If you are the owner of a company based overseas, your tax advisor may suggest there could be good reason to form your US affiliate as a traditional, domestic corporation.
The likelihood is high that you may have but one, single shareholder and very few corporate directors for the domestic entity. If this is true, you will likely want to have the flexibility afforded to many LLCs via a well drafted operating agreement.
Issues like the departure of a needed Director, who was also a business manager, inconvenience of in person meetings for shareholders or directors, and problems making changes to the business to quickly adapt to its evolving needs, demand a governance structure that is as nimble as your business model in general.
Here are some possible clauses to consider to help give you the real flexibility you need:
- Meetings: provide for the use of telecommunications in holding meetings. Many Bylaws require meetings to be held in person – that is highly inefficient in the electronic era and should not be necessary for most shareholder or director meetings.
- Waiver of Notice of Meetings: allow waivers of notice to be freely exercised and easy to make. Shareholders and Directors at this level are unlikely to need formal notices until the ownership base or number of directors is larger.
- Proxies: proxy voting should be easy no matter what size corporation is involved. But with a small, international business it can be even more important. Language differences, distance, inconvenience, and the fact that one shareholder may have dominant or effective control of the company, all combine to provide cause for simple forms and explanations of how proxy voting works (one caveat: proxy forms and instructions should be in the native language of the shareholder to whom it’s provided.
- Treasury Stock: depending on the state of incorporation, treasury stock may be prohibited from voting by statute. If not, it’s wise to prohibit it’s voting under the Bylaws. The complexity of determining how treasury stock will be voted, coupled with the redundancy that can unintentionally occur, make the voting of treasury stock highly unwise for the closely held, international company.
The above are a brief sample of the many issues you will want to consider in determining the best corporate governance structure for your company.
If you’d like help in setting up this structure, maintaining corporate records, keeping the structure up to date, or fending off unwanted litigation against your company, please contact the Thompson Law Office at (317) 564-4976 today!
Startups and small businesses need capital. Most new businesses “bootstrap” their way to stability in their early years of existence, and others find financing by borrowing against home equity or through the SBA when the owners have enough financial strength to borrow from lending sources.
But there are plenty of businesses and entrepreneurs with great ideas that merely lack the funding to actualize their business plans. For these businesses, the struggle is to keep going until the revenue streams are sufficient to enable the sustainability of a great idea with a good service or product to offer.
In the past six years, “crowdfunding” has leapt upon the fundraising scene, enabling thousands of projects to be funded or get off the ground. Sites like “Kickstarter”, “Indiegogo”, and “GoFundMe” offer portals to connect project authors with potential donors. But none of these portals can offer equity positions to the parties who invest in their projects. You cannot receive a return of profits or any kind of dividend for a contribution to any project on any of these portals. Thus, a great chasm exists between the small investor and the small business operator, and if this chasm could be bridged, economic activity and personal wealth could increase tremendously.
The idea of Crowdfund Indy is to build that bridge, at least for local companies and investors, in and around Indianapolis. We hope to do this through a series of initiatives:
Networking Hub: First, the members of this group have a wide variety of unique and exceptional skills. We want to create the opportunity for monthly interaction as a group, to build individual relationships you have the opportunity to follow up with on your own. We also want to expose the group to some outstanding speakers who have great success stories to share about funding the startup of their own business, or helping others do the same.
Advocacy: Second, to be advocates for a much more free, legal and regulatory environment for crowdfunding. This will be challenging because the present environment is controlled largely and mostly at the federal level. We intend to attack the problem both locally and to the federal government to the extent we can. Out state has passed its version of a crowdfunding law, but it is targeted at “qualified investors” with a net worth of over $1,000,000. The goal of Crowdfund Indy is to give the real “crowd”, the folks with less wealth, the opportunity to invest in great new startup companies as well!
Fundable Plans: Third, to provide support to startups and small business in developing fundable business plans. We’ll create a committee to review business plans of group members and suggest what needs to be done in pursuing funding. A sub-committee will exist to help with creating the business plans themselves.
Pitches – Matching Businesses and Investors: We will hold special meetups (suggestions for name?) for startup champions to share their stories and visions with a real crowd of potential investors who will help them network to other potential investors.
Investment Portal: Ultimately, the investments will have to go through a “portal” that handles crowdfund investments. At present, it would have to be a FINRA approved portal. Regardless, our stretch goal is a group is to create the prototype funding portal for true, equity crowdfunding – investments for average investors in companies that are starting up or growing and will succeed.
Crowdfund Indy is a unique group, committed to the success of small business AND smaller investors in Indiana. If you’d like to join us and see what we’re about, check out our meetup page, Crowdfund Indy, and join us if you’d like to be part of a great movement of change in business investment.
The passage of the JOBS Act and its Crowdfunding provisions in 2012 promised to bring opportunity for small business owners and investors with limited funds the opportunity to connect and “jumpstart” business startups. Two and a half years later, however, we are still awaiting, final regulations that would enable crowdfunded offerings that utilize internet technology and networking groups to enable equity investment in small companies.
Instead of taking off as presented, however, it seems as if the SEC, the Obama Administration and Congress have worked in concert, albeit, passively, to make sure anything but this takes place. Given the state of our economy for the four years leading up to 2012, the lack of momentum for crowdfunding at the federal level raises some serious questions – most important: 1) why the lack of action? and 2) will it ever happen?
While these are complex issues, it’s reasonable to assert that the primary reason nothing is happening is that the federal government is just too enormous to care about “small things”. This shouldn’t be confused with the governments zeal to engage the minutia of those issues it’s forced to address because of the numbers of voters who are more directly affected, but the problem for crowdfunding is that the idea is new, it’s acknowledged mostly by younger voters (who are less likely to go to the polls), and we very, very large investment markets that dwarf any “portals” designed to be the intermediaries for smaller startups and their investors. Even the smaller portals that exist to enable crowdfunding investment, do anything but cater to the small investor, and generally have investment restrictions prohibiting people from making investments unless they can meet certain net worth or income tests. There are certainly other reasons why the SEC is slow or immobile on the issue, and these will be addressed in other posts about crowdfunding on this site in the future.
As to the issue of where it goes from here, three possibilities exist: 1) the intended expansion of crowdfunding options will occur, 2) a static environment will continue for an extended period of time, or 3) crowdfunding will actually be more restricted as the federal government realizes how difficult it is to regulate, and sees the potential loss of tax revenue.
EXpansion prospects: the prospects for expansion are indeed, actually bright, largely due to the market forces that will propel crowdfunding forward. There is too much momentum, primarily due to the non-equity crowdfunding platforms that have been so successful, and the contributors to projects on these sites, collectively, have to recognize the potential for so much more in return, than what they are getting today.
Further delays: The likelihood that little or nothing will change before the next Presidential election is, unfortunately, rather high. The federal government, as we know from experience with the Affordable Care Act, can move with all the speed of an intemperate glacier, and that is the norm – it is not the exception. The fact that so few people are concerned about SEC action on crowdfunding makes it even more likely.
Potential for Pullback: not only is a retraction possible, it is realistic given that the SEC is actively considering additional filing requirements for any company qualifying under the crowdfunding rules. While this article does not address state-specific crowdfunding statues and rules, it does appear that these are coming under scrutiny from the SEC and may face federal limitations in the future – but that is certainly not guaranteed.
Handicapping the likelihood of each possibility is challenging, but it seems reasonable to assume that in the near term, more restrictive rules will at least be considered, but as the election approaches we may see the markets, and voters, move the political climate to ease open the door to this potential flood of new investment opportunities – so remaining hopeful and participating politically may serve the end goal of crowdfunded equity opportunities well.
Crowdfunding means democratic participation in real investment markets – with real returns on investment. Anyone who champions greater participation by more people and greater opportunity for small businesses to attract equity investments should take part in helping to stake out the market freedom we deserve.
The day is not too far past when raising money was primarily the domain of nonprofit and charitable organizations. While fundraising has never been more important than it is now for charitable entities, the door has been blown wide open with respect to fundraising opportunities for profit seeking firms, particularly when they raise some or all of their funding through not-for-profit projects through sources like fundme.com or indiegogo.com.
And with the advent of the Jobs Act in 2012, fundraising has been made more popular, if not necessarily easier for every kind of for profit business and entrepreneurial endeavor. Our nation has adapted to an economic culture that embraces one to many access via the internet, so that as thousands or perhaps even millions of people are reached in a brief instant, they can respond to ideas they believe in or simply just love with a gift, contribution or equity investment to become a part of a project that has a chance to succeed tremendously.
Let’s take a couple examples and consider how they can obtain sufficient funding and advance the objectives of an idea.
First, consider an after school project designed to help middle schoolers learn to produce high quality videos of school academic, sports and performing arts events. For one school, the cost is over $10,000 per year to run the program (maybe even $20,000 or more). There’s a natural constituency of parents, teachers and other “friends” of the school, and there is also a constituency of funders who are interested in like kinds of projects.
So the project sponsors create a campaign using indiegogo and set out to raise the first $10,000 needed to assure the project’s success. They know they may need a second round of funding, but if they hit their initial goal, there will be a project for the next school year. And it works! They meet their goal, actually raising $11,212, and they’re off. But now what? That’s a question we’ll get to in another post, but for now, let’s look at another example.
Have you often felt that the ease of transition between work and the workout is not quite easy enough? This project is the development of a business office space used to support the intersection of work and exercise. It seeks building space on a bike path-trail, with a unique footprint that incorporates a combination of gym space, a pool, personal trainers of various specialties, massage therapists, etc., interlaced with office space, primarily traditional, small business and professional office space. Funding this project will take something close to $1,000,000.
In this situation, the JOBS Act’s crowdfunding options should be very helpful. However, proposed rules for crowdfunding still await final SEC approval. As proposed, they generally permit:
individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.
Under the proposed rules:
- A company would be able to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period.
- Investors, over the course of a 12-month period, would be permitted to invest up to:
- $2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.
- 10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.
The proposed rules go on in much greater detail to explain how crowdfunding should work.
It is still very rare that companies are using for profit crowdfunding because the rules are so new, and there is so much risk associated with it.
The Thompson Law Office helps businesses, entrepreneurs, investors, nonprofits, charities, and general cause oriented project founders, raise the funding they need and create the organizational structures necessary to grow and flourish. Call us today for a free consultation (317) 604-1276.
If you are a business owner, dealer, or even a guarantor of debt on inventory financing, you may have learned the hard way that slow times in business can be very costly. Recently, I consulted with a boat dealer who worked with a loan known finance company here in Indiana to finance over $250,000 in inventory in his dealership in North Carolina. Realistically, of course, $250,000 in inventory is a fairly modest showroom today, but if it’s your own hard earned money, it’s really significant!
Inventory financing depends on rapid turnover. If you can’t sell what you have quickly, it is subject to repossession in short periods, often as little as 30 days, with little recourse for the dealer. Once the tide turns against you, i.e. the first repossession takes place, the losses mount quickly. It can be a vicious, downhill slide. So what do you do?
From a business perspective, about the only thing you can do is make quick sales and try to stop the bleeding that’s begun. But if you’re not successful in moving inventory quickly, you will face a serious debt crisis that requires some type of legal bailout or bankruptcy. But you surely didn’t go into business to go bankrupt, you did it to make a profit. So what are your other options?
Going on the Offensive
While this may seem highly impractical, it may be the best way to force the creditor to come to terms you can accept. What does it mean? It means choosing the best legal, actionable set of facts that would enable you to allege and assert some type of breach, misrepresentation or other action against the creditor before they come after you instead.
Spreading the Debt
This strategy is also certainly less than perfect, but if you have business partners, guarantors, etc., you may be able to force the finance company to expend its resources going after multiple parties and they may not be easy to reach. In turn, the creditor’s efforts pursuing other debtors may buy some time for you and enable you to defend on a “share of wallet” negotiating strategy.
Asserting Direct, Legal Defenses
Truly, the simplest and most basic tactic – defending on your own rights – is often the best way to go. In our firm, we have successfully defended debtors and dealers based on signature analysis, and on more common legal defenses such as laches, estoppel, and breaches of unique and specific terms under the contract with the floor plan finance company.
Typically, the best and most successful strategy is one that involves a workout on amounts asserted as due from the creditor now, and modification of terms of payment or inventory terms going forward. This can enable a dealer to avoid insolvency and also create the opportunity for future success when there is little or not hope for such success in the present.
Even in situations that seem hopeless in the moment, there are ways to protect what your assets and minimize your losses. If you need assistance in defending against a claim from a floor plan finance dealer, please contact the Thompson Law Office at (317) 604-1276 or email us at firstname.lastname@example.org.
What is the Exposure of a Trustee?
It’s important to understand the role of a Trustee if we are to answer this question. A trustee is also known as a fiduciary, i.e. a person or a party responsible for the financial management and protection of another person or party’s assets.
A trustee can be an individual, a corporate trustee, such as a bank or trust company, or a combination of both. The exact duties of a Trustee will vary based on what assets are owned by the trust, and the specific terms of the trust itself.
As a fiduciary, a trustee has a duty to act solely in the best interests of the beneficiaries of the trust.
The Trustee can, depending on state law and the terms of the trust agreement, delegate certain duties to others, such as hiring a financial advisor to oversee investments or hiring a property manager to oversee rental real estate. But the Trustee is held to a high standard of care and due diligence even when delegating duties and is required to avoid any conflicts of interest with the beneficiaries, except with their knowledge and consent.
The duties of a Trustee should never be taken lightly. As with any professional service, there are risks inherent to the role of a Trustee. Understanding this exposure will help you develop appropriate risk management strategies to mitigate potential liability.
Cases Where A Trustee Was Liable for Beneficiary Losses
- A trust suffered significant losses due in part to decisions made by the trust’s investment advisor. The trustee was sued for failing to properly select and supervise its investment advisor, for failing to make certain that the assets of the trust were invested according to the trust’s objectives, and for negligent tax planning. The trustee eventually paid a sizeable settlement with beneficiaries of the trust.
- A “family office” provided services to a number of multiple family trusts. One trust was offered an opportunity to sell shares it owned at market prices; the other families were not offered the opportunity. On advice of their attorneys, the family office sold the shares back, but did not share the offer with the other trusts. The price of the stock then fell dramatically, and the other trusts suffered material losses. The trusts’ beneficiaries brought suit claiming breach of fiduciary duties. The case went to trial, and the trustees won. Note that their legal expenses exceeded a million dollars to prevail on this case.
- A family trust held diverse assets, but the most significant asset was a closely held company. The company was listed for sale and sold to an investor group. The group was not the highest bidder for the company, but has the most solid financial backing. One beneficiary of the trust is a non-profit organization, and that organization would benefit from ongoing distributions from the trust after the sale of the company. The state Attorney General initiated an investigation of the sale, and brought an action against the trustee for failure to secure the highest bid for the company. The Attorney General has a right of action because of the non-profit beneficiary whether the beneficiary itself chooses to pursue a claim against the trustee.
- A trustee seeks to diversify a trust’s assets, and places some of the assets into a large, well-known mutual fund. Thereafter, the mutual fund incurs significant investment losses. An action is brought by various beneficiaries against the trustee and the investment advisor for failure to follow prudent investment guidelines, and failure to follow the investment policies and objectives of the trust. After months of discovery, the case settles to avoid continued escalation in defense costs.
If you have concerns as a trustee, fiduciary or agent of a fiduciary, or if you are the beneficiary of a trust with concerns regarding the means by which your trust is being handled, please contact the Thompson Law Office at (317) 564-4976 for a consultation to discuss your legal rights.
I had a conversation yesterday that sparked some thought about a subject I face in my practice every day: what is a client’s business really worth?
I hear quick commentary on business values (and sales) regularly – “We’re an $8 Million company”. “…about $3.5 Million”…these comments on a business’ market value or sales are tossed out quickly and frequently, but not always thoughtfully. Reciting sales/revenue numbers can be easy, but ultimately tells you little about the company’s actual value. Asset size can be similarly vague in terms of the net value of the company, as can net book value.
These figures are useful in day-to-day considerations of the immediate access to capital for a business, the size of a particular transaction it can anticipate, the number of employees in the company, and other quick analysis. But the moment shares of the company are to be transferred, via gift, sale, merger or otherwise, a whole new perspective takes shape on the company’s value.
That business you thought was worth seven million at the end of the last calendar year, might turn out to be worth no more than five when you put it on the market. The business you hoped you would only have exposure on $2-3 Million subject to tax valuation (after appropriate discounts), may actually be necessarily valued at $4-5 Million because of the operating covenants and the manner in which control of the company was established.
These are very simple examples about why the valuation or appraisal of your business is important. It may not seem important right now, and may not be terribly important until a liquidity event approaches, or perhaps in the event of unwanted litigation. Yet, until you get some important answers to questions that may skew the estimates of reasonable valuation of your company, you may not know what the company is really worth.
So when do you need to have your company appraised? Most likely you will not need a full appraisal until the liquidity event or crisis is on the horizon, but whether or not you actually pay for an appraisal, it will be in your best interest to know the answers to the key questions that will ultimately determine how your company will be valued.
For example, what is the reason for the appraisal? Different techniques may apply depending on whether you are contemplating the sale of the company, o ran internal recapitalization.
What contingent liabilities exist that you do not consider from day to day?
How can you measure the real, market value of the goodwill of your business?
These are the basics. In the ordinary course of running and managing your business, you may not need to know these answers. But as you prepare yourself for the major events that will transform the ownership and structure of your business, they will become central to accomplishing your objectives.
It’s wise to sit down with your team of key advisors presently and get the right sense of what to expect in a future appraisal. Ask them to make sure a well qualified valuation expert is involved in the conversation and available to answer your questions.
Whether the day of transition is the next year or several years out, you will find you’re well advised to understand the factors that can affect the transfer value of your enterprise.