Tuesday, April 13, 2010

Should You Incorporate Your Business?

Are you thinking about starting your own business or incorporating your sole propreitorship?

I will be presenting at the Freelancer's Union special two-part seminar "Should I Incorporate" on June 16th and June 23rd. Together with tax expert Howard Samuels, CPA, I will be speaking on the ins and outs of incorporating your freelance business from both the taxation and legal perspective.

This event will cover the following topics:
• Structural differences between S-Corps, C-Corps, LLCs, and Sole Proprietorships • How business entities differ for tax purposes • How business entities are taxed on a state/city level • How business entities differ from a legal and personal liability standpoint • How to ensure that a creditor will not "pierce" the corporation or LLC to hold you personally liable • Accounting/bookkeeping requirements for entities • How to hire an accountant for your business • What to ask when retaining a lawyer for your business

Part-one is coming up soon!
Wednesday, June 16, 2010
Wednesday, June 23, 2010

6:30 PM – 8:30PM
15 MetroTech Center, Brooklyn

Register for this event at:

Monday, November 09, 2009

IBD Article on Entrepreneurialism

Investors Businesss Daily just published a great article recently on Entrepreneurialism. It touched on:

All issues that our clients regularly face, and that we have resources on in the Aricles page of our website.

Check out the the article here.

Monday, November 02, 2009

Can You Pay a Finder to Raise Capital?

This issue has been coming up a lot lateley. We have unfortunately been the bearer of bad news to clients who want to raise capital, and pay an unlicensed finder to do it for them.

I think it's a sign of the times. You have a lot of people tapping into their entrepreneurial skills these days, some out out necessity (been laid off from a job and there aren't so many options out there).

To compound matters, the "stable" stock portfolios of angel type investors who typically fund early stage businesses have taken a dive, so there's less money around for speculative type funding.

Raising capital for an early stage business has never been easy--and it's particularly difficult in times like these.

Neverthless, as a business owner, you should be educated about the rules around raising capital. Make a mistake now (like paying an unlicensed finder a commission for raising capital), on even the smallest of investments, may cause serious problems when the economy turns a corner.

If you are a business owner and raising capital is in your company's future, please read the following article that describes what you can and cannot do:

I was recently a speaker at a conference for entrepreneurs. My topic was about the different ways to raise investment capital. At the end of the program, a young entrepreneur spoke with me about how he was raising capital to produce a film.

A couple of weeks later, I received a letter from an accounting firm who was soliciting investments for the young filmmaker.

On its face, the letter seemed like a excellent idea: the polished letterhead from the accounting firm (and their endorsement) made the young filmmaker seem more credible; this was a great reason for the accounting firm to contact new people; and, if the filmmaker raised the money he needed, the accounting firm would surely have a great new client.

Problem is, both the filmmaker and the accounting firm violated a number of state and federal securities laws by mailing that letter.

Let's face it, raising investment capital for a business isn't easy-and most entrepreneurs would take all the help they can get.

Entrepreneurs are a clever bunch of people who are often required to make things happen with limited resources. Problem is, many of the techniques that you would rely on to fill a pipeline of prospective clients often times violate state and federal securities laws when used to find investors.

For example, if you're selling shares in your company to raise cash, it seems logical that you should get your company's sales staff, or outsourced services, to help you out. Perhaps you can even pay them a high commission on stock sales and they'll be extra motivated.

After all, few things motivate someone to sell like a big commission check.

Better yet, what about hiring one of these guys who call themselves "consultants" or "finders" and claim to help companies raise money? Just about anyone who's done some networking in the venture capital seminar scene has likely run across someone like this. They work on great terms: you don't pay unless they raise cash. And even if the fee they charge for their services may be high, who wouldn't give up a big chunk of cash (or a kidney) for the ease of having someone find investors for you?

On a fairly regular basis, my entrepreneur and investor clients ask me if they can pay their employees, or a finder-consultant a piece of the deal if they help the company raise investment dollars.

In almost every case, the answer is a definitive no. The payment of a finder's fee or commission in connection with the sale of securities to a person who is not a broker registered with FINRA (formerly the NASD) is generally illegal.

Another common misconception among entrepreneurs is that the payment of finder's fees falls within a "gray area" of the law. This is just wrong. It's a myth that seems to be perpetuated by entrepreneurs and finders who have engaged in this activity and haven't been caught.

I can't tell you how many times I have heard from clients "well, I know ABC Company who paid a finder a commission and didn't have any problems." My reply is always the same: "ever drive a car on the West Side Highway at 75 miles per hour and get passed by someone going faster than you and neither of you got a ticket?" Just because you didn't get nabbed by New York's Finest doesn't mean you weren't breaking the speed limit by a fairly wide margin.

In my practice, I've represented clients who have had problems with regulators by unknowingly violating these rules. In nearly every case, the company went out of business or sought protection from creditors under the bankruptcy laws as a result of the mistake.

The business of getting paid commissions for introducing investors to companies is something that our government has taken a keen interest in regulating.

If you are serious about growing your business, you will need to become adept at raising capital when your company requires it. Educating yourself about what your employees and consultants can and cannot do to help you raise capital is critical to your company's health.

Here are the basics about using employees and finder-consultants to help you with your capital raising efforts:

What is a "finder?"
A finder is an individual, company or service that receives compensation in connection with the solicitation of potential investors. The most common examples of legal finders are broker-dealers or investment bankers working for broker-dealers.

What is a broker?
A "broker" is defined under the securities laws as "any person engaged in the business of effecting transactions in securities for the account of others." Helping a company sell shares to raise capital, engaging in other activities like participating in presentations and negotiations, making recommendations to investors concerning securities, receiving transaction-based compensation (i.e. commissions or finder's fees), and continuing or regular involvement in sales of securities are evidence of activities rendering a person a broker.

If your employees or finder-consultants perform these tasks, typically the person is obligated to be registered as a broker with (and thus regulated by) FINRA.

How can an employee help a company raise capital lawfully?
Under certain conditions, a company can permit its employees to help it raise investment capital without triggering the broker registration requirements. For example, the SEC's Rules allow an employee, officer or director of a company to participate as a finder in a private offering provided that the employee:

** is not considered by the SEC to be a securities industry "bad boy";

** does not get paid commissions in connection with the offering;

** is not an associated person of a broker or dealer at the time of his participation; performs a job for the company other than in connection with the company's offering (i.e., marketing or customer relations);

** was not within the last year a registered broker; and

** does not participate in the company's securities offerings more than once every 12 months (with certain restrictions).

Keep in mind, that each state has its own set of regulations that may differ from federal regulations. For example, in some states only officers and directors of a company are permitted to engage in the sale of securities.

Does a finder-consultant always have to be a registered as a broker with FINRA?

There are some circumstances where a finder-consultant is not required to register as a broker. However, if you're acting as a finder (or you're a company hiring a finder), you must take extreme care to ensure that the finder's activities are limited so that he or she is not functioning as an unlicensed broker.

Finders can avoid registering as a broker by limiting to:

** merely introducing prospective investors to a company without engaging in negotiations;

** not recommending the company's securities to prospective investors;

** and basing their compensation on a flat fee that is not contingent on the closing of a securities sale (for example, the finder gets a fee of $50,000 for making the introduction to an investor, regardless of whether the investor purchases shares or not).

What kind of compensation cannot be paid to finder-consultants?

Transaction-based compensation, or success-based compensation, like a finder's fee or commission, is compensation that is contingent on the transaction closing. Often the fee is a percentage of the amount of securities sold. Unregistered persons are not permitted to receive this type of fee from a company.

Permissible forms of compensation may include professional fees based on hourly billing rates or fixed fees; non-transaction based consulting fees; non-transaction based due diligence fees; or expense reimbursements.

You'll notice that common theme among permissible forms of compensation is that the fee is paid regardless of whether funds are raised. My experience is that most companies are unwilling, or at least reluctant to pay a finder a fee for services that may or may not turn into an investment.

Many companies have attempted to disguise a commission as a permissible fee. For example, entrepreneurs often hire "finders" as "consultants" and call the finder's fee a "consulting fee." However, if the compensation the consultant receives is ultimately tied to their activity of selling shares in the company, and they would not have received the fee absent the company raising capital, then the payment of the fee to an unregistered person is not permissible.

Regulators will easily sniff out a thinly disguised form of success-based compensation, and the fee will not be considered valid.

What can happen if a regulatory agency determines that a finder-consultant or employee is acting as an unregistered broker?

If a regulatory agency, like the securities division of a state or the SEC, determines that a finder-consultant or employee has acted as an unregistered broker, the SEC or state could impose fines on the finder, which may include disgorging to the issuer commissions paid. Further, regulators could bar the finder in some cases from ever registering as a broker in with their agency in the future.

What can happen to a company if the SEC determines it unlawfully used an unregistered finder?

If a regulator determines that a company used an unregistered finder to locate investors, they could force the company to offer investors the right to rescind their purchase and obtain a return of their entire investment. This may be a problem if you've spent the investment money and there's nothing in the company's coffers to purchase shares back from investors.

Also, under certain circumstances, the regulators could impose fines on the company for participating in a transaction that violated the securities laws or prohibit the company from engaging in securities transactions in the regulators' jurisdiction in the future.

Finally, any irregularity in early financing activities can make subsequent rounds of financing more difficult to complete. When disclosed to subsequent investors, errors made in early-stage funding efforts may cut the company off from funding options in the future.

For more information about raising capital for your company, visit http://www.alternativefundingstrategies.com/.

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Monday, October 05, 2009

Becoming A Contender: A Marketing Plan to Put You in the Running with the Nation’s Largest Law Firms

Steve Furnari was quoted this week in the Wisconsin Law Journal, offering up some insightful marketing ideas for small law firms. Check out the article here for his advice on staying in contact with prospective clients and how a small, well-thought out gift can make a big difference.


Wednesday, September 30, 2009

Quicktip: Arbitrate Disputes and Save Time and Money

BIG CONFESSION: I’m involved in litigation with former business partners.

As much preaching as I do about business partners having a good quality written agreement, we didn’t have one. You know the story about the cobbler who lets his kids run around with holes in their shoes. My bad.

It’s a long, sad story about how we got here. Mostly it’s the result of strong personalities and differing opinions about how a piece of commercial real estate should be managed.

Hindsight being 20/20, as we now progress into the second year of litigation, a side battle with my first set of lawyers, and generally a lot of aggravation, the dispute has greatly changed my opinion about the use of arbitration clauses in commercial contacts.

In any contract, the parties can agree to arbitrate any dispute that may come up.

Arbitration is a form of alternative dispute resolution (ADR), that allows parties to resolve disputes outside the courts. One or more “arbitrators” are selected who hear each party’s side of the story. The arbitrator makes a decision about the outcome of a case, and their decision is legally binding on the parties.

Once you enter into an agreement to arbitrate, absent a new written agreement from both parties to change the terms of the arbitration clause, courts will not let either party "opt out" of arbitration. By the way, our over-burdened court system LOVES arbitration clauses.

Arbitration can be a lot like achieving a settlement in litigation. Unlike the final verdict in litigation, where there is usually a "winner" and a "loser", arbitration panels take into consideration each party's interests when rendering a decision. Rarely are there ever pure winners or losers.

The downside, of course, is when you are 100% "in the right" and would likely win a claim in litigation (eventually), you could end up with a decision in arbitration for an award that is something less than 100% of what you feel you are entitled to. Also, if you don't agree with the award, you are stuck with it--appeals are not an option in Arbitration.

In my opinion, this is a small price to pay for getting yourself into the dispute in the first place. Most disputes are avoidable by drafting good agreements at the outset of a relationship and picking partners, customers and vendors selectively.

In the end, parties who resolve disputes in arbitration wind up with a final outcome that is fairer and rendered more expediently than in litigation. The result is less time wasted and a fraction of the expense spent as compared fighting battles in court.

When you factor in the benefit of reduced time and legal expense, prudent business people--especially the owners of small businesses whose customers may have deeper pockets that their own--should seriously consider adding mandatory arbitration clauses to all their contracts.

If arbitrating potential disputes is right for your business, I have set up a way for you to get a copy of an Arbitration Clause that you can easily add to your agreements. Go to http://www.ArbitrateClause.com.

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Monday, September 21, 2009

To LLC or not to LLC?

The Freelancer's Union picked up on our quote in Crain's New York last week and mentioned us in their Blog .

While you’re there be sure to sign up for the “Legal Basics For Every Freelancer” Seminar on September 30th.


Wednesday, September 16, 2009

Save Hundreds Now, Lose Thousands Later

Steve Furnari and our friend and colleague Howard Samuels, CPA , were quoted this week in Crains New York in an article about the costly mistakes entreprenuers make when they use a legal form service, like legal zoom. Check out the article to discover the one mistake (according to Steve) that business owners commonly make that can cost them $8,500+ a year. See:


Friday, August 28, 2009

Can You Grow Your Own Money Tree?

To let our clients and friends know we've been thinking about them and rooting for their success during these uncertain economic times, we sent a card an a gift of a paper dollar sign embedded with seeds that, when planted, promised to sprout colorful wildflowers - a symbol of planting seeds for future success.

My friend and colleague Rosalind Resnick wrote an article about it in her column on Entrepreneur.com.

Tuesday, July 28, 2009

Quicktip: What to Do with Your “Corporate Book”?

Back when you formed your corporation or LLC, you probably received a black, three-ring binder with official looking papers and stock certificates. The binder often has a fancy cover and may even have your company’s name embossed on its edge. This binder is your Corporate Book.

It’s been our experience that many entrepreneurs, especially those who bootstrap and organize their business using a low cost legal service, simply put the book as is on a shelf where it collects dust and (frequently) gets misplaced.

Regardless of whether your corporation has one shareholder or hundreds, it is your responsibility to keep a meticulous record of the activities of your corporation. This is part of the process maintaining the “corporate formalities” required to demonstrate that your business is the real deal and not just a sham. These records become very important if your business ever ends up in court and your adversaries try to hold you personally responsible for business activities and debts by questioning the legitimacy of your corporate entity.

We recommend that our clients—even one man armies--have their board of directors approve in writing all material action that is outside the ordinary course of their businesses (like leasing new office space or issuing equity ownership). The written record of the board’s decision is then filed in the company’s Corporate Book.

If your corporate existence is ever called into question, a well maintained Corporate Book will serve as significant evidence that your business is legit.

Are you making legal mistakes that can shut your business down? Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.


Thursday, April 30, 2009

Legal Misfortune: Accepting the Deal That Is “Too Good to be True” Just May Cost You

We represented a client who agreed to sell his electrical contracting business to a competitor. The price he was to receive for the business actually exceeded the client’s expectations, so he was both anxious to close the transaction and hesitant to raise any issues during the sales process that might cause the buyer to have second thoughts.

Because of the nature and location of the client’s business, the client maintained a very specialized license to perform certain types of sophisticated electrical work. As the negotiations on the transaction progressed, the buyer discovered that it would take several months (if not longer) to apply for and obtain these same licenses and made initial overtures into trying to get out of the deal. In order to salvage the deal, the client wanted to allow the buyer to use his name and license after the closing until such time as the buyer was able to obtain its license. We advised the client that this entailed substantial risks, as he would still be personally liable for the work done on the jobs after the closing by the buyer as if the client were still the owner of the business. However, the still felt that the deal was too good to walk away from and was willing to take the risk.

We were able to convince the client, and subsequently the buyer, that the best way to handle the situation was to have the seller enter into an employment agreement with the buyer for a term to last until the buyer obtained its license or one year, whichever occurred first. This would allow the buyer the flexibility to use the client’s license. However, if the client was terminated for any reason (other than for good cause), the client would have the right to immediately terminate the licenses. We also insisted that the buyer indemnify and hold our client harmless from any and all loss or liability incurred by our client as a result of work done by the buyer under the Seller’s license. In addition, the buyer had to agree to (a) allow the client to have the right to control any corrective proceedings that may be required as a result of any violations that were filed against the license due to the buyer’s conduct, and (b) cover all costs and fees associated with the licenses (renewals, etc.), as well as the costs of maintaining an umbrella liability insurance policy for the benefit of the client.

By having a competent business attorney advise him, our client was able to both salvage his deal with the buyer and minimize his risk going forward after agreeing to an extraordinary concession in the buyer’s favor.

Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.