FAQ

A COOPERATIVE is an organization of individuals or businesses (“members”) that provides services that the members need. The goal of a cooperative is to provide services to its own members at a lower cost, and more efficiently, than if third parties were used. Unlike a corporation, members of a cooperative share equal control and ownership (“one member, one vote”). Also unlike a corporation, a member’s interest in a cooperative is not saleable (however, an interest may be transferable, if allowed under the cooperatives articles of incorporation or bylaws).

In California, the Consumer Cooperative Corporation Law, enacted in 1982, regulates entities which operate as cooperatives.  However, cooperatives may be organized as corporations, limited liability corporations (LLC), or even remain unregistered with the State.

TYPES OF COOPERATIVES

The U.S. Tax Court has divided cooperatives into two categories: consumer and producer. In consumer cooperatives, the members are consumers, and the cooperative offers products to benefit the members. In producer cooperatives, the members are producers, and the product the members make is processed or marketed by the cooperative.

INDUSTRIES

Cooperatives exist in many industries, including agricultural (e.g. Sunkist, Blue Diamond, Sun-Maid); utility (e.g. Palo Alto Park Mutual Water Company, Central Florida Electric Cooperative); housing; consumer goods (e.g. REI, ACE Hardware); education. Cooperatives can be established in nearly any industry, for any purpose, so long as they are organized and conduct business activities primarily for the benefit of its members, and not to make a profit.

INVOLUNTARY DISSOLUTION of a CORPORATION (S-CORP/C-CORP) in CALIFORNIA

May be filed by:

• ½ or more of directors
• 33 1/3 or more of share holders or equity holders*

* can be 33 1/3 of total shares or 33 1/3 of total common shares; in any case, the total excludes shares of those who are in control of the corporation and are “guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers”

DISSOLUTION OF A CALIFORNIA LLC

A CA Limited Liability Company (LLC) is dissolved when any of the following occur:

• A specific event (e.g. a date set, a goal reached, etc.) that is specified in the operating agreement
• Members with 50% or more of the voting interest decide it is
• Generally, if it has no members for more than 90 days
• A Court Order

If an LLC is formed, it can be cancelled within a year if it does no business and meets certain other basic requirements (filing a Franchise Tax Board return)

If a court case for dissolution is filed, the member(s) that oppose the dissolution can prevent it by buying out the member(s) that want the dissolution.

• Purchase must be cash
• Purchase price is “fair market value”
• If the parties cannot agree on fair market value, the Court will halt the dissolution until it can determine the fair market value
• The Court determines fair market value by appointing 3 independent appraisers

[CA CORP § 17707.03]

A LIQUIDATED DAMAGES CLAUSE in a contract specifies an amount of damages that party is entitled to for a particular breach of that agreement. The purpose is to streamline, or even deter litigation altogether by setting a fixed amount for the breach. They are very useful in eliminating unpredictability, and ultimately costs. However, there are several rules that must be followed, or the clause will be invalidated by a Court.

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.

501(c)(3) ORGANIZATIONS*

Types of Organizations That May Qualify:

• Religious
• Charitable
• Scientific
• Testing for public safety
• Literary / Educational
• Amateur sports competition
• Prevention of cruelty to children or animals

* 501(c)(3) organizations are exempt from paying federal income tax, and, in some cases, charitable contributions to a 501(c)(3) organization are deductible by donors.

Note that 501(c)(3) status is a federal tax exemption, and state organization and other laws must still be complied with.

Every 501(c)(3) organization is either a Public Charity or a Private Foundation.  The classification is important because different tax rules apply to each one.  In general, Private Foundations are subject to more stringent requirements than a Public Charity.

(Note that the name of the organization has nothing to do with the classification.  For example, there are Public Charities with the word “Foundation” in the name).

If you do not qualify as a Public Charity, you are a Private Foundation.  Private Foundations are further broken down into Nonoperating Private Foundations or Private Operating Foundations.  Private Operating Foundations have more favorable tax rules in regard to donor contributions and grants, but your organization must qualify based on IRS tests.

PARTNER MUST BE BOUGHT OUT AT THE GREATER OF:

• Liquidation value*
• The going concern value**

* In the context of a partnership, liquidation value is not distressed sale value; in the context of a corporation, the fact that assets are being old under distressed conditions is considered

** What a willing buyer would pay a willing seller (includes goodwill); this amount is reduced based on the fact that the dissociated partner will not longer be involved; however, the dissociated partner does get value for the goodwill that was already built in the business

VALUATION BUYOUTS: S-CORP/C-CORP VS LLC

A corporation buyout is based on “Fair value”

An LLC buyout is based on “Fair Market Value”

* Fair Value “shall be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of sale of the entire business as a going concern in a liquidation” (CA Corp Code §2000)

** Fair Market Value has not been defined, but it appears to involve less “deductions” than Fair Value, meaning it will generally yield a higher buyout value

WINDING UP AN LLC : THE PROCESS[1]

1. Determine all the known debts and liabilities of the LLC (including debts and liabilities to members who are creditors of the LLC)
2. Pay or settle all debts and liabilities[2]
3. Distribute remaining assets according to member rights and preferences (paid in the following order):[3]
   1. Compensation for work in dissolution process
   2. Return of contributions
   3. Distributions to members

[1] CORP § 17707.05

[2] Even if dissolution has been filed, an LLC continues to exist as long as it is pursuing and defending court actions necessary for winding up

[3] CORP § 17707.05(a)

WINDING UP AN LLC : WHO CONTROLS?[1]

If dissolution is by Court Order, the order controls the winding up process.  If dissolution happened without a Court Order, the following person(s) are in charge of the process:

• The manager(s) who did not wrongfully dissolve the LLC, or if none:
• The members, or if none:
• A majority of the people who signed the Articles of Organization

* The person(s) responsible for winding up is/are entitled to reasonable compensation.

** Even if dissolution was not done by Court Order, members or managers can file action for an order determining how the winding up process should go.

[1] CORP § 17707.04

When real estate taxes, insurance, and operating expenses (sometimes referred to as Common Area Maintenance, or CAM, charges) are passed on to tenants, the amount passed on is based on the increase in these expenses as compared to the Base Year (the initial rent already takes into account these charges).

Organization of building owners and managers, engaged in lobbying and producing publications, including the BOMA standards.

A Triple Net Lease passes on to tenants a portion of the (1) Real estate taxes; (2) Insurance; and, (3) Operating Expenses (sometimes referred to as Common Area Maintenance, or CAM, charges, but often include maintenance outside of just “common areas.”  Other variations are Double Net (typically no operating expenses are passed through), and a Gross Lease.

Pass-throughs may be assessed at different times (per the lease), and often commercial leases will allow a landlord to retroactively apply assessed charges.  Sometimes a landlord will not assess any charges for years, but then choose to.  Negotiating the exact provisions is critical to predicting expenses and running a successful operation.  The extent of rights to audit is also a negotiable and important issue.

An Estoppel Certificate is a document typically used in performing due diligence prior to the purchase of tenant-occupied property.  The purpose is for a lender and purchaser to have written confirmation from tenants of certain terms.  Important amongst these are: the rental amount; security deposit; duration of lease; and, as discussed further below, a “subordination” clause.

The subordination clause is used to confirm that the tenants have agreed, in their lease, that their interest is subordinate to future mortgages.  Without such confirmation, the tenants’ leases have priority over mortgages that are subsequently obtained.  Furthermore, only a tenant whose interest is subordinate to the mortgage can be evicted.  A purchaser (and their lender) may be stuck with tenants for an indefinite period without the ability to earn market rental values.  A tenant may be locked in for years, and potentially even forever—courts have upheld provisions giving the tenant the right to perpetual renewal of leases.

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Refers to the buildout a landlord will deliver.  a Grey Box includes the bare minimum: e.g. just walls,  no HVAC, no wiring.  A Vanilla Box may have: electrical wiring, flooring, dropped ceiling, HVAC and air ducts.  What the Landlord has agreed to buildout is critical.  Detailed plans and specifications are ideal.

A LIQUIDATED DAMAGES CLAUSE in a contract specifies an amount of damages that party is entitled to for a particular breach of that agreement. The purpose is to streamline, or even deter litigation altogether by setting a fixed amount for the breach. They are very useful in eliminating unpredictability, and ultimately costs. However, there are several rules that must be followed, or the clause will be invalidated by a Court.

First, the liquidated damages cannot be a penalty—the amount specified must be reasonable under the circumstances, and cannot be “designed to substantially exceed the damages suffered, and…to serve as a threat to compel compliance through the imposition of charges bearing little or no relationship to the amount of actual loss.” Utility Consumers’ Action Network, Inc. v. AT&T Broadband, 135 Cal. App. 4th 1023, 1029 (2006); Cal. Civ. Code § 1671(b). A guiding principle is that any number picked cannot be arbitrary, and instead must be based on a reasonable attempt at determining a fair amount of compensation for the breach.

There are further rules if the clause is contained in a contract for the purchase or rental of personal property; a service used primarily for personal, family, or household purposes; or a residential lease. In those cases, a liquidated damages clause is allowed only when “it would be impracticable or extremely difficult to fix the actual damage.” Cal. Civ. Code § 1671(c) and (d).

Every situation is different, and should be evaluated by a qualified attorney. After all, if the clause unenforceable, it won’t save time, and may even ultimately cost more. It is always better to prevent problems before they occur, rather than waiting, and a well-crafted liquidated damages clause can be very effective in doing so.

ASCAP / BMI / SESAC (American Society of Composers, Authors, and Publishers / Broadcast Music, Inc. / SESAC). The 3 U.S. “public performance organizations” (PROs). The PROs collect royalties on behalf of copyright owners of musical compositions for the public performance of their works. This includes the public performance of musical compositions on terrestrial radio (i.e., traditional AM/FM), and on digital radio (e.g., Pandora, iTunes, Spotify); and, in stores, amusement parks, malls, sports arenas, and concerts. A public performance royalty is owed to copyright owners when played over speakers, or performed live (if performed as a cover, a mechanical license is also needed).

The PROs distribute royalties to the copyright owners of the musical composition, typically the publisher and songwriter(s). There is no public performance right in sound recordings, meaning that a singer/rapper that performs on a song, but is not a writer, does not receive any public performance royalty when their song is played on traditional radio. If the song is played on digital radio, the singer/rapper will get a royalty for the public performance of their sound recording, which is collected by SoundExchange.

An implied license does not require any actual agreement—it arises solely from conduct and serves to allow others to use your intellectual property (“IP”).  There is no requirement that even a verbal understanding was reached.  Rather, an implied license is a legal concept that is created solely by the actions of parties and does not require any intention to allow such use.

The implied license originated as a concept in patent law, and was then adopted in copyright cases.  It is now also applicable to the right of publicity.

Generally, an implied license will be found where the following occurred:

1. At the request of a client
2. An author creates a work
3. Knowing the intended use by the client
4. And provides the work to the client

For singers, producers, songwriters, and artists, an implied license will allow others to use your most valuable IP, copyrights and rights to publicity (e.g., voice, image, likeness), without any compensation, or without further compensation.  Moreover, if a payment is found to have been made, the license will be nonrevocable.

Not only can you license your IP without any agreement, unless you explicitly limit the extent to which your IP is licensed, a Court will find the contours of the license to be as broad as reasonably possible.  In other words, unless there is evidence demonstrating that you limited the extent to which your IP may be used, an implied license will cover all uses reasonably anticipated, and without geographic limitation.

It is critical that creators understand the situations under which you may be found to have transferred rights, and to avoid the implied licensing of your work by having thorough, written agreements in place.  Without a written agreement, you may be giving your rights away without compensation, without adequate compensation, and without knowing the parameters of the license that you have given.

There may be situations where it makes sense to work for a low amount or even for free—e.g., in order to build a reputation, make connections, learn and develop skills—but, this should not be done without careful consideration of the pros and cons of doing so in the context of your career, and you should never give away your IP without knowing that you’re doing so.  Do it because you want and intend to, and because you are being fairly compensated in return (whether that compensation is monetary or otherwise).   And always, know what your rights are, and what you can expect for allowing other to use them, whether that is a one-time “buy-out” payment, or it includes residual payments based on the performance of the product, or is an alternative arrangement.

There are exceptions to the implied license doctrine, including fraud.  See e.g., Garcia v. Google, Inc., 743 F.3d 1258, amended by Garcia v. Google, Inc., 766 F.3d 929 (9th Cir. 2014).  However, you do not want to rely on exceptions, as this will mean spending a lot more money on attorneys battling out the legal nuances of your situation, whether in or out of court.  The far better practice is to make sure that you consult with an attorney prior to creating and handing over your work.  If you are an author, producer, actor, musician, singer, artist, set designer, etc., be sure to have an attorney review your situation and draft or review a written agreement.  The money you spend in legal fees to prevent fixing a bad situation will be a fraction of what it costs to remedy that situation.

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A mere idea is not protected as property in California (Desny v. Wilder). However, a promise to pay for the conveyance of an idea may be implied by the law from the circumstances surrounding the acceptance of that idea (Burtis v. Universal Pictures Co.).

In order to prevail on a breach of an implied-in-fact contract claim, it must be shown that the plaintiff not only conveyed an idea that was used by the defendant for a profit, but also that the idea was conveyed with the expectation that payment would be made if the idea were to be used. The plaintiff must show:

1. that he or she prepared the work;
2. that he or she disclosed the work to the offeree for sale;
3. under all circumstances attending disclosure it can be concluded that the offeree voluntarily accepted the disclosure knowing the conditions on which was tendered (i.e., the offeree must have the opportunity to reject the attempted disclosure if the conditions were unacceptable); and
4. the reasonable value of the work. (Faris v. Enberg)

Formerly administered by the Harry Fox Agency, now owned by SESAC.

A MUSICAL COMPOSITION includes the music, and any accompanying words (“lyrics”). The author of a musical composition is generally the composer and/or lyricist, although the owner may be different (e.g., by virtue of a “Work Made for Hire” agreement).

A musical composition may be written (e.g. notes and lyrics), or in the form of a phonorecord (recording of the notes and lyrics). The owner(s) of the copyright to the musical composition may differ from the owner(s) of the copyright to the sound recording of that musical composition. A copyright in one is not the same as, or a substitute for, a copyright in the other. Compare with: sound recording.

SOUNDEXCHANGE collects and distributes royalties on behalf of sound recording copyright owners, using statutory licenses. SoundExchange is designated by the Librarian of Congress as the sole organization authorized to collect royalties due for the digital transmission of sound recordings, whether the transmission is made via streaming or by making ephemeral phonorecords (i.e., where copyrighted work is reproduced, but only for a short period). Prior to 1996, there was no digital public performance right.

Registration with SoundExchange does not necessarily eliminate the need for an artist/writer/producer to also affiliate with one of the PROs.

Compare with: ASCAP, BMI, and SESAC, the 3 U.S. public performance organizations (PROs) that collect royalties on behalf of copyright owners of musical compositions or the public performance of their works in “traditional” avenues (i.e., non-digital).

A SOUND RECORDING is the permanent fixation of music, lyrics, and sound in any medium (e.g. digital, CD, vinyl). The author(s) of a sound recording are the perfomer(s) whose performance is fixed and/or the producer(s) who fix music and sounds in the final recording, although the owner may be different (e.g., by virtue of a “Work Made for Hire” agreement).

The owner(s) of the copyright to the sound recording may differ from the owner(s) of the copyright to the musical composition that is being recorded. A copyright in one is not the same as, or a substitute for, a copyright in the other. Compare with: Musical Composition.

Section 101 of the Copyright Act (title 17 of the U.S. Code) defines a “work made for hire” in two parts:

A work prepared by an employee within the scope of his or her employment

or

A work specially ordered or commissioned for use

1. as a contribution to a collective work,
2. as a part of a motion picture or other audiovisual work,
3. as a translation,
4. as a supplementary work,
5. as a compilation,
6. as an instructional text,
7. as a test,
8. as answer material for a test,
9. as an atlas, or
10. if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.