What happens if a startup fails in California?


What happens if a startup fails in California and has VC funding? I read in a previous question that

companies incorporated in New York State, employee payroll liabilities of the business extend personally onto shareholders that own more than a certain percentage of the company's stock. This is a really good reason to incorporate in a state like Delaware and not New York.
Does such a thing exist in California as well?

California Failure

asked Apr 13 '10 at 15:03
418 points

2 Answers


State courts in California have not held that employers are liable for wages. New York state courts have - and even have criminal penalties for wage violations.

HOWEVER, you need to know that the there is a federal regulation called the Fair Labor Standards Act ("FLSA") and recently the Ninth Circuit US Court of Appeals held employers liable for wages after the company filed bankruptcy. This is important for two big reasons: 1) California is a state within the Ninth Circuit; and 2) the ruling broadened the scope of liability to any manager with control over the employment relationship. No shareholding was required. If you care to read the case, see Boucher v. Shaw, 572 F.3d 1087 (9th Cir. 2009).

The reason bankruptcy didn't protect the individuals named as defendants was because the former employees weren't making claims against the assets of the companies. The automatic stay you get in bankruptcy would have just put them in line with other creditors. Instead, they named the individuals and used the provisions of FLSA.

How do you protect yourself? Other than making sure that you are covered in your insurance policy, make sure that if you are facing liquity issues, that you prioritize wage issues. Become familiar with state and federal laws or have someone who can give you a primer and that you can turn to when you need to get answers.

answered Apr 14 '10 at 04:05
Sharon Drew
957 points
  • I am going to read up on the court case you pointed out later and probably ask you some questions, i hope you dont mind. We havent started a Corp or an LLC yet just so that we make sure we have covered everything. Ofcourse the biggest concern comes in when we receive some kind of funding from either VCs or Angel Investors, and we want to be sure that we make the most out of their monies but at the same time need to make sure we have an end game scenario in mind in case a failure does happen. What state provides the most protection for founders? Delaware? – Vnchopra 14 years ago
  • California and Nevada are two choices where state laws have not found liability for wages on the part of employers. Keep in mind that this is a federal ruling and technically, regardless of state laws, any employee could potentially file a claim in federal court under FLSA and it wouldn't matter what the state laws say. – Sharon Drew 14 years ago


It has nothing to do with the state but rather with the terms of agreement that you sign.

answered Apr 14 '10 at 03:16
1,698 points

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California Failure