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

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.

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.

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.

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:

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.

Under the new reformatory bill, however, a filing must be made with the SEC even if all of the investors are “accredited”. The SEC will have 120 days to review the filing, and if that time lapses without review, the security will then be subject to review by the applicable State securities commissions.

Moreover, the bill increases the qualification of an “accredited investor” from one with a net worth of $1 million to one with a net worth of $2.3 million, and from $200,000 of annual income to $449,000 ($674,000 for joint annual income with a spouse).

Business Week reported that this change would lower the number of individual accredited investors by 77%. Yikes!

If this bill passes, not only will the pool of angel investors be dramatically reduced, but the cost and time associated with angel financing will increase substantially. This will likely hurt entrepreneurs, decrease the number of new business ventures, and adversely affect job creation.

For a more in-depth discussion of the bill and the goals lawmakers are hoping to achieve, check out this article at TechFlash. If interested in voicing your opposition, take a minute to sign this petition.

One method courts use to determine if corporate protections should be set aside is the alter ego test. Here, shareholders can be held personally liable when there is such a unity of interest between the corporation and the shareholders that they are essentially one in the same, and that some injustice would occur if the shareholders were permitted to escape personal liability.

When applying this test, courts will consider a number of factors, such as: whether corporate funds were used for personal use; whether personal and corporate property were held separately; whether stock was properly issued; whether the shareholders kept corporate records and adhered to legal formalities; and whether the corporation was adequately capitalized.

Courts have also used inadequate capitalization or undercapitalization as the sole means to pin liability on shareholders. Measuring the adequacy of capital is no easy task. Courts will look to whether capitalization is unreasonably small or illusory given the size, nature, and liabilities of the business. Although no bright-line rule has been set, officers and directors would do well to consult their financial advisors, prepare budgets and financial forecasts, and examine the need for liability insurance.

In short, to protect yourself from personal liability you must see to it that the corporation is ran on the up-and-up. Make sure that you and your fellow shareholders treat the corporation like a separate entity. See to it that the business has a reasonably strong capital structure. Observe all of your corporate formalities. Fulfill your tax obligations. Keep good records. And do not, under any circumstances, treat corporate property like personal property, or vice versa.

* LLC members should also take note. In California, much of the above also holds true for LLCs.

Is issuance of Class F Stock a good idea for founders? Well, the jury is still out. For an interesting summary of Class F Stock, including possible pros and cons, check out
this featurein VentureBeat’s weekly attorney/startup Q&A section, Ask the Attorney .

The general partnership is the consensual association of two or more persons formed to carry on as co-owners of a business for profit. There are no formal formation requirements for the GP. In fact, the general partnership can be formed whether or not the partners actually intend to create one.
Except under narrow circumstances, all partners of a GP may act on behalf of the business, binding the partnership to any agreements. Likewise, all general partners are jointly and severally liable for the debts of the partnerships and the actions of the other general partners. This means that a partner’s personal assets can be reached by a creditor if the business fails to make good on its contractual obligations.

For the above reasons, the general partnership is often disfavored as a form of business ownership. Business associations often find the limited liability company (LLC) or the subchapter S corporation more attractive. These entities give partners much of the legal protection given to corporate shareholders while allowing the individual-based tax treatment usually favored by small business.