Don’t be Fooled by Solicitations from Companies that Will “File” Your Annual Corporate Minutes (for a fee, of course)

After receiving a suspicious-looking solicitation on “official” letterhead bearing a Sacramento address, clients often ask:

“I got a form in the mail entitled “Disclosure Statement: Department of Annual Business Minutes (DOBM)” or “Annual Disclosure Statement” (or something similar), from a Sacramento address. It says I must fill it out and return it with a check for $125. Is this a scam? Do I need to do anything with my minutes on a yearly basis?”

Generally speaking, these are scams. I, myself, receive these solicitations several times a year. There are many companies out there that get an address somewhere in Sacramento (sometimes it’s just a mailbox store), and send envelopes with logos that somewhat resemble the official seal of the State of California, or they may look like they are from the Secretary of State’s office or the Department of Corporations. They generally tell you of some ill that will befall you and your business of you do not immediately sign the form and send it back with anywhere from $115 to $150 for annual minutes. You may receive such a solicitation within a few of weeks of filing your Articles of Incorporation.

Articles of Incorporation are public records, and these companies simply purchase lists of newly formed corporations. With so many small businesses incorporating every day, it’s like shooting fish in a barrel for them, and unfortunately their scare tactics work on a lot of people.

Here’s the real deal: Your corporation must have an annual meeting of the shareholders and an annual meeting of the directors. Meeting requirements are set forth in the Corporations Code and also in your corporation’s bylaws. These “meetings” do not have to be at a fancy conference location, and if your board of directors consists of just one person, you won’t exactly be “meeting” with yourself. But the meetings do have to be documented with minutes in your corporate record book. The bylaws further specify the requirements for the date and time of both the annual meeting of shareholders and the annual meeting of directors. In small corporations, these are usually handled as “paper meetings,” that is, minutes are generated documenting major decisions made that affect the corporation, but there is no actual “meeting” where folks sit down and conduct a discussion, etc. Failure to maintain an up to date corporate binder with all of the documents required in the Corporations Code and your bylaws (including minutes of these annual meetings) could potentially cause you to lose your corporate liability protection, and you may also be required to produce such documentation in the event you are ever audited by the tax authorities.

You can find an attorney or legal document assistant to prepare the necessary documents. However, these are all things you can do yourself, too. There are some easy-to-understand self-help books out there, like Nolo’s book on corporate resolutions. The Secretary of State will mail you a blank SOI form you can fill out and send back. But if you don’t want to hassle with it, we’re here to help.

Above all else, please understand that any solicitation you receive is likely a scam. Minutes do not get filed with the Secretary of State’s office; the only thing filed with the Secretary is the annual Statement of Information. Odds are, you will receive these bulk-mailed solicitations at various times of the year, often when you are nowhere near the annual meeting date established in your bylaws. Whatever services they are trying to sell you most likely won’t include the SOI, may not include the necessary notice waivers, and may not include the minutes of both meetings (shareholders and directors) as required in your bylaws.

Bottom line…buyer beware!

Forming a California Non-Profit Public Benefit Corporation

In California, a non-profit organization that is incorporated to serve religious or charitable purposes is referred to as a “nonprofit public benefit corporation.” The legal requirements pertaining to these organizations are set forth in the California Corporations Code, beginning with § 5110. This article details the steps necessary to establish a California nonprofit public benefit corporation.

Laying the Groundwork
The philosopher Edmund Burke once said, “Good order is the foundation of all things.” In the spirit of Burke’s sage advice, we urge you to take your time with these preliminary steps, to ensure your new organization gets off to a good start with a solid foundation.

Direct your attention to your organization’s mission, funding sources, and annual budget. This is not the time to cut corners. Taking the time to write a mission statement that clearly identifies the needs your nonprofit corporation will address will assist you throughout the organization’s developmental stages, and will help you attract volunteers and donors.

Incorporate Your Nonprofit Organization
If you haven’t done so already, now is the time to choose name for the corporation and check the name availability with the California Secretary of State. Your organization’s name cannot be the same as, or deceptively similar to, other corporate names already on file (limited exceptions may apply).

You may also need to recruit directors to serve on your organization’s board. A California nonprofit public benefit corporation must have at least one director, and the number of directors must be stated in either the Articles of Incorporation or the corporate bylaws.*

Your Articles of Incorporation must be filed with the California Secretary of State. A filing fee is required; as of this writing that fee is $30. Current fees can be found on the Secretary of State’s website.

The Articles of Incorporation must contain specific language in order to qualify for tax-exempt status at the federal and state levels. Information about drafting the Articles of Incorporations, please consult California Corporations Code § 5130.

Once the Articles have been filed, you have 90 days to file a Statement of Information with the Secretary of State. This Statement is a public disclosure of information including a description of what the organization does, where it is located, and the names and addresses of its officers. After the original Statement is filed, you must file a new Statement of Information every two years. This Statement may be filed electronically via the Secretary of State’s website, or in paper format.

Draft Your Bylaws
The law requires that your organization adopt Bylaws, which are the internal governing document for your nonprofit corporation. The Bylaws establish the internal rules and procedures, including details about how business will be conducted, who has decision-making authority, and even the process by which the Bylaws can later be amended.

The Bylaws are not filed with any governmental entity, but must be kept with the organization’s corporate records at its principal place of business.

Hold an Organizational Meeting of the Board of Directors
The minutes from your Organizational Meeting of the Board of Directors will document the many of the remaining steps required to get your nonprofit organization up and running.
At this meeting, the incorporators and/or initial directors of the corporation will typically conduct the following business:

• Appoint additional directors


• Appoint or elect officers


• Adopt the corporate Bylaws


• Establish a budget


• Designate a bank for the corporate account


• Adopt a corporate seal


• Set up a Corporate Record Book

Your corporate record book contains the important documents concerning the formation, management and due diligence of your nonprofit organization. Detailed information regarding recordkeeping requirements a nonprofit public benefit corporation must follow can be found in California Corporations Code §§ 6320-6325.

Get Your Employer Identification Numbers
Your nonprofit corporation must get a federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This can be obtained by phone, fax, mail or online application.
A California EIN is also required if your organization will be paying at least $100 in wages in a quarter. This EIN can be obtained online.

Apply for Tax Exempt Status
You will most likely want to apply for tax-exempt status with both the IRS and the California Franchise Tax Board (FTB). Without these exemptions, your organization may be obligated to pay at least the minimum federal and state corporate income tax.

The federal tax exemption under section IRC § 501(c)(3) is requested using IRS Form 1023, Application for Recognition of Exemption. This form may not be required, however, if your organization was established with a 501(c)(3) purpose and your annual gross receipts are normally less than $5,000.

California state tax exemption is requested on FTB Form 3500, Exemption Application. If you have already obtained a letter of determination from the IRS, you can apply to the FTB using the shorter Form 3500A, Submission of Exemption Request, and attaching a copy of the federal letter. These forms can be downloaded from the FTB’s website.

Register with the California Attorney General
Once your nonprofit public benefit corporation begins receiving donations, you must file the Initial Registration Form CT-1. This form must be filed with the Registry of Charitable Trusts within 30 days.

* Note: Under California law, no more than 49 percent of a board of directors may be interested persons. An interested person is a director who provides nondirector services to the nonprofit public benefit corporation and is paid for the services rendered. The law also extends to cover any close relative of the director. For more information, see California Corporations Code § 5227.

FAQ: Should I Incorporate My Business?

The primary advantages of operating as a corporation are liability protection and potential tax savings. Like any important decision, choosing whether to incorporate involves weighing the pros and cons, and should only be done after careful research and consultation with a legal or tax professional.

Once incorporated, the business assets of the corporation are separated from the owner’s personal finances. As a result, the owner’s personal assets generally can be shielded from creditors of the business.

To maintain this legal separation (and avoid “piercing the corporate veil”), the corporation must observe certain formalities, including:

• Keeping corporate assets and personal assets separate (no commingling of funds)


• Holding shareholder and director meetings at least annually


• Maintaining a corporate record book including bylaws, minutes of shareholder and director meetings, and shareholder records


• Filing annual information statements with the Secretary of State


• Filing a separate tax return for the corporation

Many people are concerned about “double taxation” of income, but you should do your own research, and compare the features of the C-corporation and S-corporation. The double taxation results when a C-corporation has profit at the end of the year, and that profit is then distributed to the shareholders. That profit is taxed to the corporation, at the corporate tax rate, and then the dividends are taxable income to the shareholders on their personal tax returns. However, the corporate tax rate is typically much lower than the individual tax rate that a sole-proprietor will pay on a 1040 Schedule C, and a competent accountant can help the corporation minimize double-taxation (or eliminate it completely).

For example, a small C-corporation will likely have a shareholder who is also an employee. Paychecks to the shareholder/employee are, of course, tax deductible to the business. To the shareholder/employee, they are taxable income (as would be the case with a paycheck from any employer). A bonus could be paid to the shareholder/employee in order to lower the corporation’s taxable profit, eliminating the double-taxation. These calculations should be performed by your accountant or tax advisor, but shifting income from the corporation to the shareholder/employee (or vice versa, depending on which has the lower tax rate) can be a great way to lower your overall tax liability. In addition, there are certain advantages that are only available with a C-Corporation, such as full tax-deductibility of medical benefits for a shareholder/employee.

The S-Corporation avoids the double-taxation by offering a tax structure similar to the Limited Liability Company (LLC, which is not an option for businesses that are required to hold a license, certification or registration). A corporation with 100 or fewer shareholders can elect to be treated as an S-Corporation. If the corporation is profitable, the shareholder/employee must draw a reasonable salary (and pay employment tax on it), but then all remaining corporate profits flow through to the shareholder’s personal tax return (thereby avoiding the FICA tax on the portion of profits that is taken as a dividend).

Before deciding to incorporate, you should seek legal and tax advice on what type of ownership best suits your business. An experienced attorney and tax advisor can help you decide which form of ownership is best for your business. For the do-it-yourselfers, we highly recommend “Own Your Own Corporation” by Garrett Sutton, Esq. (part of the Rich Dad series).

What is a Notice of Pendency of Action (Lis Pendens)?

A “notice of pendency of action,” also known as a “lis pendens” (Latin for “a suit pending”), is a written notice that a lawsuit has been filed that may affect either the title to, possession of, or a claimed ownership interest in real property. The notice is usually filed in the county Recorder’s office. Recording the notice alerts a potential purchaser or lender that the property’s title is in question, which can make the property less attractive to a buyer or lender.

A notice of pendency of action is available in actions involving “real property claims,” which are defined in California Code of Civil Procedure § 405.04 as “the cause or causes of action in a pleading which would, if meritorious, affect (a) title to, or the right to possession of, specific real property or (b) the use of an easement identified in the pleading, other than an easement obtained pursuant to statute by any regulated public utility.”

Unless otherwise specified, the notice must be recorded in the office of the Recorder of each county in which all or part of the property is situated. The notice must contain the names of all parties to the court action and a description of the property.

An attorney of record in an action may sign a notice of pendency of action. Alternatively, a judge of the court in which an action that includes a real property claim is pending may, on request of a party, approve a notice of pendency of action. Such a request is usually made in the form of an ex parte application. Both the notice and the ex parte application are routine legal documents that you can prepare yourself, with a little help from the law library, or a non-attorney legal document preparer can assist you.

Federal Courts React to Tide of Pro Se Litigants

From The National Law Journal

In response to a growing tide of pro se litigants in federal courts, legal centers in at least three districts have been set up to provide services and advice to parties who represent themselves in civil cases.

The newest center opened on March 5 at a federal courthouse in downtown Los Angeles. Last year, a similar one opened in the federal courthouse in San Francisco. A third program, operating out of the federal courthouse in Chicago, has been operating since 2006.

The centers reflect the increasing number of pro se litigants in federal courts, particularly in employment and certain types of civil rights lawsuits.

"It's part of a whole movement that's taking place in the courts to try to recognize, as a practical matter, that most people just can't afford lawyers these days," said Richard Zorza, coordinator of the Self Represented Litigation Network, which works with organizations on pro se litigant issues.

About 150 centers exist nationwide to assist pro se litigants, but most are part of state courts and vary from clinics to telephone hotlines to online resources, Zorza said. "It's certainly unique doing it in federal court," he said.

Unlike state courts, where pro se litigants frequently show up in divorces, the vast majority in federal court appear with employment claims, such as violations of the Americans With Disabilities Act and other anti-discrimination statutes.

The new pro se centers focus on civil cases and, for the most part, litigants who are not prisoners. The services are free. At the Pro Se Clinic in Los Angeles, which covers the Central District of California, a poster advertising its services in the courthouse lobby already had drawn up to 15 people a day before its official opening on March 5, said Janet Lewis, supervising attorney of the clinic.

Lewis works for Public Counsel, a nonprofit legal organization that operates the clinic, which came about after judges grew frustrated with pro se litigants.

Many of their problems are procedural. "The complaints are not put together in a way so that the court actually feels comfortable they can use them," she said.

Lewis is one of two attorneys in the clinic who provide legal advice, review briefs or refer litigants to pro bono attorneys, said Hernán Vera, president of Public Counsel. But they stop short of writing briefs or appearing in court.

In San Francisco, the Legal Help Center, sponsored by the Bar Association of San Francisco's Volunteer Legal Services Program, opened in September.

"Often, there are people who are misguided in terms of not really understanding what the cause of action is, and what's recognizable, and the fact that they don't have a viable cause of action for one reason or the other," said U.S. Magistrate Judge Edward Chen of the Northern District of California, who came up with the idea of the clinic. "Often, people do have a cause of action but are at a loss as to how to prosecute their case."

He said the court has a handbook available to help pro se litigants with terms. But the handbook doesn't explain legal theories, he said.

Unlike attorneys at the other two centers, the supervising attorney of the San Francisco clinic, Jennifer Greengold, can give limited legal advice and write pleadings. But she can't go to court and can't do outside research for pro se litigants.

Legal Information or Legal Advice?

Clarifying the Role of Legal Document Assistant (LDA)

As a Legal Document Assistant (LDA), I have often found myself in a quandary about how to provide the best service to my clients, enabling them to truly accomplish their self-help legal objectives, without crossing the line into forbidden territory. It is commonly understood that practicing law is exclusively within the domain of lawyers.

But what, exactly, is the “practice of law?”

Throughout the United States, courts, bar associations and legislative bodies have grappled with this issue and come up with a variety of tests to determine whether a particular activity constitutes the practice of law:

• The “commonly understood” test defines the practice of law as composed of activities that lawyers have traditionally performed.[1] There are exceptions to this test, including:
  ~Non-attorneys may undertake activities usually performed by attorneys, if those activities are incidental to the profession or business of the non-attorney.[2]
  ~Lay people are permitted to provide services that are commonly understood to be the practice of law as long as those services do not involve difficult or complex questions of law.[3]
• The existence of an attorney-client relationship is sometimes used as a determining factor.[4]
• Other tests include whether the client believes he or she is receiving legal services, whether the activity involves the application of legal knowledge to the specific situation of an individual, and whether the services provided affect the recipient’s legal rights.[5]

Chapter 5.5 of the Business & Professions Code makes several references to the prohibition against non-attorney LDAs engaging in the practice of law. While the Business & Professions Code expressly prohibits the practice of law by individuals who are not active members of the State Bar,[6] the Code is silent on what, specifically, defines the “practice of law.”

The California Supreme Court addressed this issue in 1922, before the State Bar Act was enacted, but that definition is by no means carved in stone. In People v. Merchants Protective Corp., the court adopted the definition set forth by the Indiana Court of Appeals in 1893.[7] “As the term is generally understood, the practice of the law is the doing or performing services in a court of justice, in any matter depending therein, throughout its various stages, and in conformity to the adopted rules of procedure. But in a larger sense it includes legal advice and counsel, and the preparation of legal instruments and contracts by which legal rights are secured although such matter may or may not be depending in a court.”[8] This definition was reaffirmed in 1970 by the California Supreme Court in Baron v. Los Angeles.[9]

This definition, however, continues to evolve. “Defining the practice of law has been a difficult question for the legal profession for many years. The emergence of new technologies such as the Internet has expanded the number of ways in which legal advice and information can be disseminated, which has increased the complexity of the task,” as noted in comments made by the Federal Trade Commission and Department of Justice, in response to the American Bar Association’s proposed Model Definition of the Practice of Law. “The boundaries of the practice of law are unclear and have been prone to vary over time and geography.”[10]

In 2006, the California Supreme Court, referring to Merchants, held: “Notwithstanding the foregoing historical rule, a number of sources provided for exceptions to the rule. First, legislation was enacted that eroded the broad rule against the corporate practice of law and the practice of other professions. As noted, the 1968 Professional Corporation Act[11] permits the corporate practice of law even for profit, subject to various restrictions that are intended to safeguard client interests against the profit motive, including registration with the State Bar and a requirement of corporate ownership and governance solely by attorneys.”[12]

Similarly, legislation enacted in 1998 specifically authorizes non-attorneys to provide legal document preparation services.[13] Such activities necessarily include “the preparation of legal instruments and contracts by which legal rights are secured although such matter may or may not be depending in a court,” and clearly fall within the scope of prohibited activity under the previously-accepted definition of the practice of law.

In Baron, the Court has also noted that “ascertaining whether a particular activity falls within this general definition may be a formidable endeavor.”[14] In reaching its conclusion, the Baron Court stated, “In close cases, the courts have determined that the resolution of legal questions for another by advice and action is practicing law ‘if difficult or doubtful legal questions are involved which, to safeguard the public, reasonably demand the application of a trained legal mind.’”[15]

In recent years, several organizations and agencies have also weighed in on the issue, proffering their own opinions about what constitutes the practice of law.

In 2003, the American Bar Association (ABA) published the following recommendation regarding the definition of the “practice of law”:

"RESOLVED, That the American Bar Association recommends that every state and territory adopt a definition of the practice of law.
FURTHER RESOLVED, That each state’s and territory’s definition should include the basic premise that the practice of law is the application of legal principles and judgment to the circumstances or objectives of another person or entity.
FURTHER RESOLVED, That each state and territory should determine who may provide services that are included within the state’s or territory’s definition of the practice of law and under what circumstances, based upon the potential harm and benefit to the public. The determination should include consideration of minimum qualifications, competence and accountability.[16] "

This common-sense definition was recommended following a lengthy process which included significant public comment from government agencies, attorneys, non-attorney legal service providers, bar associations, and advocacy organizations.[17]

The draft version of this recommendation, released in 2002, was significantly broader in scope and thus heavily criticized. The 2002 draft stated that an individual was engaged in the practice of law when engaging in any of the following activities on behalf of another:

• Giving advice or counsel to persons as to their legal rights or responsibilities or to those of others;
• Selecting, drafting, or completing legal documents or agreements that affect the legal rights of a person;
• Representing a person before an adjudicative body[18], including, but not limited to, preparing or filing documents or conducting discovery; or
• Negotiating legal rights or responsibilities on behalf of a person.

This proposed Model Definition came under heavy fire, with accusations that it is overbroad, contrary to the public interest, does not protect consumers from harm, and could restrain competition between lawyers and non-lawyers.

In an article addressing the ABA’s proposed Model Definition, Attorney James C. Turner wrote, “There is a better approach. We should limit the concept of unauthorized practice by establishing a common-sense, brightline test that equates it to fraudulent practice – that is, saying you’re a lawyer when you’re not…Consumers understand this, and so should the profession.” In conclusion, Turner stated, “Whether the ABA likes it or not, lawyers cannot fully serve the legal needs of the public, and non-lawyer legal providers are here to stay. It is time to come into the 21st century and repudiate protectionist practices that hurt consumers and justifiably engender disdain for the legal profession.”[19]

In public comments made by the Federal Trade Commission and Department of Justice, Acting Assistant Attorney General Pate, et al., wrote, “If adopted by state governments, the proposed Definition is likely to raise costs for consumers and limit their competitive choices. There is no evidence before the ABA of which we are aware that consumers are hurt by this competition and there is substantial evidence that they benefit from it. Consequently, we recommend that the proposed Model Definition be substantially narrowed or rejected.”[20]

“We conclude that the proposed definition is not in the public interest because the harms it imposes on consumers by limiting competition are likely much greater than any consumer harm that it prevents.”[21]

In 2007, a similarly draconian definition of the “practice of law” was proposed in Hawai’i.[22] In public comments regarding the proposed rule, Thomas O. Barnett, United States Assistant Attorney General, et al., wrote, “The Justice Department and the [Federal Trade Commission] believe that the definition of the practice of law should be limited to activities for which specialized legal knowledge and training is demonstrably necessary to protect consumers and an attorney-client relationship is present.” [23] Barnett, et al. went on to urge the Hawai’I Supreme Court to “consider adopting language similar to that found in Rule 49 of the District of Columbia Court of Appeals. Rule 49 defines the practice of law as ‘the provision of professional legal advice or services where there is a client relationship of trust or reliance.’[24] The Commentary to Rule 49 makes clear that giving advice or counsel to others as to legal rights or responsibilities is not necessarily the practice of law. Rather, such services may be the practice of law if they are provided in the context of an attorney-client relationship.”[25]

So what does all of this mean in the context of the LDA-client relationship? How do we, as LDAs, best serve the interests of our clients and ensure that we further the access to justice movement while maintaining sound business practices that are appropriate and correct under the law?

California case law has established that providing the client with legal information – even a detailed manual containing specific advice – does not constitute the practice of law if the LDA refrains from personally advising the client regarding his particular case.[26]

Furthermore, significant First Amendment concerns are raised in connection with the outright prohibition of “any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options…”[27] if such comments fail to meet California’s accepted definition of what constitutes the practice of law, e.g. providing advice if difficult or doubtful legal questions are involved which demand the application of a trained legal mind.[28]

By refraining from directly resolving a a client’s legal questions “by advice and action…if difficult or doubtful legal questions are involved which, to safeguard the public, reasonably demand the application of a trained legal mind,” the Legal Document Assistant should remain free from any finding of the unauthorized practice of law, or violation of Business & Professions Code section 6400, et seq.

[1] State Bar of Arizona v. Arizona Land Title and Trust Co., 366 P2d 1, 5-11 (Ariz. 1961)
[2] Virginia v. Jones & Robins, Inc., 41 S.E.2d 720, 727 (Va. 1947)
[3] Agran v. Shapiro, 127 Cal.App.2d Supp. 807, 818 (1954)
[4] Va. Sup. Ct. Unauthorized Practice Rules, Section B, Definition of the Practice of Law
[5] See Guidelines on Mediation and the Unauthorized Practice of Law, Department of Dispute Resolution Services of the Supreme Court of Virginia, (2001)
[6] Cal. Bus. & Prof. Code § 6125, et seq.
[7] Ely v. Miller, 34 N.E. 836 (Ind. 1893)
[8] People v. Merchants Protective Corp., 209 P. 363, 365 (Cal. 1922)
[9] Baron v. Los Angeles, 2 Cal.3d 535 (1970)
[10] Ltr. from the R. Hewitt Pate, Acting Assistant Attorney General, United States Department of Justice, et. al. to the ABA Task Force on the Model Definition of the Practice of Law, p. 2 (December 20, 2002)
[11] Cal. Corp. Code § 13400, et seq.
[12] Frye v. Tenderloin Housing Clinic, Inc., 38 Cal.4th 23, 38 (2006) (login required to access link)
[13] Cal. Bus. & Prof. Code § 6400, et seq.
[14] Baron, 2 Cal.3d at 543
[15] Id. at 543, citing Agran, 127 Cal.App.2d Supp. at 818 (emphasis added)
[16] Recommendation, Task Force on the Model Definition of the Practice of Law (ABA 2003) (emphases added)
[17] For complete details of the public comments submitted and presented at the hearing, click here
[18] For the purposes of this recommendation, an “adjudicative body” includes a court, mediator, arbitrator, legislative body, administrative agency or other body acting in an adjudicative capacity.
[19] James C. Turner, Lawyer vs. Nonlawyer, 26 Legal Times (February 3, 2003)
[20] Ltr. from R. Hewitt Pate, et al., p. 3
[21] Id., at p. 4
[22] Proposed Addition to the Rules of the Supreme Court of the State of Hawai’i
[23] Ltr. from the Thomas O. Barnett, Assistant Attorney General, United States Department of Justice, et. al. to the Judiciary Public Affairs Office of the State of Hawai’i, p. 1 (January 25, 2008)
[24] D.C. Court of Appeals Rule 49(b)(2) (2004) (emphasis added by Barnett, et al.)
[25] Ltr. from Barnett, et al., p. 8 (emphasis in original)
[26] People v. Landlords Professional Services, 215 Cal.App.3d 1599 at 1608 (4th Dist. 1990)
[27] Cal. Bus. & Prof. Code § 6400(g)
[28] Baron, 2 Cal.3d at 543