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Archive for the 'General Finance' Category
Palm Beach Businesses Still Moving and Shaking
October 22nd, 2008
I was a recent guest speaker at the Palm Beach Partners 2008 Partner Matchmaker Expo. My topic, of course, was building business credit, and I was pleased to join a panel with other experts who agreed how important it is for business owners to focus on strong business credit.
Suzanne Leeds runs Leeds Capital Solutions, a factoring firm, and she gave advice on using receivables to improve cash flow. (I was flattered when Suzanne told me that she had our Corporate Advantage CD and listened to it often! If you would like a complimentary copy, give the XBanker a call and they’ll be happy to pop one in the mail for you or get you a download link.)
Donald Nappi with Network Technology Solutions in Pompano Beach gave some great tips on financing computer equipment with business financing deals from Microsoft.
If you are in the West Florida area, I recommend you make sure you attend future events. And congrats to Shawn Lewis of Celsius Holdings for all his hard work organizing this successful event. Shawn told me he’s been successfully building his own business credit using our advice. We love success stories!
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Things You Need to Know About Raising Money for Your Business
October 1st, 2008
Whether you have an established business in need of additional capital or are just starting out, you need to know about the benefits and limitations inherent in your financing options. The costs and risks involved in the first few years of operating a business may be frightening. Careful planning will help to reduce the risks. Facing realities about your business’s financing needs and diligently preparing your business plan will help you to overcome the costs involved. The investment community is not willing to grant loans or invest in your business unless you provide them with something worthwhile to invest in. The following considerations and suggestions will help you to gain the trust of investors and meet your business’s financial needs.
- Retain Accountant’s and Attorney’s services - Although the expense may seem burdensome at first, accountants’ and attorneys’ services will save you and your business money in the long run. The hourly rate of a competent advisor is little compared to the cost of losing your business or being held liable for the business’s mistakes. These advisors will help you to structure your business properly and take steps to help the business grow responsibly. Some accountants and attorneys even provide flexible payment options for young businesses.
- Establish the Necessary Structure - While many business entities are available that provide differing advantages, structural differences may affect your ability to obtain financing without losing control of your business. If you have any aspirations of developing your business into a publically traded entity, you will need to know about the structure of a C corporation. Before you approach your first investor, you need to decide the number of shares of stock to authorize, whether more than one class of stock will be necessary, and how many shares to retain yourself.
- Prepare Your Business Plan - The first step in your business’s search for financing, if not a preliminary step in creating your business, should be ensuring that you have developed your dream into a coherent, well-drafted business plan. Your business plan should provide potential investors with a comprehensive view of the structure of your business, your conclusions about the business, a realistic operating plan that you intend to abide by, potential risks the business may face, the position the business can pretty safely expect to be in over the next six months and over the next year, and possible the comments about your hopes for further developments. In addition to providing investors with valuable information, your business plan will cause you to focus your attention and force you to look at every opportunity and every risk that comes with it with a clear eye and a level head. Periodically updating your business plan will help you to gauge your progress and enhance your ability to make realistic predictions.
- Decide Between Loans and Equity Offers - Before considering financing, and possibly in the course of developing your business plan or through other research, you should gain an understanding of the costs involved in operating the business. Remember that many young businesses operate for at least three years without any profit. Unless you start your business with old money, you will need to explore the possibility of loans or raising money by selling partial ownership of your business in equity offerings. While loans may allow you to retain ownership and control of the business, often, institutional lenders will be hesitant to help finance a new business. Accordingly, the business may have to sell equity to meet its financing needs. Depending upon the business uses, this may be through the sale of shares of stock, membership interests, or partnership interests. In selling equity, you and your business must exercise care so as to prevent giving control of the business to investors and to ensure compliance with federal and state regulations affecting such sales.
- Differentiate Among Investors - Federal and state regulations affecting the sale of equity in businesses, generally referred to as securities regulations, differentiating among types of investors. Accordingly, in selling equity in the business, you and the business will need to differentiate between investors to ensure compliance with securities regulations. For most young companies, the investor of choice is an accredited investor. Generally, accredited investors have the financial resources and knowledge to rationally make business investments. Regardless of the type of investor involved, the business must make certain disclosures regarding the business’s financial resources and its business plan. Before accepting money from anyone, the business must know which type of investor it is dealing with, what the investor needs to make an informed decision, and which laws affect the transaction.
- Satisfy Continuing Obligations - Once the business obtains the initial financing it needs, it must manage its debts and obligations responsibly. As with a personal credit history, the business’s ability to satisfy creditors and manage its obligations may affect future financing options and prevent the business from being subjected to creditors’ lawsuits. Part of ensuring that the business will be able to satisfy its continuing obligations is ensuring that the business obtains sufficient financing from the start. By carefully and realistically planning for the business’s needs, you can help the business to achieve short-term and long-term financial stability.
Every business is unique. Your financing strategy should be based on your specific circumstances. However, success requires careful consideration of available alternatives. By considering your financing options and engaging in financial planning, you will ensure that you take advantage of available opportunities.
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The Time Has Come To Fight Foreclosures
September 12th, 2008
In this difficult real estate market, many investors are advised to just turn in the keys and walk away from a property they can’t afford. The lender will sue for foreclosure, the borrower will not defend the case, and the property will be sold at a foreclosure sale.
In many states the lenders (or, in future years, those bottom feeders who buy such judgments for ten cents on the dollar) will pursue the borrower for a deficiency judgment. Meaning if you owed $400,000 back, you still owe $300,000. Years later you will still have someone chasing you for the money and your problems will continue long past turning in the keys on a failed investment.
It is now becoming clear that your best strategy is to fight a foreclosure. Hire an attorney to defend a foreclosure complaint. There are many defenses to be asserted, including a developing theory of predatory lending practices. As well, there are many appropriate procedural tactics which can be used to delay a foreclosure. When lenders run up against an aggressive defense, they are much more open to negotiating a settlement. They don’t want to spend a great deal of time or money on one case that has become a problem” for them. And as we know, they have a lot of cases to work on these days.
We are hearing of cases from around the country where lenders are becoming frustrated with defendant challenges to their foreclosure actions. Frequently, deals are struck whereby in exchange for the borrower allowing the foreclosure sale to proceed the lender agrees not to pursue a deficiency judgment and further agrees that the property value equaled the loan amount, thus avoiding the tax on forgiven debt. Borrowers are thus able to truly walk away from a property without the nagging concern of someone later pursuing a deficiency judgment or Uncle Sam later wanting money for debt forgiveness taxation. The attorney’s fees of between $2,000 to $5,000 in most cases are a small price to pay for getting clear of tens to hundreds of thousands of dollars in continuing obligations.
The time has come to stand up and fight foreclosures. Gain the leverage you need to release yourself from years of liability. Our office handles foreclosure matters in Nevada and California. In other states you will want to locate a competent real estate litigator in your area. Good luck.
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Grab Your Free Chapter!
September 4th, 2008
Garrett Sutton and I contributed a chapter to the Entrepreneur Start Up Guide: Start Your Own Information Marketing Business. Our chapter was about how to finance your info marketing start up, and of course we talked about business credit and creative financing strategies!
Now you can nab a free chapter of the book here. It’s offered by Robert Skrob, the info marketing guru who pulled the book together (in an amazingly short period of time I might add!). And in the true tradition of info marketing, Robert’s offering a bunch of good free stuff for would-be entpreneurs.
We’ve learned a lot from Robert and his colleagues who authored chapters in the book. So if you’ve ever thought about getting paid for that stuff in your head, I would recommend you go ahead and get your chapter (or ideally the whole book!), get inspired, and GET STARTED!
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Less Privacy Ahead for Corporations?
September 3rd, 2008
Are you aware of what certain U.S. Senators would like to see when it comes to corporate formations?
You might be very surprised.
The Incorporation Transparency and Law Enforcement Assistance Act, or Senate Bill 2956, was recently introduced by Senators Barack Obama, Carl Levin and Norm Coleman. These senators want to know exactly who owns each and every corporations or LLC formed in every U.S. state.
Granted, certain U.S. criminal minds have used corporate privacy to shield their fraudulent actions. Yet methods do exist to learn of this information. So why the concern? Some government officials now claim that international terrorists are using U.S. entities to hurt us. We have heard this song before as our civil liberties get chipped away. And so under this legislation the basic privacy in conducting one’s affairs will be sacrificed at the temple of complete government knowledge to combat what may not be a problem.
Stay tuned. But for now know that the bill as proposed would contain the following:
- Requires states to obtain a list of beneficial owners of each corporation or LLC formed under their laws.
- Requires states to ensure the beneficial owner information be updated annually.
- Requires states to provide information to law enforcement upon request.
- Requires entities with foreign beneficial owners to provide certification from an in-state formation agent that the formation agent has verified the identity of those owners.
- Establishes federal, civil and criminal penalties for persons knowingly providing false beneficial ownership information.
- Provides exemptions for publicly traded corporations since the Securities Exchange Commission already oversees them.
- Authorizes states to use an existing Department of Homeland Security to use already appropriated funds to meet the requirements of this Act.
- Gives states until October, 2011, to require beneficial ownership information.
- Requires the Treasury Secretary to issue a rule requiring formation agents to establish anti-money laundering programs to ensure they are not forming U.S. corporations or other entities for criminals or other suspect persons.
Series LLCs: Where Angels Fear to Tread
August 27th, 2008
There’s a lot of talk about Series LLCs. More and more people are wondering if they’re a smart idea. The short answer is that they aren’t - they haven’t been tested, giving them limited applications if they have any at all.
First, some background. LLCs alone are an excellent structure for many different uses. For instance, they work well as a method of holding high dollar assets like real estate. If you own commercial or rental property, it’s important that you hold title to that property in an entity. If this entity (most likely an LLC) is run and managed properly, it can protect you from any personal liability.
Many people own a number of different investment properties. They want to protect both their investments and themselves by placing them into one or more LLCs. The task then is scenario, every investment is held under a different LLC. That’s not a popular answer for people who have lots of investments, but it’s built on sound reasoning. Think of LLCs as giant shoeboxes. As many investment items as you like can be placed inside, but they’re all at risk if something happens to the box. If a lawsuit happens, every investment you’ve placed into that LLC will be in danger.
The solution is to separate your investments. Ideally, you should use a separate LLC for each one. If you can’t, be sure to examine the equity you have at stake in every investment along with its liability potential. Then group them in LLCs accordingly. As an example, it’s not a good idea to include a single family beach front rental in Maui in the same LLC as a duplex on the wrong side of town. You may have several thousand dollars of equity stored in the house on Maui, which is placed at risk by including it in the same LLC as the rough edged duplex. Keep them separate. However, if you own three single family homes in Idaho, each within about twenty thousand dollars of equity, you might feel that placing them together is an acceptable risk. But that segregation strategy can get expensive.
If you have ten properties, using ten different LLCs might seem confusing and costly. Series LLCs seem to provide a solution as statutes in certain states allow you to create separate series within a single LLC, the debts and liabilities of which are only enforceable against that series. These laws allow LLCs to establish separate series of interests, members and managers, giving them separate duties, powers and rights. Those include the rights to profits and losses with respect to specific property and obligations. In states that have this kind of enabling legislation, each series within the LLC works as a separate entity under state law. This is why many people are attracted to series LLCs - they theoretically have the ability to shield property in different series from liabilities incurred in or against one another without paying state fees for multiple entities. This means that an LLC containing two properties can choose to place each into a separate series, so that liabilities from one can’t cause problems with the assets of the other. (Remember the same effect can be created using two different LLCs to hold these two properties.) Many people prefer series LLCs because at first glance they appear to be cheaper to set up. However, this assumption is false. It’s actually more complicated to set up a series LLC, making it more expensive than the basic type. In California you might find a series LLC appealing because the Franchise Tax Board charges an annual fee of eight hundred dollars for each entity. Many people think that setting up a single series LLC means paying only one fee in California. However, the Franchise Tax Board takes the position that each series counts as its own LLC for fee purposes, meaning you’ll have to pay the same whether you set assets up in series or in their own separate LLCs.
The biggest problem with series LLCs is that many states (including California) don’t have series legislation and may choose to ignore the laws of the state where the series was created. That’s because you’re subject to their rules when doing business in their state. The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since series LLCs are so new they’ve never been tested by courts, even in the states that permit them. That means there’s no guarantee that limited liability protection will be extended to each series until every state rules on the subject. It’s hard to see how a court would choose to grant this kind of protection inside one entity, and only time will tell if courts will do this. But do you want this type of uncertainty when you are trying to protect your assets?
Again, one should be concerned about how series LLCs will be treated by the states that don’t have laws permitting them. If you set up a series LLC in Nevada then register it as a foreign entity conducting business in the state of Massachusetts, each series in the LLC own a separate piece of property. If there’s a lawsuit in regards to one of these properties you can’t be sure that the Massachusetts court will honor the series structure of the LLC, applying Nevada’s law to the real estate and activities that are located in Massachusetts. If they do, the claimant can collect only against the property in that series. If they don’t, the claimant can collect against the properties in other series as well. States are expected to give full faith and credit to legislation of other states, but the answer is uncertain. Exceptions do happen. It is also important to note that the American Bar Association did a review of series LLCs and declined to endorse them. You can be certain that future court cases will take note of this development.
Since the laws about creating series LLCs are different in every state that permits them, it might take a long time before enough case law is accumulated to give us any level of comfort about using them. If you want to make sure your assets have good, solid protection, it’s a much better idea to avoid corporate structures that don’t provide reliable protection. Avoid series LLCs as a form of protection until a definitive case law is established and rely instead on known, tested entities such as individual LLCs.
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Protect Yourself from Your Assets
August 21st, 2008
How can you best protect your personal assets? Here are some things to consider.
- Keep Your Personal and Business Assets Separate
If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.
As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.
Or perhaps you’ve formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.
To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.
- Protect Your Business Assets
You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.
A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker’s Compensation insurance. The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years. If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses. A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.
But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.
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Save Your Business in Bankruptcy
August 11th, 2008
My Xbanker colleague Garrett Sutton has written extensively on the value of incorporating a small business, and here’s another reason to do so:
Incorporating can literally save your business.
I doubt many sole proprietors realize that filing for personal bankruptcy (due to medical debts, divorce or many of the other reasons people file) could mean the end of their business.
I didn’t.
But in a recent post on the Bankruptcy Law Network, California bankruptcy attorney Cathy Moran describes a recent case in which a couple who owned a business as a sole proprietorship were in danger of losing it – even though it was doing just fine – because they had to file for personal bankruptcy due to real estate investment debts.
She points out that:
…(the) business was a sole proprietorship. If we filed Chapter 7 now, Chapter 7 trustee’s first reaction to a going business is to shut it down. The trustee is concerned about his liability for regular business debts the operation may incur and the possibility that a customer may be hurt on the premises. The trustee wants to preserve the status quo by shutting the doors, even if there is nothing in the business that he can sell for the benefit of creditors.”
In this case, she was able to incorporate the business to save it.
But as another California bankruptcy attorney Douglas Jacobs points out in another post, waiting until you are contemplating bankruptcy to incorporate your business is risky business. It can be considered a “fraudulent conveyance” and can backfire.
If you haven’t been convinced yet that you need to incorporate, what else can I do to convince you that you need to check it out? It may literally save your business.
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Keys for Using an S-Corporation
August 6th, 2008
If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends, a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business.
While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders.
Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:
- Incorporate the Business - As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.
- File an S-Corporation Election Form - To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.
- Notice and Obey S-Corporation Limitations - Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants’ estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.
Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations’ tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form, you will ensure that you take advantage of available opportunities.
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Five Mistakes People Make When Incorporating
July 30th, 2008
1. Choosing the Wrong Entity
Problem: Many incorporating companies are not run by lawyers but by promoters, people who have no experience and training in corporate law. These companies are geared to sell you something, not to assist you in carefully selecting the right corporate entity. Choosing the wrong corporate entity can cost you hundreds of thousands of dollars in extra taxes and can fail to protect your assets. It is so crucial to make the right choice.
Solution: Corporate Direct is owned and operated by lawyers, Our staff is trained to work with you to select the correct corporate entity, be it a C corporation, S corporation, LLC or LP, for your specific situation.
2. Creating Too Many Entities
Problem: Many incorporating companies are staffed by commissioned sales people. Their goal is to sell you as many entities as possible in order to earn a higher commission. We have seen situations where as many as six entities have been formed where only one was needed. Creating too many entities is costly upfront and costly on an annual basis.
Solution: Our staff is trained to protect you with the right amount of entities, not an overabundance of them. Our staff is not on commission and thus has no incentive to sell you more than you need.
3. Paying Too Much Money
Problem: Many companies will lure clients in with promises of low cost incorporations only to have high pressure sales people upsell them into products and services they do not need or want. We have seen cases where services that should have cost under $1,000 have been inflated to over $10,000 in fees. The clients may never know they have been cheated, or learn only when it is too late.
Solution: Corporate Direct charges a flat fee per entity and provides you with an upfront statement of what your specific strategy will cost. There are never any hidden fees or surprises.
4. Bogus Office Packages
Problem: Many companies will tell you that state law requires you to have an office in your state of incorporation, for example, Nevada. They will then sell you on a $3,000 annual office package to keep you in compliance. In truth, there is no such law requiring a fully staffed office and you have been ripped off for $3,000 a year.
Solution: Corporate Direct does not sell bogus packages. If you need mail forwarding and the like we can assist for as little as $360 per year. But we will not misrepresent state law to take money out of your pocket.
5. Incomplete Formations
Problem: Many companies will file articles with the state and then only provide you with forms to fill in for the bylaws, minutes, and stock certificates. Do you know how to fill in these forms? Will they ever be filled in once you receive them? Of course not. And by not having complete documents you open yourself to having the corporate veil pierced and thus exposing all of your personal assets to creditor claims.
Solution: Corporate Direct provides a complete formation package in your own corporate binder. All of the bylaws, minutes, and certificates are completed and you are protected.
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