cause” mean?
It should be clearly defined.
Vague language invites disputes.
4. Severance & Separation Agreements
Severance negotiations should address:
- Payment structure
- Release language
- Confidentiality
- Non-disparagement
Executives should not assume the first draft is final.
Key Takeaways
- The right legal structure reduces long-term risk.
- Templates often create expensive disputes.
- California employment laws are stricter than most states.
- Commercial leases can expose personal assets.
- Executive agreements deserve careful review.
- Involving counsel early often costs far less than fixing problems later.
Frequently Asked Questions
- When should a California startup hire a lawyer?
At formation, before signing major contracts, before hiring, and at the first sign of a dispute.
- Does forming an LLC protect my business name?
No. Trademark protection is separate from entity formation.
- Are non-competes enforceable in California?
Generally no, subject to limited statutory exceptions.
- Should I sign a commercial lease without review?
Not without understanding the personal guarantee, CAM charges, and exit provisions.
Conclusion
Most small business legal problems are not dramatic. They are procedural.
- A missed filing.
- An undefined term.
- A personal guarantee you didn’t notice.
If you own a California business under $10M, this checklist can help you spot risk before it becomes expensive.
If you’re unsure where your business stands, a focused consultation can often identify issues quickly and efficiently.
This post is for informational purposes only and does not constitute legal advice. For advice on your specific situation, consult a qualified attorney.