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Brandon M.
Brandon M., Counselor at Law
Category: California Employment Law
Satisfied Customers: 12620
Experience:  California licensed attorney
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I am the sole owner of a California S-corp formerly doing business

Customer Question

I am the sole owner of a California S-corp formerly doing business corp-to-corp with a small contracting company. My corp had ongoing payment issues with this contracting company and the owners lack of professionalism has caused him to lose the business with the client. To maintain the business with the client, the client would like me to sign on as an employee and get paid via W2. The contracting company is threatening legal action and I need a consultation to determine whether I can move forward with the client as a separate entity than my S corp. The corp-to-corp contract had non-compete/non-solicitation clauses, but my understanding is that those are unenforceable in CA and in turn would not be enforceable upon me as a individual versus a corporate entity.
Submitted: 5 years ago.
Category: California Employment Law
Expert:  Brandon M. replied 5 years ago.
Hello there:

Thank you for entrusting me with your question. Your understanding is essentially correct--non-compete agreements are essentially unenforceable in California. California. Business and Professions Code § 16600 provides that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void."

In the California courts, there are a few exceptions.

First, an agreement to protect trade secrets can be enforced.

Second, Business & Professions Code § 16601 creates an exception permitting lawful non-compete agreements for company owners. It applies when a shareholder "sells" their stock to another for valuable consideration. You described yourself as the "sole owner", so would not seem to apply.

Third, Business & Professions Code § 16602 makes certain exceptions in the case of partnerships. Again... you are a sole owner.

There are also some exceptions where the employer and employee reside in different states and where the agreement is entered into outside the state; if either of those situations apply, let me know. Otherwise, the general rule remains intact--non-competes are unenforceable, regardless of whether it is in a corporate or individual capacity.

I understand that you may have follow-up questions. Let me know if further clarification is needed. Thank you.