Articles Posted in Business Startups

Ken Teegardin [CC BY-SA 2.0 (https://creativecommons.org/licenses/by-sa/2.0/)], via FlickrTax planning is a critical part of running a small business, or starting a new one. Some tax issues determine how a business may proceed, while others can only be addressed once the business has made a decision. Depending on the type of business entity chosen, income tax may be assessed against the business itself, the owners, or both. Businesses must also be aware of tax issues affecting their employees, including officers. The Internal Revenue Code (IRC) provides multiple options for both companies and their employees with regard to taxation of income. When a business compensates an employee, or any other “service provider,” with certain types of equity incentives, Section 83(b) of the IRC, 26 U.S.C. § 83(b), offers certain advantages that businesses—particularly small businesses and start-ups—should consider.

Businesses typically compensate employees with cash payments, either on an hourly or salaried basis, along with health insurance and various “perks.” Start-ups might compensate employees, contractors, and others with company stock or stock options during the early start-up phases. Established companies might grant shares of stock to employees as direct compensation, or as a bonus to provide incentives for performance. Two important questions arise from this sort of compensation: when does the grant of certain types of equity constitute a taxable event, and how is it valued?

Section 83(b) deals specifically with equity incentives that are subject to vesting. For example, a grant of 10,000 shares of stock subject to a four-year vesting schedule would mean that one-fourth of the total shares, or 2,500 shares, become available to the employee at the end of each year. For a person who elects Section 83(b) taxation, the taxable event is the initial grant of the unvested stocks, meaning that the taxable income is based on the fair market value of the stocks at that point in time. Otherwise, the taxable event might occur when the stocks vest. Presumably, the stocks are worth less when the initial grant occurs, and more when they vest. Section 83(b) therefore reduces the overall taxable amount.
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Tax Credits [CC BY 2.0 (https://creativecommons.org/licenses/by/2.0/)], via FlickrPrivate equity, the process by which companies can raise funding from investors, comes with numerous rules and regulations enforced by the Securities and Exchange Commission (SEC). One of the most important rules that small businesses must understand is Regulation D, or “Reg D,” 17 C.F.R. § 230.500 et seq., which sets forth the procedures for offering securities for sale without going through the full process of registering with the SEC under the Securities Act of 1933, 15 U.S.C. § 77a et seq. Reg D prohibits advertising any sale of securities to the general public, and it states that a business may only issue securities to “accredited investors.” In August 2015, the SEC approved a venture capital firm’s plan to use an online platform to match investors with businesses, finding that it does not conflict with Reg D’s ban on public advertising. This could be good news for other businesses hoping to leverage the internet and social media to raise private equity funds.

Under Reg D, securities may only be issued to “accredited investors,” defined to include banks, nonprofit business trusts, directors, or officers of the issuing company, and individuals with a net worth of more than $1 million or annual income in excess of $200,000. 17 C.F.R. § 230.501(a). With some exceptions, an issuer under Reg D cannot advertise the sale of securities or solicit purchasers from the general public. 17 C.F.R. § 230.502(c). Issuers must file Form D with the SEC to indicate compliance with Reg D.

Rule 506 of Reg D, codified at 17 C.F.R. § 230.506, establishes procedures for communicating with potential investors. Most Reg D offerings follow Rule 506(b), which provides that issuers can approach potential investors if they have a pre-existing relationship, but they cannot advertise or solicit investors from the general public. Offerings under Rule 506(b) may also include up to 35 non-accredited, sophisticated investors who are “capable of evaluating the merits and risks of the prospective investment.” Id. at § 230.506(b)(2)(ii).

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By Kevin Hutchinson (Flickr) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsRaising capital is a critical step in the early stages of starting a business, but federal and state laws set several important limits on this process. Ownership in a business, when given in exchange for a monetary contribution, is generally considered a “security” for the purpose of federal financial law. Federal law requires companies that are offering stock for sale to the public to register the offer with the Securities and Exchange Commission (SEC). An exception to this rule, known as “Regulation D” or “Reg D,” allows companies to offer stock to certain investors without the lengthy and expensive SEC registration process. This allows small businesses and startups to approach angel investors, venture capital firms, and others.

Public vs. Private Offerings

The process of raising capital for a small business or startup is commonly known as “private equity,” since funding comes from a limited pool of potential investors. A company that registers with the SEC and meets all of the requirements of the Securities Act of 1933, 15 U.S.C. § 77a et seq., can offer their stock for sale to the general public on exchanges like the New York Stock Exchange. It then becomes known as a “publicly-traded” company.

When a company offers its stock for sale to the public for the first time, it is known as an initial public offering (IPO). Obtaining SEC approval for an IPO is complicated, expensive, and out of reach for startups and many small businesses. These businesses need to raise capital, but they must do so in a way that does not inadvertently become an unauthorized public offering of securities.

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PublicDomainPictures [Public domain, CC0 1.0 (https://creativecommons.org/publicdomain/zero/1.0/deed.en)], via PixabayThe word “license” comes up quite often in discussions of starting, owning, and running a small business, but it can be easy to get confused about what a business owner or entrepreneur must do to remain in compliance with the law. In a very general sense, “license” means the freedom to act. More specifically, it means official permission to engage in a particular activity, such as driving a car. In a business context, a license confers the right to engage in certain types of business or professional activities. A license may be held by an individual, as in the case of a professional or occupational license, or by a business organization. Operating without a required license can have serious consequences, ranging from substantial fines to criminal penalties. New Jersey and New York business owners should be aware of the various types of licenses in order to determine what they need for their own businesses.

Licensing Authorities

Most licenses needed to do business in New Jersey are issued and managed by local or state agencies. State agencies typically handle occupational and professional licenses based on qualifications and criteria that apply statewide. Licenses and permits that pertain to a specific location, such as construction or use permits, are often the responsibility of officials at the city or county level, who might have greater knowledge and understanding of local circumstances and issues. Businesses in certain industries might need licenses from one or more federal agencies.

Professional and Occupational Licenses

Licenses are reportedly required for more than 200 occupations in New Jersey, which is slightly below the national average. About 20 percent of New Jersey’s workforce need a license for their job.

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By Urbanrenewal (Own work) [Public domain], via Wikimedia CommonsSmall business owners and entrepreneurs in New Jersey and New York have a wide range of options for financing their businesses. Venture capital (VC) financing is a rather well-known method of financing a startup business. While it accounts for only a small percentage of total business financing, venture capital has gained prominence in recent years because of its role in the technology sector in California’s Silicon Valley region and other areas of the country. Even if your company is not able to catch the interest of any VC firms, the VC process still offers useful ideas for business financing in general.

What is venture capital?

The term “venture capital” generally refers to private equity invested in startup businesses that demonstrate a high potential for growth and a return on investment. A VC firm manages a VC fund, which provides the capital to invest in promising business ventures.

Stage 1: Seed Financing

All businesses, to some extent, begin as an idea. In some cases, an individual or new business venture may be able to convince an angel investor or VC firm that their idea, which could involve a product or service, has a high potential for growth and is a worthwhile investment. Since an investment at such an early stage carries a high degree of risk, VC firms often require a “feasibility study” showing that the idea is both technologically and economically feasible.

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By Pictofigo (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia CommonsGreat business successes often begin with a single idea, or so we often hear from people who have succeeded in business. It is certainly true that an idea can mark the beginning of a process that, hopefully, results in “success” by whatever metric a business owner wants to measure it. That process has many steps, and it requires the assistance and involvement of many other people, businesses, and organizations. How does a business owner or entrepreneur embark on this path while keeping others from stealing their idea? Intellectual property laws are not much help for something that is still in the “idea” phase, but New Jersey’s trade secrets law may provide some protection. Caution is still a good strategy, however, and no business venture is free of this sort of risk.

The first question to address, of course, is what we mean by a “business idea.” In order to qualify for legal protection, a business idea cannot be too general or vague. New Jersey law states that a “trade secret” must be kept secret, must have “actual or potential” economic value, and must not be something that a competitor could easily figure out on their own. N.J. Rev. Stat. § 56:15-2. New Jersey law allows a person to obtain injunctions and recover damages, including actual damages and unjust enrichment, for misappropriation of trade secrets.

If an idea must be kept secret in order to have protection under the trade secrets law, how does anyone ever work with other people on their business ideas? This is the part that involves some inherent risks. A person may ask other people, prior to meeting to discuss the idea, to sign a non-disclosure agreement (NDA). This can be effective, since it is enforceable both under the trade secrets law and breach of contract law. Some larger companies, however, may refuse to sign NDAs, often on the grounds that they do not want to risk exposure to a legal claim if they reject the idea, but then later develop a similar idea entirely on their own.

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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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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.
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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.
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7013169701_f5a8160d67_z.jpgChoosing the right typeface, commonly known as a “font,” is a critically important, if lesser-known, part of marketing a small business. Business owners and entrepreneurs have far more options available to them than the typefaces that come preinstalled with computers and software applications. The internet has allowed for a significant growth in the world of typeface design, particularly in the New York City area. An ongoing dispute between two designers, who are also former business partners, shows just how big this business has become. In addition to highlighting the world of typeface design, the lawsuit, Frere-Jones v. Hoefler, No. 650139/2014, complaint (N.Y. Sup. Ct., N.Y. Co., Jan. 16, 2014), illustrates some of the potential disputes arising from small business formation.

Businesses should carefully consider the typefaces they use in their marketing and promotional materials, as well as the documents they use in the ordinary course of business. “Typeface” refers to a set of letters, numbers, and symbols with common design features. Well-known examples include Times New Roman, Arial, and Comic Sans.

Unless a business owner creates their own typeface, they must obtain a license to use a typeface in their business. Licenses for most uses of common fonts are included with the purchase of certain software packages, but businesses can also purchase licenses for specific typefaces. Typefaces are generally protected by copyright law, but patent law may also cover the design elements of a typeface. Specific uses of a typeface, such as in a brand logo, may also be subject to trademark protection.
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