Articles Posted in Banking & Finance

Manhattan.jpgOne of the most important benefits of forming a corporation or other business entity is the protection of owners and managers from personal liability for acts performed on behalf of the business. Holding a shareholder or officer liable is known as “piercing the corporate veil.” This may occur for acts found to be illegal or grossly negligent. A series of decisions from the Court of International Trade (CIT) and the Federal Circuit Court of Appeals addressed the liability of a corporate president, who was also the sole shareholder, for failure to pay customs duties on imported goods. The Federal Circuit ultimately applied a broad interpretation of the statute in question and held that the corporation and the shareholder may be held jointly and severally liable.

The corporation, Trek Leather, Inc., imported a number of men’s suits during a period of about eight months in 2004. According to U.S. Customs and Border Protection (CBP), Trek Leather’s sole shareholder and president used other corporate entities to purchase materials for foreign manufacturers. The manufacturers used the materials, known as “assists” in federal customs law, to produce the suits that he imported. CBP alleged that he failed to include the cost of these assists in the total price that he reported to customs officials. A lower price meant a lower customs duty.

CBP brought an action against Trek Leather and the shareholder in the CIT for misrepresenting the value of imported goods under 19 U.S.C. § 1592(a). The shareholder argued that he could not be held personally liable because he was not the “importer of record.” The CIT found that the statute applied to him as well as the corporation. It granted CBP’s motion for summary judgment and ruled that Trek Leather and the shareholder were jointly and severally liable for unpaid customs duties and related civil penalties. United States v. Trek Leather, 781 F.Supp.2d 1306 (USCIT 2011).
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Fondos_archivo.jpgA business entity created under the laws of New Jersey or another U.S. state is, at the most basic level, a collection of legal rights and obligations aimed at specific business activities, usually with the goal of making a profit. Those rights and obligations depend on a substantial number of agreements that should be reduced to writing and stored where a business owner can easily find them.

The following list includes 15 types of documents you should keep with your business records. You might need any of them if you have a disagreement with a business partner, co-owner, contractor, or employee, if you want to do business with a government agency, if you are looking for venture capital or other new investors, if you are trying to wind the business down, or simply in preparation for the unexpected. A few ounces of paper might be worth many pounds of future regret.

1. Formation Documents

Forming a business entity requires filing documents with the state and paying a fee. In New Jersey, the Department of the Treasury’s Division of Revenue and Enterprise Services handles business formation. A document forming a corporation is often known as a Certificate of Incorporation, while one creating a limited liability company (LLC) is known as a Certificate of Organization.
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2008-03-13_Rave_crowd.jpgNew federal laws may allow entrepreneurs and small business owners to seek investors publicly without having to go through the complex and expensive process of creating an initial public offering (IPO). New businesses may soon be able to raise capital via social media and the internet, in a process known as “crowdfunding.” Currently, websites like Kickstarter allow people to crowdfund creative projects, but businesses seeking equity investments have had to follow strict regulations enforced by the Securities and Exchange Commission (SEC). New rule proposals recently issued by the SEC, however, may change that.

Entrepreneurs have generally had to limit their efforts to raise capital to private sources. According to Forbes, most startup capital comes from the entrepreneurs themselves, who might invest their own savings, take out loans, or use credit cards. Family members, such as parents and spouses, account for a small percentage of startup capital. “Outsiders,” including government programs, venture capitalists, angel investors, and other businesses, account for some startup financing. Venture capitalists fund 0.04% of all startups, and angel investors fund 0.91%. Despite such a small percentage of businesses, venture capitalists are expected to invest $2.7 billion in New York-based startups in 2013. A startup seeking individual equity investors may only approach people who meet certain criteria as “accredited investors,” such as individuals whose net worth is at least $1 million or whose annual income exceeds $200,000.

The Jumpstart Our Business Startups Act (JOBS Act) became law in April 2012. Its purpose was, in part, to help businesses that are not large enough for an IPO but have difficulty raising capital through private channels. It raises the maximum number of shareholders corporations may have, from five hundred to two thousand, before they are required to register with the SEC. The JOBS Act allows companies to raise up to $1 million per year from individual investors, and it greatly relaxes the restrictions on who may invest. Individual investors with a net worth or annual income below $100,000 may invest up to the greater of $2,000 or five percent of their annual income, while investors with a net worth or annual income above $100,000 may invest a maximum of ten percent of their annual income. Companies must still provide information to the SEC, such as names of directors and officers, but the reporting burden is far less than for fully public companies.
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1QPS.pngLawmakers often use state and federal tax laws to encourage certain types of business activity, or to discourage activities in lieu of banning them. Tax breaks often serve as incentives to investors and entrepreneurs to focus on a particular industry or market. Bills pending in the U.S. Congress and the New Jersey Legislature propose various tax incentives for businesses, including technology investments, infrastructure development, and hurricane relief. Supporters of these bills hope to promote job creation by spurring business activity. Critics contend, however, that similar New Jersey incentives have not had the desired impact on job creation in the past. New Jersey and New York businesses should be aware of pending legislation in order to take advantage of any tax breaks or tax incentives that might benefit them.

On April 9, 2013, a Democratic lawmaker from Maryland introduced H.R. 1415, the Innovative Technologies Investment Incentive Act of 2013 (ITIIA), in the U.S. House of Representatives. The bill would allow a tax credit for qualified investments in “high technology and biotechnology business concerns,” H.R. 1415 § 2 (113th Cong.), equal to twenty-five percent of the investment amount. This would be a direct credit against the amount of tax owed by the investor, as opposed to a deduction from the investor’s total taxable income. The total amount of the credit would be subject to a nationwide limit of $500 million per year, and the Small Business Administration (SBA) would be responsible for allocating credits among qualified investors. To qualify for the credit, the investment must be a stock purchase or other capital investment in a high-tech or biotechnology business with less than five hundred employees. Investors must hold onto their investments for at least three years. The purpose of the bill is to encourage investment in technology and biotechnology companies, which in turn will hopefully promote innovation and job creation.
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284089_4502.jpgSole proprietorships, closely-held businesses, and family businesses are often the product of years of hard work, investment, and sacrifice. To call such businesses a “labor of love” would be no exaggeration, because starting a business is like taking in a family member who needs constant care and attention to grow and thrive. Business entities in New York and New Jersey law will continue to exist after their owners are no longer able to run them. It is therefore critical for small business owners, shareholders, members, or partners to plan ahead for contingencies that might prevent them from working, and for succession of the business when the owner or owners are gone.

The preservation of a business’ legacy requires the anticipation of reasonably possible events that could severely impact a business owner, and therefore the business, and preparation for how the business may continue. The death or long-term disability of an owner can make future governance of the business uncertain. If a business owner’s spouse or child becomes disabled, that could cause the owner to need to withdraw or retire from the business. An owner’s divorce could lead to the inclusion of the owner’s business equity in a property division. Other events, such as a partner’s bankruptcy, could trigger a sale of equity in the business. Not all contingencies are entirely negative, of course, such as if an owner finds sudden fortune and wishes to leave the business behind.

Planning for legacy preservation ideally begins when the business itself begins, with planning for one’s exit from a business included in planning for one’s entrance. Here are five tips to help business owners plan ahead:
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911378_21359151.jpgThe U.S. Supreme Court will review the Securities and Exchange Commission’s (SEC’s) five-year statute of limitations for civil actions to recover penalties. The question before the Court in Gabelli v. SEC, Docket No. 11-1274, is precisely when the statute begins to run. The SEC contends that the statute begins to run when it actually learns of an alleged violation, a position that the Second Circuit Court of Appeals affirmed in SEC v. Gabelli, 653 F.3d 49 (2nd Cir. 2011). Marc Gabelli, who petitioned the Court for certiorari, argues that the statute should have begun when the SEC’s cause of action actually accrued, i.e. when the alleged violation occurred. For small businesses and startups pursuing financing options, this case could have important implications for how the SEC investigates and prosecutes alleged wrongdoing.

Gabelli was the portfolio manager of a mutual fund known as Gabelli Global Growth Fund (GGGF). The SEC filed a complaint against him and Bruce Alpert, who was the chief operating officer of GGGF’s adviser Gabelli Funds, LLC, accusing them of engaging in a practice called “market timing” in a way that preferred certain GGGF investors over others. The practice involves making rapid trades in order to exploit short-term inefficiencies in pricing. It is not illegal per se, but it can be detrimental to a fund’s long-term investors by, for example, affecting transaction costs and disrupting the overall management of the fund.

The SEC alleged that Gabelli and Alpert allowed a form of market timing in GGGF between 1999 and the spring of 2002. While the market timing was taking place, the SEC claimed, the defendants did not notify the fund’s board, nor did they disclose the activity to the fund’s other investors. The SEC argued that this was “materially misleading” to the fund and its investors. SEC v. Gabelli, 653 F.3d at 55.
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Facebook_HQ.jpgFacebook, the social networking website that began as a college dorm room project and grew into a multi-billion dollar corporation, in many ways embodies the dreams of small business owners and entrepreneurs. It has enjoyed explosive growth since its founding in 2004, and its service has become a feature of daily life for almost a billion people. In light of this, it may not be surprising that Facebook’s initial public offering (IPO) had very high expectations. The IPO broke records and raised billions of dollars. At the same time, the stock price failed to rise much above the initial price, disappointing many investors who hoped to see the price skyrocket.

Facebook began in a Harvard dorm room in 2003. Within a year, it had moved to Silicon Valley and acquired millions in start-up funding. The basic story of the company’s founding, with a fair amount of artistic license, is familiar to moviegoers from the 2010 film The Social Network. By the time the film came out in theaters, Facebook had over 500 million active users. By the time of the company’s IPO in May 2012, the total number of users had surpassed 900 million. This amounts to roughly three times the population of the United States and one-seventh of the world population.

On February 1, 2012, Facebook filed a registration with the Securities and Exchange Commission (SEC) for an IPO. The registration form, known as Form S-1, provides basic information for investors about the business, including the financial risks associated with investing in the IPO. Facebook’s registration declared an intention to raise $5 billion through sales of shares of common stock, but it did not say how many shares it hoped to sell or at what price. An analysis of the IPO registration by the technology blog Mashable compared the IPO’s potential earnings to those of companies like AT&T Wireless and Deutsche Telekom.
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'1 Wall Street' by Jim in Times Square (Flickr) [CC-BY-2.0 (], via Wikimedia CommonsThe Bank of New York Mellon Corporation, or BNY Mellon, faces several lawsuits filed by state governments alleging fraud in the bank’s investment of state funds in foreign currency markets. The Wall Street bank is reportedly the world’s largest deposit bank, with more than $26 trillion in assets in its custody and administration. It is also reportedly the oldest banking corporation in the country, originating in the Bank of New York founded by Alexander Hamilton in 1784. The current disputes involve accusations of manipulating foreign exchange rates, overcharging pension and retirement funds, and other alleged acts of mismanagement. This matter is of interest to New Jersey and New York small businesses because it could impact other international assets held or managed by a large bank. As businesses in places like New York City do an increasing amount of international business, issues affecting U.S. currency and finance become important to more than just the large banks.

Ohio is the most recent U.S. state to break with BNY Mellon and other Wall Street banks over this issue. In March, the state fired BNY Mellon and State Street Corp. from their roles overseeing the international assets of four of Ohio’s five pension funds. The two banks had handled foreign currency transactions for the pension funds, whose international holdings totaled $41.3 billion. The state treasurer expressed concerns that the banks had manipulated exchange rates, which potentially deprived the funds, and therefore state employees and retirees, of millions of dollars in earnings. These actions allegedly cost the state millions of dollars in overcharged fees.
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1334534_93875724_03262012.jpgThe Affordable Care Act (ACA), sometimes known as “Obamacare,” passed the U.S. Congress two years ago. Many of its provisions have only just begun to take effect, and some will not take effect for several more years. One of its requirements is for each state to establish a health insurance exchange, which would allow, but not require, consumers to purchase health insurance in an open market system. The federal government will establish exchanges in any states that do not set up one of their own. Several people have recently published op-eds in New Jersey newspapers encouraging the state to set up an exchange. It could benefit small businesses by removing some of the burden of providing health insurance to employees.

According to New Jersey Newsroom, 1.3 million New Jersey residents, about 1 in 7 of the state’s population, lack health insurance coverage. The total number of uninsured residents in 2010 was fifty percent higher than the number in 2000. This rate is much higher than the rate of increase nationwide. Increasing premiums are generally blamed for people’s growing inability to afford insurance. Most people depend on employer-provided health insurance, as premiums tend to be much higher for insurance purchased directly by a consumer. Such a widespread lack of health care coverage can have a broader impact on a state’s economy, as people cannot work due to health problems but cannot afford health care. This can lead to foreclosures and even business failures.

The ACA introduced a number of provisions to improve people’s access to health insurance coverage. Many of these provisions, like the insurance mandate requiring people to purchase health insurance, have proven controversial and are the subject of court challenges. The law has had positive impacts on many people, though. The Philadelphia Inquirer reports, for example, that over 130,000 young adults in New Jersey and Pennsylvania, age 26 or less, may now obtain health insurance through plans held by their parents. This can lead, unfortunately, to increased costs for employers, as family-plan premiums are generally higher than plans covering one person or a married couple.

The proposed New Jersey Health Benefit Exchange Act would give consumers and small businesses the ability to shop for coverage plans that are better customized to their particular needs. According to bill sponsor Ruben J. Ramos, Jr., an Assemblyman from New Jersey’s 33rd District, this system can save money for everyone involved, including the government, consumers, and employers.
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534981_64316266_02042012.jpgTechnology has given businesses many different ways to collect payments from their customers, to the point that cash makes up only a portion of revenue for some businesses, and others do not receive cash at all. Credit card payments form a large part of how businesses collect payments, both through merchant accounts and services like PayPal. The fees associated with such payment methods are often more than worth the convenience they offer. Small businesses accepting credit cards through merchant accounts, in which a financial institution pays the business the amount of a transaction minus a small percentage, should know of recent legislation that may impose some reporting requirements on them come tax time.

The Housing Assistance Tax Act of 2008 became law in June 2008, primarily as a means of addressing the subprime mortgage crisis that had begun the previous year. The law mainly affects banks and other financial institutions that engage in mortgage lending, authorizing the Federal Housing Administration to guarantee certain fixed-rate mortgages and allowing states to refinance subprime mortgage loans. The financial crisis of late 2008 had a significant impact on Fannie Mae and Freddie Mac, two intended beneficiaries of the law, but certain provisions of the law have an impact even outside of the real estate sphere.

According to regulations from the Internal Revenue Service (IRS) that took effect in 2011, “payment settlement entities” must report payments made to merchants for credit card and other third-party credit transactions. “Payment settlement entities” are defined as banks and other financial companies that receive and process credit card, debit card, and other credit-based transactions for businesses (or “merchants.”) This does not impose any additional tax liability, but rather requires reporting by these payment settlement entities of the amounts they pay to merchants, which could be companies of any size or even individuals who accept credit cards as part of their business activities. These reports are included in a Form 1099-K issued by payment settlement entities at the end of each calendar (or fiscal) year.

The important consideration for companies that accept credit card payments is this: reports by payment settlement entities do not include any credits, offsets, discounts, refunds, or other modifications made by the merchant for the customer. This means that the amount stated by the payment settlement entity on the 1099-K might not match the amount of income reported by the merchant to the IRS. The merchant then has the responsibility of accounting for the difference in the corporate or partnership tax returns or Schedule C of a personal 1040 form.
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