A Defining Moment For Venture Capital

October 7th, 2010

The Wall Street Journal has just posted an article summarizing the National Venture Capital Association’s efforts to influuence potential legislation that stands to put another dent in the already dinged up venture capital market. As the SEC moves forward with its task of defining venture capital, the NVCA is working dutifully to educate SEC official with the hope that its definition, expected by the end of this year, will not be unduly inhibitive.

It will be interesting to see how this pans out. Check out the article here.

Posted in Corporation, Securities, Venture Finance | No Comments »

Using Insurance to Fund Buy-Outs

May 26th, 2010

A buy-sell agreement is a contract used to secure the future of a closely-held business. With a buy-sell agreement, founders can determine what will happen to ownership interests in the event one of the founders dies, retires, becomes disabled, or withdraws from the business. For example, it may be in the founders’ best interests to ensure that the corporation has the right to redeem the stocks of a departing founder, and/or enable the remaining founders to purchase these stocks.

It is important for business owners to consider where they will acquire funding to purchase the equity interest of a founder in the case of death. A common source of such funding is life insurance. A business can maintain life insurance policies on each of its founders, and founders can maintain life insurance policies on each of the other founders. Proceeds from the life insurance policy enables policy holders to purchase all or part of the deceased founder’s ownership interests.

Maintaining life insurance policies protects the interests of all founders, including that of the deceased. Shareholders will maintain control over the closely-hold business in the event of a founder’s death regardless of whether they have adequate capital to purchase those shares. Furthermore, all founders can rest assure that their family will be adequately compensated for their share of the business in the event that something happens to them.

Disability buyout insurance should also be considered. If a founder becomes disabled, and it appears her disability will affect her long-term participation in the business, the policy will enable the business and/or other founders to “buy out” that disabled partner. Companies typically opt for a 1 – 2 year waiting period for such a policy to kick in.

Again, this protects not only the business and the other founders, but also the disabled founder, ensuring that they will receive the value of their share of the business when they are no longer able to participate in that business’s growth.

A carefully selected formula for valuating shares or a predetermined fixed value should be included in the buy-sell agreement. When choosing a life or disability buyout policy, it is important that the founders choose a policy that will fund the entire value as set by the buy-sell agreement, and revisit the policy periodically to ensure that it remains sufficient.

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Posted in Buy-Sell, Corporation, Formation, Founders' Agreements, LLC, Partnerships, S Corporation, Startup, Stock | No Comments »

Nonprofit Transparency

April 19th, 2010

A quick note about the level of transparency nonprofit ventures must adhere to:

In order to maintain exempt status, most nonprofit organizations must make sure that certain choice documents are available for public inspection. This includes not only its exemption application (Form 1023 and Form 1024), but also its annual returns (such as its Form 990 and Form 990-T).

Unless the organization is a private foundation or a political organization, the identities of the organization’s donors are excluded from the information required to be made available for public inspection.

Tax-exempt status is generally granted only to companies organized to achieve some societal purpose. The rationale behind this transparency is so that any interested party can peer into the a nonprofit’s financial dealings to ensure they are on the up-and-up. All of a nonprofit’s required disclosures must be made available to any individual requesting them. If the request is made in person, the documents must be provided immediately. If the request is made in writing, the organization has 30 days to provide the information unless it is widely available.

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Posted in Tax-Exempt Organizations | 1 Comment »

Nonprofit and Small Business Health Care Tax Credit

April 13th, 2010

This year’s monumental health care reform bill includes a Small Business Health Care Tax Credit aimed at encouraging small businesses and tax-exempt organizations to provide health insurance for their employees.

To be eligible, the employer must: 1) cover at least 50% of the cost of health care coverage workers based on the single rate; 2) have less than the equivalent of 25 full-time workers (or 50 half-time workers); and 3) pay average annual wages below $50K.

As of 2010, the credit can reach as high as 35% of the business’ premium costs. In 2014 this number increases to 50% for for-profit businesses, but will remain 35% for exempt organizations. There is a gradual phase-out of the credit for businesses with averages wages between $25 – $50K and for those with between 10 and 25 full-time workers.

The IRS has conveniently provided some examples of how the credit will work here.

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Posted in Employment, IRS, Tax, Tax-Exempt Organizations | 1 Comment »

New Tax Benefits For Hiring Unemployed Workers

April 9th, 2010

Provisions of the recently enacted Hiring Incentives to Restore Employment Act (HIRE for short) provide two new tax benefits to businesses and tax-exempt organizations who hire and retain workers who were previously unemployed or working part-time.

The fist gives qualifying employers a 6.2 percent payroll tax incentivefor hiring previously unemployed workers. This effectively exempts employers from their share of that worker’s Social Security taxes, though it has no effect on the worker’s Social Security benefits.

The second gives employers a general business tax credit, up to $1K per worker, if they hire an unemployed worker and retain them at least a year. This credit will be reflected on its beneficiaries 2011 returns.

These benefits extend both to employers who add new positions to their payrolls and employers who replace existing workers as long as the previous employee left voluntarily or for cause. Benefits do not extend to hiring relatives.

To qualify, employers must obtain a statement that the new hire was unemployed during the 60 days preceding (or worked fewer than a total of 40 hours during those 60 days). The IRS is creating a uniform from employers can use for this purpose.

You can find out more about this tax credit here:

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Posted in Employment, IRS, Tax, Tax-Exempt Organizations | 1 Comment »

The Limited Partnership and Federal Securities Laws

April 6th, 2010

A limited partnership is a popular vehicle for entities who wish to maintain flexible management but have partners who wish to stay out of the day-to-day operations of the business. The limited partnership allows these passive investors – called “limited partners” – to avoid personally liable for the debts and obligations of the business beyond the extent of their capital contributions.

Business owners need to consider federal and state securities laws when setting up a limited partnership. Although a general partner’s interest is not usually consider a “security” under state and federal securities laws, a limited partner’s interest usually is. Therefore, acquiring a limited partnership interest must comply with the federal Securities Act of 1933 and the California Corporate Securities Law of 1968.

These securities laws generally require a security registration statement to be filed and cleared by the appropriate agencies before they are issued. This process can be time consuming and costly, sometimes taking up to several months and costing upwards of $75,000.

There are, however, a number of state and federal exemptions to these requirements, which should be taken advantage of whenever possible. The requirements of these exemptions can be tedious, which I’ll try and address in a subsequent blog post. The important thing to remember is that, if you are considering forming a limited partnership, securities laws apply to the interests owned by the limited partnerships, and there are exemptions available to avoid the costly process of registering those interests.

The Securities and Exchange Commission has plenty of registration and exemption information on their website.

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Posted in Formation, Partnerships, Securities, Startup | 1 Comment »

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