Look Out for Misleading Solicitations Targeting California Business Entities

Several of our clients have recently received official-looking letters from an entity called California State Corporations and a few others companies asserting that the California entities are not in compliance with California law.  These companies essentially passe themselves off as a branch of the state government where there is actually no affiliation or connection.  These solicitations are not being made by the California Secretary of State’s office and are not being made by or on behalf of any governmental entity. The mailings imply that the entities are either not in compliance or are required to complete enclosed paperwork and return it along with a fee ranging anywhere from$49.50 to $150 for obtaining a Certificate of Status. Please note that business entities are not ordinarily required to obtain a Certificate of Status with the California Secretary of State, unless for a specific transaction-related purpose, such as in commercial real estate financing. Should you require a Certificate of Status, we an assist you in obtaining this document.  Although a business entity can use an intermediary to submit filings, request a certificate of status, and pay fees to our office, no business is required to go through another private entity in order to obtain documents or certificates from the Secretary of State’s office and no private entity can issue these documents.  The California Secretary of State only charges $15 for the first certificate and $5 for each additional certificate – NOT the $49.50 this particular scam asserts. Furthermore, the scam claims that obtaining the document will take seven to 10 business days, when turnaround times are currently only 24 to 48 hours....
Can a Foreigner be a Shareholder of an S-Corporation?

Can a Foreigner be a Shareholder of an S-Corporation?

Becoming an S-Corporations Some startup companies benefit from starting out as an S-corporation, while others remain C- Corporations.   Corporations can elect to remain C-Corporations for a number of reasons, including tax deductions only available for C-Corporations, the corporation does not qualify as an S-Corporation, or the shareholders’ desire to have the opportunity to exclude from gross income 100% (until December 31, 2013, thereafter 50%) of the gain from the sale of “qualified small business stock” . Generally a corporation fails to qualify for S-Corporation status if one or more of the following situations apply:  ANY owner of the corporation is another business entity or a non-resident alien (as described further below) The corporation will be owned by more than 75 persons The corporation plans to issue more than one class of stock (i.e., special allocations of profits and losses will be made that are not proportionate to the equity percentage of each owner). Non-resident Aliens and S-Corporations Although the tax code permits certain foreigners to be shareholders of S-Corporations, it is generally not advised, as foreigners who do not stay in the country long enough during a particular year can inadvertently cause the corporation to lose its S-Corporation status.  This can cause adverse and unintended tax consequences to the other S-Corporation shareholders. Whether a foreigner is a non-resident alien does not depend on the visa class held by the immigrant.  Rather, under the IRS code, only a green card holder or one who meets the “Substantial Presence Test” determines whether an alien is eligible to be an S Corporation shareholder. However, individuals under certain visas such as the F-1...
Family & Friends Funding: Frequently Asked Questions from Start-Up Business Owners and Founders

Family & Friends Funding: Frequently Asked Questions from Start-Up Business Owners and Founders

In the search for start-up capital funding, there can be quite a few advantages to going to friends and family for your source of financing.  They know your strengths and capabilities and may take a chance on you when banks or investor funding may not be readily available.  Also, this source of money may be available when other money is not.  For Founders having trouble with cash flow or don’t have the collateral or revenue to attract a bank or professional equity financing, this could be your only source of start-up capital.  This initial investment source can help in launch a new venture or serve as bridge funding until venture capital investment comes through. ADVANTAGES FOR THE START-UP FOUNDER Raising money from family and friends has a number of advantages, especially as compared to other financing alternatives. For instance, private loans may have more Founder-friendly terms than other traditional sources.  Founders may also be able to structure convertible notes and preferred share investments with more favorable terms than commonly found with early investor seed money.  Founders might be able to make more flexible arrangements regarding payback, including paying lower interest, grace periods, or graduated payments, than through traditional lending sources. Importantly, raising money from friends and family shows validation from key supporters. The start-up phase of a new business can be a very stressful and doubt-filled time, and having friends’ and families’ financial support shows belief in a Founder’s ideas, which can make all the difference in those early days. FREQUENTLY ASKED QUESTIONS Below are some of the most common question IBV Advisory Group Inc. encounters when representing Founders...
Forming a Corporation:  What are “Corporate Formalities” and Why are They Important?

Forming a Corporation: What are “Corporate Formalities” and Why are They Important?

There are many considerations a business owner must think through before deciding which business entity to select.  While a business owner may elect to do business as a sole proprietorship or as a partnership, he may inadvertently put his personal assets at risk by not implementing a structure that separates the individuals involved from the business itself.  A corporation is one business entity option that limits the business owners’ risk of loss to the amount of money invested in the business, provided that the corporation adheres to basic “corporate formalities”. If corporate formalities are not followed, the corporation will not be recognized as a corporation and both business owners and shareholders may open themselves p to personal liability.  When a corporation is found to have not followed corporate formalities, this is known as “piercing the corporate veil”, which opens up a shareholder’s personal assets. WHAT DOES IT MEAN TO ADHERE TO CORPORATE FORMALITIES Adherence to corporate formalities is often cited as a significant disadvantage for those who consider a Corporation as a business form and this is often why many instead opt for a Limited Liability Company (LLC).  In addition to entity maintenance and formalities, selecting the appropriate entity should also reflect tax, partnership structuring, and decision-making considerations, which is why individuals starting a new business should always seek qualified legal counsel and tax advice. The following are basics of corporate formalities which must be followed.  Keep in mind that each state has its own corporation laws, and in addition to corporate formalities may require different forms or documents to be filed on a regular basis. Bylaws. Bylaws are...
SEC Removes Prohibition on General Solicitation and General Advertising in Certain SEC Offerings

SEC Removes Prohibition on General Solicitation and General Advertising in Certain SEC Offerings

Background Under the current SEC offering process, companies seeking to raise capital through the sale of securities must either register the securities offering with the SEC or rely on an exemption from registration. Most of the exemptions from registration prohibit companies from engaging in general solicitation or general advertising – that is, advertising in newspapers or on the Internet among other things – in connection with securities offerings. Rule 506 of Regulation D is the most widely-used exemption from registration. In an offering that qualifies for the Rule 506 exemption, an issuer may raise an unlimited amount of capital from an unlimited number of “accredited investors” and up to 35 non-accredited investors. Under SEC rules, accredited investors are individuals who meet certain minimum income or net worth levels, or certain institutions such as trusts, corporations, or charitable organizations that meet certain minimum asset levels. JOBS Act In April 2012, Congress passed the Jumpstart Our Business Startups Act (JOBS Act). Section 201(a)(1) of the JOBS Act directs the SEC to remove the prohibition on general solicitation or general advertising for securities offerings relying on Rule 506 provided that sales are limited to accredited investors and an issuer takes reasonable steps to verify that all purchasers of the securities are accredited investors. By requiring the SEC to remove this general solicitation restriction, Congress sought to make it easier for a company to find investors and thereby raise capital. While issuers will be able to widely solicit and advertise for potential investors, the JOBS Act required the SEC to adopt rules that “require the issuer to take reasonable steps to verify that...