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4. INITIAL OPERATIONS

b. Personnel

The founders of a private equity company or fund should consult with a business attorney and a certified public accountant (CPA). The company or fund may also require additional personnel.

Board of Directors

Applicable law may require the entity to have a board of directors. The role of a board is to oversee management on behalf of the owners. Directors are typically responsible for making major decisions such as financing transactions, mergers and acquisitions, and dissolution.

California law generally requires corporations to have a board of directors. The law establishes the minimum number of directors. Corporations with one shareholder must have at least one director, corporations with two shareholders must have at least two directors, and corporations with three or more shareholders must have at least three directors. Shareholders elect directors on an annual basis. The default rules further specify that director quorums and votes require a "per capita" majority.

If you want to avoid the default rules, designate your corporation as a “close corporation” and write your own rules (to the extent allowed by law) in the articles or shareholders' agreement. For example, you can reduce the number of directors or eliminate the board entirely.

California law does not require limited liability companies (LLC's) or limited partnerships (LP's) to have any directors. If the founders of a California LLC or LP want directors, they should establish the applicable rules in the owners' agreement. The California LLC and LP statutes do not provide any default rules regarding director meetings.

A company or entity may have a board of “advisers” instead of, or in addition to, a board of “directors”. Advisers play a less formal role than directors.

Officers

Business entities usually designate officers to manage day-to-day operations. Applicable state law sometimes requires the appointment of certain officers.

California corporations must have a Chief Executive Officer (CEO), Secretary, and Chief Financial Officer (CFO). The CEO usually has the title of “President”, and the CFO usually has the title of “Treasurer”. The same individual may hold more than one office. In the typical corporation, officers are appointed by the board of directors each year. In a "close" corporation, officers are either appointed by the directors (if any) or named in the shareholders' agreement.

California does not require LLC's or LP's to have any officers. In the case of an LLC, one or more of the members may serve as managers. In the case of an LP, the general partner or its individual personnel may serve as the managers. Alternatively, the LLC or LP may retain outside managers.

In California, all members of an LLC have the authority to bind the entity unless the articles indicate otherwise. The LLC operating agreement will usually address management issues and identify the initial managers and officers. The managers and officers may have any titles specified in the operating agreement. Unless the operating agreement provides otherwise, quorums require a majority of the membership interests, and decisions require a majority vote or unanimous written consent.

Independent Contractors vs. Employees

You need to decide whether to treat your personnel as “independent contractors” or “employees”. Directors are usually treated as independent contractors. Officers and other personnel may be independent contractors or employees.

The characterization of your personnel has important legal consequences. For example --

• Typically, unaffiliated independent contractors are not agents of their clients and cannot bind their clients to legal obligations. The opposite is true for employees.

• Companies are generally not legally responsible for the acts of their independent contractors. On the other hand, companies usually bear legal responsibility for employee actions occurring within the course and scope of employment.

• The use of employees requires compliance with various tax and labor laws not applicable to independent contractors. The labor laws are described below. The tax laws are described in Chapter 5(d) ("Taxes").

To characterize an individual properly, consider the regulations and guidance of the government agencies that enforce tax and labor laws. At the federal level, the agencies include the IRS and the U.S. Department of Labor. In California, the agencies are the Franchise Tax Board, Employment Development Department, and Department of Industrial Relations, among others.

Documentation

If you have personnel, put the essential deal terms in writing. That means executing a formal written agreement with every service provider. Each independent contractor should sign a “consultant agreement”. Executive officers treated as employees should sign a detailed “employment agreement” tailored to the person and position. Lower-level employees may sign a standard, one-size-fits-all version of the employment agreement.

At a minimum, a consultant or employment agreement should include the following:

• specific services to be provided
• compensation type, amount, and timing
• reimbursement of expenses
• standards for performance
• term (period) of service
• ownership and use of materials
• confidentiality
• indemnification from claims of third parties

In addition, you should distribute a personnel handbook to every on-site worker (whether an employee or independent contractor). The handbook should contain general ethical rules, a code of conduct, and policies regarding sexual harassment, health & safety, discrimination, privacy, confidentiality, and any other matters important to your company. Require the on-site personnel to agree in writing to comply with the handbook.

Depending on the circumstances, you may also distribute the handbook to your off-site personnel and require their compliance.

Employment Laws

As noted above, certain laws apply to employees but not independent contractors.

At the federal level, the following laws apply to employees:

Federal Law	Subject Matter
Immigration Reform and Control Act	status verification (must verify citizenship or work visa within three business days of hire)
Fair Labor Standards Act	minimum wage, overtime pay
Americans with Disabilities Act	discrimination against the disabled
Civil Rights Act	discrimination against race, color, religion, sex, or national origin
Age Discrimination in Employment Act	discrimination against individuals who are 40 years of age or older
National Labor Relations Act	union organizing

States also regulate employment relations. In California, employers must comply with the following state laws in addition to the federal laws:

State Law	Subject Matter
California Labor Code	minimum wage, overtime pay, workers’ compensation
California Fair Employment and Housing Act	discrimination against age, ancestry, color, creed, disability, marital status, medical condition, national origin, race, religion, sex, or gender
California Occupational Safety and Health Act	on-site working conditions