-Miracle_Cure!-_Health_Fraud_Scams_(8528312890).jpgThe Federal Trade Commission (FTC) has filed a lawsuit against a Nevada company and its affiliates for a variety of alleged deceptive practices in the sale of products online. FTC v. Health Formulas, LLC, et al, No. 2:14-cv-01649, complaint (D. Nev., Oct. 7, 2014). The lawsuit is the first one brought by the agency under the Restore Online Shoppers' Confidence Act (ROSCA), 15 U.S.C. § 8401 et seq., which Congress passed in 2010. ROSCA requires online sellers to disclose the details of transactions known as "negative options" to consumers up front. The FTC claims that the defendants violated ROSCA and several other federal statutes in their marketing and sales activities. It obtained a temporary restraining order (TRO) and a preliminary injunction (PI) against the defendants, and it is seeking a permanent injunction.

A "negative option" is defined as a transaction in which the consumer's failure to reject goods or services through some affirmative act constitutes acceptance of the seller's offer. 16 C.F.R. § 310.2(u). To put it another way, the customer accepts the goods or services and becomes obligated to pay for them by doing nothing. Negative option billing is common in online or mail-order clubs like Columbia House, which periodically send customers a CD or DVD and allow them a period of time to return it, after which they are billed for it.

Consumers have generally not been successful challenging negative option billing provisions in court if the contract clearly discloses the nature of the transaction, but many negative options are not so clearly explained. ROSCA requires online sellers to "clearly and conspicuously disclose[]...all material terms of the transaction" to the consumers before obtaining their billing information in online sales and marketing. 15 U.S.C. §§ 8402, 8403.

Continue reading "FTC Brings First Lawsuit Under 2010 E-Commerce Statute" »

295128_6656.jpgA business may decide to sell all or a substantial amount of its business assets to another individual or company for a variety of reasons. These types of transactions are known as "bulk sales" if they are not part of ordinary business activities. Both New York and New Jersey require businesses that collect sales tax to disclose a planned bulk sale to state tax authorities. This disclosure is the purchaser's obligation, since the purpose is to allow the state to determine the seller's tax liability. If the purchaser does not make the required disclosures, it could become liable for the seller's outstanding tax debt to the state. The disclosure process is not terribly complicated, but it appears to be one that many businesses forget in the course of purchasing another business' assets.

What Is a "Bulk Sale"?

Any sale of business assets that is not part of the normal course of business could qualify as a bulk sale under state law. A bulk sale may occur if a company is going out of business, upgrading its equipment, or making significant changes in its business activities. Bulk sales may also occur in mergers or acquisitions, or if a business is converting from a sole proprietorship to a corporation or other business entity.

"Business assets" include any assets used in the course of business, including:
- Personal property, such as computers, office furniture, and inventory;
- Intellectual property, including patents, trademarks, and trade secrets;
- Certain types of real property; and
- Intangible assets, like business goodwill.

Continue reading "New Jersey and New York Require Notice Before Bulk Sales of Business Assets" »

Bitcoin_ATM_Plate.jpgThe New York Department of Financial Services (DFS) recently issued proposed regulations for businesses that deal with "virtual currencies," defined by the U.S. Department of the Treasury as a medium of exchange that operates much like traditional currency, but only in some environments. Virtual currencies are gaining in prominence as an alternative to fiat currencies like the dollar and the euro, although they have been highly controversial. New York appears to be one of the first states to take serious steps towards regulating businesses that perform virtual currency transactions for customers.

Bitcoin is probably the most famous virtual currency, but it is far from the only one. The currency only exists in the online world, having no physical representation like actual coins or bills. The process by which new Bitcoins are created, known as "mining," involves performing increasingly complex computer calculations. Bitcoin has grown as a form of payment for goods and services online, but it is also the subject of scrutiny based on allegations that it is used for illegal online purchases, such as drugs and identity theft information.

Bitcoin is treated somewhat like a commodity by some people, as suggested by the fact that the value of one Bitcoin is typically expressed in terms of U.S. dollars. Online exchanges allow people to exchange various other currencies for Bitcoins. As of mid-November 2014, one Bitcoin is worth about $400. One presumably happy Norwegian man discovered in late 2013 that the $27 worth of Bitcoins he purchased in 2009 had appreciated in value to about $886,000.

Continue reading "New York Financial Regulators Propose Rules for Bitcoin and Other Virtual Currencies" »

1.12.02NewYorkStockExchangeByLuigiNovi1.jpgThe number of initial public offerings (IPOs), in which a company first offers its stock for sale on public exchanges, has skyrocketed during the first nine months of 2014. 220 companies went public during that time, raising about $77 billion. The record-breaking IPO of the Chinese company Alibaba alone raised $21.8 billion, but the vast majority of 2014 IPOs reportedly consist of "emerging growth companies" (EGCs), a category established in 2012 by the Jumpstart Our Business Startups (JOBS) Act. EGCs are smaller companies that have often been unable to meet the regulatory requirements for IPOs, but now they account for most or all of the growth in the number of IPOs in recent years.

The JOBS Act was introduced in Congress as H.R. 3606 in March 2012. It quickly passed both houses of Congress, and the President signed it into law that April. The law relaxes various regulatory requirements for smaller public companies and expands their eligibility to go public. It also increases, from 500 to 2,000, the number of record stockholders a company may have before it must register with the Securities and Exchange Commission (SEC).

The JOBS Act amends the Securities Act of 1933 and the Securities Exchange Act of 1934 to include "emerging growth companies." H.R.3606 §§ 101(a) - (b), 15 U.S.C. § 77b(a)(19), 15 U.S.C. § 78c(a)(80). An EGC is defined as a company that began issuing securities to the public after December 8, 2011, and that had less than $1 billion, adjusted for inflation, in annual gross revenues during the most recently ended fiscal year.

Continue reading "Initial Public Offerings by Small Businesses Are Surging, Possibly Due to JOBS Act" »

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).

Continue reading "Federal Appellate Court Pierces Corporate Veil, Holds Shareholder Liable for Customs Violations" »

BurgerKingFood.jpg"Corporate inversion," the process by which a corporation merges with a foreign corporation and relocates its headquarters to the foreign company's home country, has received a considerable amount of attention in recent months. It is often expressly intended to reduce a corporation's tax burden by moving the company to a country with lower corporate taxes, while still maintaining physical operations in the U.S. The White House and others have criticized the practice, and corporations are lobbying against laws that would restrict it. The Internal Revenue Code (IRC) already contains "anti-inversion" provisions, and a recent notice from the Department of the Treasury (DOT) states that new Internal Revenue Service (IRS) regulations will enhance the scrutiny of foreign mergers.

Section 7874 of the IRC, 26 U.S.C. § 7874, seeks to regulate corporate inversions. It applies to any U.S. corporation that transfers its headquarters and other assets overseas through a merger with a foreign corporation after March 4, 2003. The merged foreign corporation is subject to the same tax treatment as a domestic corporation if 80 percent of its stock is held by the U.S. company's former shareholders, and it does not have "substantial business activities" in its home country. Id. at §§ 7874(a)(2), (b). If the merged foreign corporation has 60 percent of its shareholders in common with its domestic predecessor, the IRS designates it as a "surrogate foreign corporation" and applies U.S. tax rates to the amount of its inversion gain. Id. at §§ 7874(a)(1)-(2).

Several U.S. corporations have announced inversion plans in 2014. While some of them decided not to follow through after public opinion turned against them, other deals are still in the works. The U.S. pharmaceutical company Pfizer abandoned a bid to acquire the British company AstraZeneca, and the pharmacy chain Walgreens decided not to reorganize in Switzerland after merging with that country's Alliance Boots. The fast-food chain Burger King, however, is reportedly still in the process of acquiring Tim Hortons and reorganizing in Canada.

Continue reading "Treasury Department Issues New Guidance for Corporations that Transfer Operations Abroad to Reduce Tax Liability" »

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.

Continue reading "Corporate Recordkeeping for Small Business Owners" »

2711081060_ba91f69796.jpgInformation technology (IT) is widely recognized as a critical component of business operations, but the security of a company's IT often does not receive as much attention. Breaches of a company's cybersecurity can result in serious losses, not only due to direct theft, but also through potential liability to regulators and customers. Despite some highly-publicized cybersecurity breaches, a recent survey of top-level corporate executives found that nearly three-fourths of those surveyed did not think the Chief Information Security Officers (CISOs) merit a place at a corporation's "leadership table." Nearly half of them see the role of a CISO as someone to take the fall if a breach occurs. Businesses, including small businesses and entrepreneurs, should seriously consider allocating resources to protect their IT.

The technology industry publication SearchSecurity defines a CISO as the executive "responsible for aligning security initiatives with enterprise programs and business objectives," and with "ensuring that information assets and technologies are adequately protected. This includes maintaining oversight of a company's entire system of computers and computer networks, which can be a colossal task in a large organization. A CISO must keep a company's hardware, software, and data safe from intrusion by both outsiders and insiders, while allowing business operations to run unhindered.

The role of the CISO has grown in importance recently, particularly after several large and highly-publicized cybersecurity breaches at major retail chains like Target and Home Depot, which exposed the personal financial information of millions of consumers. Target announced that it hired a CISO about six months after its breach. Since information is vulnerable from both cyberattacks via the internet or another network and physical intrusions on a company's hardware, some corporations merge a CISO's role with that of a chief security officer (CSO), commonly responsible for the security of a business' physical assets.

Continue reading "Information Security Not a High Priority for Many Top-Level Corporate Executives, Study Finds" »

False_morel_sauce_with_vegetables.jpgOnline user-submitted reviews have become a critical component of many businesses' public images. According to a 2011 study from Harvard Business School, a one-star increase in an independent restaurant's overall Yelp rating increased revenues by five to nine percent. Just as businesses benefit from good reviews, bad reviews can have a devastating impact on a business' bottom line. Competition among small businesses can, in some instances, lead to false or misleading negative reviews about a competitor, or false positive reviews about a business' own products or services. Some companies, under the guise of marketing services, provide positive reviews purportedly written by consumers. State and federal law prohibit many of these practices, and both the authors of false or misleading reviews and the businesses that benefit from them have been held liable.

Perhaps the most straightforward method of affecting a business' online profile involves posting negative information about its products or services. This includes negative reviews posted to websites like Yelp, which allow consumers to write reviews of businesses, or sites like Ripoff Report, which collect consumer complaints. The reviews themselves could contain false information, such as false claims about a restaurant's cleanliness or food quality, or the reviewer could assume a false identity by posing as a disgruntled former employee or other insider. Many sites attempt to screen and remove fraudulent reviews, but no system is perfect.

False positive reviews promote a business' reputation at the expense of its competitors. The business could post its own reviews to Yelp and similar sites, or outsource the job to "marketing" companies. A more advanced form of false-positive reviewing involves creating a blog or website that appears to offer impartial reviews of multiple businesses in a particular market. The site ultimately and unsurprisingly recommends the company that created it, although readers do not know of the company's involvement. Businesses may offer incentives to bloggers and writers with large audiences to promote their product, but without disclosing the writer's financial interest.

Continue reading "Writing or Soliciting False Reviews Can Result in Liability for Small Businesses" »

Ford_1921.jpgAccording to most U.S. corporate laws, a for-profit corporation may be established for nearly any lawful purpose, subject to restrictions in particular industries or professions. One of the primary purposes of a for-profit business has long been held to be making profits for the company's shareholders, and this causes many people to perceive the interests of American businesses as being at odds with the interests of society. New York, New Jersey, and more than 20 other states now allow the creation of "benefit corporations," or "B corporations," which allow business owners to direct for-profit enterprises towards one or more specified public benefits. See N.Y. Bus. Corp. L. § 1701 et seq., N.J. Rev. Stat. § 14A:18-1 et seq. B Labs, the nonprofit organization that developed the model legislation for most B corporation statutes, offers private certification for B corporations that meet certain standards.

The Michigan Supreme Court once held that "[a] business corporation is organized and carried on primarily for the profit of the stockholders." Dodge v. Ford Motor Company, 170 N.W. 668 (Mich. 1919). While this is no longer held by law to be a corporation's sole purpose, that perception of the business world endures for many people. In situations where a corporation's shareholders want to direct resources towards a particular cause, minority shareholders might be able to stop them if it would have a negative impact on their shares.

B corporations must identify one or more "general public benefits" that they intend to support through their activities. "General public benefit" is defined as something that makes a "material positive impact on society and the environment" as determined in comparison to "a third-party standard." N.Y. Bus. Corp. L. § 1702(b), N.J. Rev. Stat. § 14A:18-1. Existing corporations may amend their formation documents to become B corporations, or new entities may incorporate as B corporations. Many well-known businesses, such as the New York-based e-commerce company Etsy, are organized as B corporations.

Continue reading "Benefit Corporations Allow New York and New Jersey Businesses to Combine Profits with the Public Good" »

Sir_William_Blackstone_from_NPG.jpgThe U.S. Supreme Court's recent decision in Burwell v. Hobby Lobby Stores, Inc., et al, No. 13-354, slip op. (Sup. Ct., Jun. 30, 2014), commonly known simply as the Hobby Lobby case, brought up the issue of corporate "personhood" once again. The decision has been highly controversial, and ultimately, it did not do much to resolve, or even clarify, the underlying question of what it means to say that a corporation or other business entity is a "person." Corporations still cannot vote, but they do share a number of rights and privileges with individuals.

The simplest explanation of corporate personhood is that corporations are fictitious entities that can perform some of the same activities as individual people. Sir William Blackstone, writing in the 1760s, called them "artificial persons, who may maintain a perpetual succession, and enjoy a kind of legal immortality." Commentaries on the Laws of England, Book 1, Chapter 18. Contracts and statutes may use defined terms as a shorthand, such as defining "person" to include other legal entities besides humans. The United States Code included corporations in its definition of "person" from the very beginning, in 1 U.S.C. § 1.

To include a corporation within the definition of "person," one must also define a "corporation." Each state has its own set of corporate laws, but they all have similar features. The New Jersey Business Corporation Act defines "corporation" in a rather circular fashion, as "a corporation for profit organized under this act." N.J. Rev. Stat. § 14A:1-2.1(g). A corporation is essentially an organization composed of individuals and contractual relationships. The U.S. Supreme Court set the stage for this concept of the corporation by establishing limits on the government's ability to interfere in private contracts. Fletcher v. Peck, 10 U.S. 87 (1810); Dartmouth College v. Woodward, 17 U.S. 250 (1819).

Continue reading "What Does It Actually Mean to Say a Corporation Is a "Person"?" »

teamwork-382673_640.jpgThe New York City Council approved its fiscal year 2015 budget (PDF file) in late June. The new budget includes $1.2 million for the support and development of worker-owned cooperative businesses, commonly known as "worker cooperatives." The defining feature of a worker cooperative is that the employees own all, or at least a substantial majority, of the company. Advocates for worker cooperatives state that they can benefit local communities by keeping ownership close to home and promoting good employment practices. The allotment of funds by the City Council is reportedly the largest investment ever by a city government in this type of business.

The U.S. Federation of Worker Cooperatives (USFWC), the only nationwide organization for worker cooperatives, defines the business form as an entity that is "owned and controlled by [its] members, the people who work in [it.]" Worker cooperatives have two "central characteristics," according to the USFWC: (1) investment in and ownership by "worker-members," who receive distributions of profits; and (2) a democratic decision-making process involving one member, one vote. Profits are often known as "surplus," which is one of many ways that worker cooperatives seek to distinguish themselves from other models of business ownership.

Article 5-A of New York's Cooperative Corporation Law allows businesses incorporated in the state to elect to be governed as a worker cooperative. Businesses that make this election are subject to parts of both the business corporation law and the cooperative corporation law. New Jersey does not have a specific business form for worker cooperatives, but businesses can choose to form as a corporation under subchapter C or S, as a limited liability company (LLC), or as other business forms.

Continue reading "New York City Sets Aside Over $1 Million for Worker-Owned Cooperative Businesses" »

Viruses.jpgBusinesses must maintain constant vigilance against the threat of hackers, who can compromise not only a business' own sensitive information, but that of its customers. Several high-profile cybersecurity breaches, such as the incidents at Target and eBay that gave hackers access to millions of consumers' personal data, have brought significant attention to this issue. Business owners and entrepreneurs must take care to protect their own sensitive information, such as financial data and trade secrets, for the sake of their business' survival. They must also have measures in place to safeguard customers' personal information. Here are three principles business owners should consider.

1. Avoid Unfamiliar E-Mail Attachments (and Almost Anything Else Unfamiliar on the Internet)

Benjamin Franklin once wrote that "a small leak will sink a great ship." He did not have cybersecurity in mind, but his words are relevant to how businesses should organize and manage their computer networks. Hackers are adept at exploiting weaknesses, and they are finding ever-more obscure ways to access business networks. According to the New York Times, the hackers who breached Target's payment systems, allowing them to obtain millions of credit card numbers, got in through the heating and cooling system. Almost any networked system, including printers and vending machines, can be a point of entry for hackers who are clever enough.

Many hackers, though, still prefer to use relatively old-fashioned methods, such as email attachments and spyware. Unfamiliar email attachments may carry malicious computer code that can spread from one computer, or even a smartphone, to an entire network. Unfamiliar websites can infect computers with spyware. Companies should train employees about cybersecurity and, when practical, restrict access to unnecessary or unfamiliar parts of the internet.

Continue reading " Three Steps New York and New Jersey Businesses Can Take to Protect Themselves from Cybersecurity Breaches" »

US_Corporateation_Income_Tax_Return_2011_form_1120.jpgThe minority shareholder of an S corporation appealed a ruling of the Internal Revenue Service (IRS), which held him liable for tax on his pro rata share of the corporation's income, to the U.S. Tax Court. He argued that he was not the "beneficial owner" of the shares and therefore should not be liable for the tax because he had been shut out of management and received no distributions from the corporation. Kumar v. Commissioner of Internal Revenue, T.C. Memo 2013-184 (2013). The Tax Court rejected his argument, finding that the liability of an S corporation shareholder for federal income tax on the corporation's earnings is not dependent on factors like management authority or actual receipt of distributions or other income. This should serve as a reminder for all S corporations to maintain shareholder agreements that provide for distribution of income in minimum amounts sufficient to cover taxes.

A subchapter S corporation avoids the "double taxation" found in corporations covered by subchapter C of the Internal Revenue Code, in which the corporation first pays tax on its income, and the shareholders then pay tax on dividends they receive. S corporations do not pay federal income tax. 26 U.S.C. § 1363(a). Instead, income and losses "pass through" directly to the shareholders, who pay taxes on income and deduct losses in proportion to their number of shares on their personal tax returns.

The petitioner in Kumar owned 40 percent of Port St. Lucie Ventures, Inc. (PSLV), a Florida medical practice organized as an S corporation. A dispute arose between him and his business partners in 2004. Around the same time, the majority shareholder of PSLV allegedly shut the petitioner out of the management of the company. The petitioner did not receive any wages or distributions from PSLV for 2005 or any subsequent year. He did, however, receive a Schedule K-1 from the corporation for the 2005 tax year, which reported his share of the corporation's taxable income as $215,920 and his share of interest income as $2,344.

Continue reading "S Corporation Shareholder Excluded from Management and Salary Still Faces Tax Liability" »

Theft-p1000763.jpgCybersecurity is a major concern for any business that uses computers and the internet, which refers to nearly every business these days. Businesses routinely come into possession of customers' personally identifiable information (PII), such as names, dates of birth, addresses, or credit card numbers. This information can be used in identity theft, which can be ruinous for victims. In certain industries, such as health care, businesses have to comply with strict requirements regarding the security of PII. Businesses in general should take steps to safeguard PII in their possession, both as a good business practice and in order to avoid possible liability, to customers and potentially to the state, for data breaches.

Recent Cybersecurity Breaches

The most recent case to make national news involved the internet auction site eBay. Hackers reportedly accessed personal data from 145 million user accounts, prompting the company to advise all of its users to change their passwords. The retail chain Target made two separate announcements in late 2013 regarding security breaches that compromised the PII of as many as 110 million customers. In both cases, the companies are accused of missing warning signs prior to the breaches, and of mishandling their responses.

Regulatory Consequences of Cybersecurity Breaches

Lawmakers in Congress and in several states are now seeking information regarding these cybersecurity breaches. Regulators in Connecticut, Florida, and Illinois have reportedly begun formal investigations, while the New York Attorney General has called on eBay and other companies to offer credit monitoring and related services free of charge to customers affected by the breaches.

Continue reading "After Hackers Hit Another Major Internet Company, New York and New Jersey Businesses Need to Be Aware of Cybersecurity Risks" »