Category: Business Organizations

Determining How to Structure Your Family Farm Business, P.2

McBrayer NEW logo 1-10-13

In our last post, we began looking at the issue of business planning within the context of a family farm business. We’ve already spoken about the importance of appropriately structuring a family farm business because of the potential tax consequences. Between the various forms of business structure, tax applications vary considerably. Although this is a big issue to plan for, here we’d like to talk briefly about the way structuring a farm business can impact ownership and management of a family farm.

There are a variety of business structures one can utilize for a family farm. Four general forms are: sole proprietorship; general partnership; corporation; and limited liability company. Which one is selected depends on the needs and goals of the business and those involved in it.

Some of the things that need to be taken into consideration when structuring a business, other than tax issues, are:

  • How many family members are involved in the business?

  • Is there a desire to share ownership with children or siblings?

  • Is shared management appropriate?

  • Should ownership of the business be separate from its management?

  • Is there a desire to limit liability among owners?

These, of course, are only preliminary questions that should be considered when selecting a business structure. Sole proprietorships and partnerships are relatively easy to set up compare to corporations and limited liability companies, though the latter two forms carry their own benefits while the former carry certain risks.

Each family has unique dynamics, of course, and what is appropriate for one family may not be appropriate for another. In addition, the needs of a family business can change over time, and this should also be considered. Ultimately, each family farm business needs to come up with a business arrangement that is appropriate for its needs. Working with experienced professionals in forming such a plan is important, including an experienced business attorney.

Source: Agri-View, “Is farm business planning part of your New Year’s Resolutions,” Troy R. Schneider, Dec. 31, 2014.

To read part 1, click here.

Determining How to Structure Your Family Farm Business, P.1

McBrayer NEW logo 1-10-13

Regardless of the type of business you run, you need to put a well-thought-out business plan in place. Business planning covers all aspects of a business, from its legal structure, to marketing, to succession planning. Without putting a viable plan in place covering each important aspect of the business, companies are taking a risk. This applies as much to a family farm businesses as to multinational corporations.

Looking at the issue of the legal structure of a family farm, there are a number of options available. Although family farms may be operated as sole proprietorships, they may also be operated as corporations, limited partnerships, limited liability companies, or a unique combination of these legal categories. Getting the business form right is important because the form or structure the business takes can have an impact on important aspects of the business.

One of these is the valuation of the business for purposes of transfer tax. This refers to taxation which applies to the passing of title to property from one person to another, which includes estate tax and gift tax. Another way legal structure can impact a family farm, or any business for that matter, is by its effect on income taxation during the business’ operation and possibly even upon liquidation.

Selecting a business form which has a favorable effect from a tax perspective, without taking other factors into consideration, is not always going to be the best strategy, but it should at least be kept in mind when determining how to structure the business at its inception.

In our next post, we’ll look at another critical reason to carefully consider how to structure a family farm business.

Source: Agri-View, “Is farm business planning part of your New Year’s Resolutions,” Troy R. Schneider, Dec. 31, 2014.

ARTICLE BY

Business and Corporate Law Practice Group
OF
McBrayer, McGinnis, Leslie and Kirkland, PLLC

North Carolina General Assembly Fails to Jump Start Our Businesses with Crowdfunding Legislation

Poyner Spruill Law firm

Crowdfunding is a relatively new capital raising tool, which was generally used in the past as a financing method for such ventures as films and music recordings.  To date, crowdfunding has not been a popular method for offering and selling securities because offering a share of financial returns or profits from business activities would subject the transaction to federal and state securities laws, requiring certain registrations with the Securities and Exchange Commission (SEC) and state securities regulators. U.S. Securities and Exchange Commission, SEC Issues Proposal on Crowdfunding (October 23, 2013).

In 2012, Congress passed the JOBS Act (Jumpstart Our Business Startups Act).  The JOBS Act, among other things, added a new section, 4(a)(6), to the Securities Act of 1933, creating a new exemption for certain crowdfunding offerings from SEC and state law registration requirements.  However, before the law can become effective the SEC must promulgate and implement rules regulating the exemption.  For further information on the JOBS Act, please see The JOBS Act—An Overview and Some Recent Developments, written by Michael E. Slipsky and David R. Krosner.

As of this summer, the SEC has proposed rules for crowdfunding, but those rules are not final. A dozen states are making an effort to join Georgia, Kansas, Michigan, Alabama, Maine, Washington, Wisconsin, and Indiana by developing their own regulations allowing crowdfunding within the states. States are growing frustrated and tired of waiting for the SEC to adopt federal regulations.  See Posting of Bill Meagher to TheDeal.com, States make own crowdfunding rules, rather than wait for SEC (May 5, 2014, 15:03 EST).

In response to the federal delay, Representative Tom Murry of Wake County sponsored state legislation attempting to allow and regulate crowdfunding in North Carolina, filing House Bill 680, the JOBS Act, on April 9, 2013.  House Bill 680 did not pass the Senate and was not eligible for consideration in the 2014 short session.  For that reason, in June the House added the crowdfunding provisions, titled, “Jump-Start Our Business Start-Ups Act,” to the 32 page fifth edition of Senate Bill 734, Regulatory Reform Act of 2014. 

When compromise discussions between the House and Senate on Senate Bill 734 stalled, the Senate added to House Bill 1224 various provisions regarding modifications to the local government sales and use tax rate as well as other provisions including the crowdfunding provisions.  House Bill 1224 had been filed at the beginning of the short session as a bill modifying the Job Maintenance and Capital Development Fund.  The House rejected the Senate’s modifications of House Bill 1224.  As a result, the House and Senate appointed a conference committee, and the committee made its report on July 31, 2014.  The Proposed Conference Committee Substitute was passed by the Senate, however it failed in the House. 

The final version of House Bill 1224, the Proposed Conference Committee Substitute, would have allowed North Carolina residents to invest up to only $2,000 per purchaser – unless the purchaser is an accredited investor as defined by rule 501 of SEC regulation D, 17 C.F.R. § 230.501 – in new in-state ventures through the crowdfunding mechanism.  It would have allowed most companies to raise up to $1 million in capital through unregistered securities without a financial audit and up to $2 million in capital if the issuer has undergone and made available to each prospective investor and the Secretary of State the documentation resulting from a financial audit.  Essentially companies would have been able to sell securities directly to the North Carolina public without having to incur the expense of conducting a registered securities offering.  The NC Secretary of State would have been tasked with the regulation of these types of transactions and would have collected quarterly reports.  See Posting of Mark Binker to WRAL TechWire, Crowdfunding bill clears N.C. Senate Committee,  (July 16, 2014 14:08 EST).

The General Assembly has adjourned sine die.  Although crowdfunding provision had an opportunity to become law during the 2014 short session in either Senate Bill 734 or the Proposed Conference Committee Substitute of House Bill 1224, the General Assembly did not pass the crowdfunding provision.  House Bill 1224 failed in the House and the compromise finally reached for Senate Bill 734 in the ratified bill excluded the crowdfunding provision.  There is a possibility the crowdfunding provision could again be considered before the 2015 session, scheduled for late January, if three-fifths of all members of the Senate and three-fifths of all members of the House vote to do so, as provided in Section 11(2) of Article II of the North Carolina Constitution.  However, the more likely scenario for the General Assembly to return would be for a “special session” by call of the Governor.  As provided in Section 5(7) of Article 3 of North Carolina Constitution, “[t]he Governor may, on extraordinary occasions, by and with the advice of the Council of State, convene the General Assembly in extra session by his proclamation, stating therein the purpose or purposes for which they are thus convened.”

ARTICLE BY

Jillian DeCamp
 
OF 
Poyner Spruill LLP

IRS Introduces New Form 1023-EZ to Streamline Applications for 501(c)(3) Tax-Exempt Status

Drinker Biddle Law Firm

On July 1, 2014, the Internal Revenue Service (IRS) launched a new Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, that is intended to enable small charities to more easily apply for recognition of tax-exempt status under Internal Revenue Code Section 501(c)(3). The IRS has described the new form as a “common sense approach” to easing the filing burdens for small organizations and to shorten the time delays associated with IRS processing. Although not expressly stated, the new form is undoubtedly part of the IRS’s current effort to alleviate the huge backlog of pending applications awaiting IRS review.

What’s the general idea behind the new form?

The concept associated with the Form 1023-EZ is that the existing 26-page Form 1023 is simply unnecessary in the case of most small organizations. As designed, the new form becomes effectively a “registration” for exemption, rather than a comprehensive description of an organization’s activities, operations, governance, finances, etc. The IRS has clarified that the new forms will not undergo substantive review by IRS personnel. Rather, the IRS will defer that review until a later date when organizations are up and running; at that point, the IRS will evaluate whether organizations are functioning as described in their original filings.

When the new form was announced in draft form earlier this year, many industry experts voiced concern about foregoing the important educational and compliance opportunities associated with completing the full Form 1023 in its standard form. Others expressed doubt as to whether the IRS would be able to effectively and consistently perform the type of follow-up reviews asserted as the means for ensuring compliance with exemption standards. Nonetheless, the IRS has forged ahead, presumably under pressure to address its internal processing challenges and perhaps to present some much-needed “taxpayer-friendly” news from the Exempt Organizations Division.

Concurrent with issuing the new form, the IRS released Revenue Procedure 2014-40, which sets forth the procedures for using the new form and IRS’s processing of the same.

Who is eligible to use the new form?

The Revenue Procedure describes the scope of organizations that are eligible to use the form, consisting generally of organizations whose annual gross receipts have not exceeded $50,000 during any of the past three years and whose projected gross receipts for the current year and next two years are below that threshold. In addition, eligible organizations may not have total assets exceeding $250,000. Notably, when the draft Form 1023-EZ was initially announced earlier this year, the thresholds were appreciably higher – annual gross receipts of $200,000 or less and assets of $500,000 or less. In setting the final eligibility requirements, the IRS reduced those thresholds, presumably in response to exempt community (and possibly state charity official) voices expressing concern about this new approach being poorly suited to ferreting out actual or intended noncompliance, as discussed above.

The Revenue Procedure goes on to list other criteria that render an applicant ineligible to use the new form, including foreign organizations, successors to for-profit entities, churches, schools, colleges, universities, hospitals, supporting organizations described in IRC Section 509(a)(3), HMOs, ACOs, and entities maintaining donor-advised funds.

Notwithstanding the foregoing restrictions, the IRS has estimated that as many as 70 percent of organizations applying for 501(c)(3) status will be eligible to use the new form.

What does the new form look like?

Anyone who has tackled the process of preparing a Form 1023 in the past will recall the burden associated with wading through the standard 26-page application, which by necessity has traditionally covered a vast range of organizations (by size, scope and character) falling under the umbrella of 501(c)(3) status. By comparison, the new Form 1023-EZ is only three pages long and calls for:

  • Identifying information;
  • Form of entity under applicable state law, including check-box attestations regarding inclusion of appropriate language in pertinent organizational documents;
  • General information regarding the organization’s activities, using NTEE classification codes, check-box attestations regarding compliance with basic exemption requirements, and yes-or-no answers to high-level questions presumably aimed at fleshing out potentially at-risk conduct;
  • A check-box approach for attesting to public charity status; and
  • A check-box approach for organizations seeking reinstatement after losing their exemption due to failure to file annual information returns for three consecutive years.

A copy of the new form is available here. The accompanying instructions can be found here.

How is the new Form 1023-EZ to be filed?

Form 1023-EZ must be filed electronically, using the www.pay.gov website. A $400 user fee applies. Once filed, the IRS process will consist of determining whether an application is complete, meaning that the applicant has provided a response to each line item in the form. If a form is incomplete, the IRS may request additional information accordingly. Once complete, the IRS will accept the form for processing.

What if we have a pending Form 1023 already in the queue at the IRS?

If an organization has already submitted Form 1023 to the IRS, it may nevertheless submit Form 1023-EZ if its Form 1023 has not yet been assigned for review. In that case, the IRS will treat the Form 1023 as withdrawn and will instead process the organization’s Form 1023-EZ.

Corey Kestenberg contributed to this article.

Article By:

Linda S. Moroney
T.J. Sullivan
Taylor A. Romigh
Of:
Drinker Biddle & Reath LLP

New York Nonprofit Revitalization Act Rollout Challenges

Proskauer

As the July 1, 2014 compliance date of the New York Nonprofit Revitalization Act of 2013 (the “Revitalization Act”) quickly approaches, many charities operating in New York are confronting some difficult rollout challenges. While parts of the Revitalization Act are clear and welcomed (such as new rules that broaden the use of electronic communications and eliminate the need for supermajority board approvals of routine property transactions), other new requirements are puzzling to many of these charities’ officers and directors. Indeed, as we counsel our clients, we are finding that certain new Revitalization Act rules that concern board operations are causing some charities, in particular family foundations and corporate foundations, to wonder whether operating through corporations formed in New York is desirable.

The charities that seem to be facing the hardest issues are foundations with small boards, and with directors that either directly and appropriately exert substantial influence over foundation operations (such as in a family foundation), or are employed by the businesses that have founded and fund these charities to do their good works.

We are finding that many, but not all, of the requirements causing concern are tied to vague drafting in the Revitalization Act. The good news is that we have also identified what we believe are reasonable interpretations of the law that align with workable solutions for many clients.

This client alert notes just a few of the more pressing Revitalization Act issues, as well as relevant potential solutions, as they appear to us today. We will be highlighting other aspects of the Revitalization Act rollout over the coming year. We stress that the New York State Attorney General’s Charities Bureau may issue clarifying Revitalization Act guidance, and it is also possible that follow-up legislation may address some of these issues. Importantly, it is possible that this guidance or future legislation will not support our interpretations, although we hope that it does. Stay tuned.

Three Independent Directors

The Revitalization Act will require many charities to identify at least three individuals that satisfy detailed requirements of “independence” to serve as directors and oversee specified audit and financial reporting activities. (Three are needed because that is the fewest number of directors required by New York law to perform delegated board-level functions.) For many family foundations, corporate foundations, and labor/management charities – with small boards that are typically composed of individuals tied in some way to the charity or related entities – this requirement has created concern. This concern may be heightened when membership on the board has been finely balanced to achieve acceptable approaches to shared governance.

Most important for these charities to keep in mind is that the requirement is limited to charities that raise or “solicit” funding from the general public. However, some of these charities, in their annual charities filing with the New York Attorney General, may have been filing as soliciting charities even though they do not actually solicit funding. We suggest that such charities consider amending their filing status and we urge that any change in filing status in response to the Revitalization Act be made in consultation with corporate and tax counsel, closely assessing individualized factors and risks. For example, part of the analysis may be to examine whether the charity has been filing its annual Form 990 with the Internal Revenue Service (“IRS”) as a “public charity” (based on “public support” concepts of the IRS that differ from the New York concepts of “solicitation”). While we do not believe that the New York charitable solicitation concepts match the IRS concepts, tailored assessments should be made with both New York charitable solicitation laws and U.S. federal tax laws in mind.

For those charities that do solicit within the meaning of New York law, and whose small boards are populated by individuals employed by related entities, it will be worthwhile to take a hard look, again guided by counsel, at the kind of control exerted by a charity’s affiliated corporate entities over the charity. Under the Revitalization Act, whether that employment disqualifies a director as “independent” will depend on whether the particular corporate or other entity that employs the director “controls” or is “under common control with” the charity. Notably, the Revitalization Act does not define “control.”

Conflicts Policy Quagmire

Although the Revitalization Act is clear that the requirement for independent-director oversight of auditing and financial matters is limited to “soliciting” charities, the law is less clear about whether independent director oversight also applies to the law’s requirements on conflicts policies.

Essentially, the Revitalization Act codifies the widespread practice already adopted by many charities – many motivated by the IRS Form 990 conflicts policy checkbox – to have a written conflicts policy. It also requires oversight of adoption, implementation, and compliance with the conflicts policy by the Board or the audit committee. Certain provisions of the Revitalization Act can be read as requiring these oversight functions to be handled by independent directors only. While our interpretation is not free from doubt, we believe that to the extent there is an obligation to have independent directors oversee conflicts policy administration, a close and reasonable reading of the Revitalization Act supports the interpretation that such requirement is also confined to soliciting charities. If not, many private foundations will be forced to make drastic board changes for conflicts policy oversight, while permitted to use directors that do not satisfy independence criteria for what is generally viewed as the critical audit oversight function – a seemingly absurd result.

Charities with conflicts policies based on the IRS form are probably already aware that they will need to amend those policies to satisfy Revitalization Act requirements, since the IRS form does not track all of the components of a conflicts policy required by the Revitalization Act. As these policies are drafted, special attention should be paid to the annual conflicts questionnaire required by the Revitalization Act. Many charities already distribute an IRS Form 990 annual questionnaire to directors, officers and key employees. Revitalization Act questionnaires will now be covering some, but not all, of the same territory. To avoid bombarding individuals with duplicative annual forms, consideration should be given as to whether to use a single questionnaire that reasonably covers both IRS and Revitalization Act requirements.

Approval of Director, Officer, and Key Employee Compensation

The Revitalization Act imposes significant new requirements concerning related-party transactions. Among other things, the Revitalization Act imposes a new requirement to “contemporaneously document in writing the basis for the board or authorized committee’s approval” of a related party transaction, “including its consideration of any alternative transactions.” The Revitalization Act also provides the Attorney General with enhanced enforcement authority to void, rescind, seek restitution, and remove directors in connection with a transaction that is not properly approved or that was not reasonable or in the best interests of the corporation at the time the transaction was approved.

Because the Revitalization Act broadly defines a “related party transaction” as “any transaction, agreement, or any other arrangement in which a related party [including a director, officer or key employee] of the corporation has a financial interest and in which the corporation or any affiliate of the corporation is a participant,” there is some question as to whether compensation arrangements with directors, officers, and key employees are related party transactions. While the matter is not free from doubt, we believe that there is a reasonable basis for considering these compensation arrangements to be regulated in a manner distinct from related party transactions under the Revitalization Act. Clarification on this issue, however, would be helpful.

In addition, the Revitalization Act appears to define all directors as “related parties,” and prohibit all related parties from participating in deliberations and voting pertaining to related party transactions, without specifically distinguishing between directors who have an interest in the particular transaction and those who do not. Guidance clarifying that the Revitalization Act will not be construed or enforced in such an impracticable manner would be helpful.

Also, certain ambiguous language in the Revitalization Act can be read as expressly prohibiting any director from being present at or participating in any board deliberations or vote concerning director compensation, while apparently requiring director approval of the compensation. While we believe that such a reading of the Revitalization Act would be unreasonable and contrary to principles of statutory construction, clarifying guidance would help avoid uncertainty on an important governance issue. In the interim, boards may wish to approve director compensation arrangements prior to July 1.

Extraterritorial Application of Revitalization Act

Finally, some commentators have raised concerns that certain provisions of the Revitalization Act relating to board composition and operation may be applicable to charitable organizations formed outside of New York, such as Delaware non-stock corporations. We have not found this to be a reasonable interpretation of the Revitalization Act. Again, however, clarifying guidance would be welcome.

Article By:

Jacob I. Friedman
Edward S. Kornreich
Amanda H Nussbaum
Richard J Zall
Herschel Goldfield
Ellen H Moskowitz
Of:
Proskauer Rose LLP

Jumpstart Your Startup: Entity Selection and Formation

vonBriesen

When starting a business, you must decide what form of business entity to establish. The “choice of entity” decision is one of the most important decisions facing new business owners. There are several forms of business to choose from, each of which generates different legal and tax consequences. That said, there is no single form of entity that is appropriate for every type of business owner.

The most common forms of business are the sole proprietorship, partnership, C corporation, S corporation, and limited liability company.

Sole Proprietorship

A sole proprietorship is the simplest business structure. It is an unincorporated entity owned and run by one individual with no distinction between the business and the individual owner. The owner is entitled to all profits and is personally responsible for all the business’ debts, losses, and liabilities.

A sole proprietorship needs to obtain the necessary licenses and permits for the industry in which the sole proprietorship does business. If the business operates under a name different than the individual, registering that name (e.g., DBA name, short for “doing business as”) with a state agency may be required.

Because the business and the owner are one and the same, the business itself is not taxed separately. The owner is responsible for and reports income, losses and expenses for income tax purposes.

Partnership

A partnership is the relationship between two or more persons who join to carry on a trade or business. Each partner may contribute money, property, labor, and/or skill, and, in return, each partner shares in the profits and losses of the business.

Because partnerships involve more than one person, it is important to develop a partnership agreement. The partnership agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (i.e., bring in new partners or buy out current partners) and under what circumstances the partnership would be dissolved. In addition, owners of a partnership should determine which type of partnership to establish. The three most common types of partnership arrangements are:

  • General Partnership: Profits, liability, and management duties are presumed to be divided equally among all partners. If an unequal ownership distribution is preferred, the partnership agreement must document that preference. A general partnership ordinarily owns its assets and is responsible for its debts. It is important to note that in a general partnership, the individual partners are personally liable for all partnership debt, obligations and liabilities. No formal state registration and/or filing is required to form a general partnership.
  • Limited Partnership: A limited partnership requires at least one general partner and one limited partner. Limited partners are generally not liable for the debts and obligations of the limited partnership (though the general partners will be liable), but they must have restricted participation in management decisions. Limited partnerships ordinarily must be filed with a state.
  • Limited Liability Partnership: A limited liability partnership generally operates and is governed by the same rules as a general partnership, except: (1) its partners have limited liability for partnership debt, (2) it can choose to be taxed as a corporation or a partnership, and (3) it is formed by filing the appropriate documentation with a state.

Generally, a partnership must file an annual information return to report income, deductions, gains, and losses from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership income or loss on his or her individual tax return.

C Corporation

A C corporation is an independent legal entity incorporated in a single state, although it may do business in other states. Because a corporation is an independent legal entity, its existence continues until formally dissolved under the laws of the state in which it is incorporated. Ownership of a corporation is in the form of shares of stock, there is no limit to the number of stockholders, and there is no limit on the number of classes of stock a C corporation can issue. Additionally, the corporation itself, not the stockholders, is generally liable for the debts and obligations of the business.

For corporate governance, a corporation generally has a board of directors and bylaws. The initial directors may be named in the articles of incorporation or elected shortly after filing the articles of incorporation. Thereafter, directors are elected as set out in the articles of incorporation or bylaws.

For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. The profit of a C corporation is taxed to the corporation when earned, and then is taxed to the stockholders if and when distributed as dividends. This creates a double tax. The corporation does not receive a tax deduction when it distributes dividends to stockholders and stockholders cannot deduct any loss of the corporation.

S Corporation

An S corporation is similar to a C corporation, except that an S corporation passes income, losses, deductions, and credits through to its stockholders for federal tax purposes. Stockholders of an S corporation report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. Thus, an S corporation generally avoids double taxation on corporate income.

In order to become an S corporation, the corporation must make appropriate filings with the IRS. To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation;
  • Have only allowable stockholders, which are individuals, certain trusts and estates, and may not include partnerships, corporations (unless owned as a qualified subchapter S subsidiary), or non-resident aliens;
  • Have no more than 100 stockholders;
  • Have only one class of stock; and
  • Not be an ineligible corporation (e.g., certain financial institutions and insurance companies).

S corporations file specific tax returns and tax forms with the IRS.

Limited Liability Company

A limited liability company (“LLC”) is a hybrid entity that is treated like a corporation for limited liability purposes, but for tax purposes can choose to be taxed either as a corporation, partnership, or, in some cases, a disregarded entity (i.e., single-member LLC). A limited liability company is created under state law by filing articles of organization with a state. The owners of an LLC are referred to as “members” and generally may include individuals, corporations, other LLCs and other types of entities. There typically is no maximum number of members.

LLCs with more than one owner should have an operating agreement. An operating agreement usually includes provisions that address ownership interests, allocation of profits and losses, and members’ rights and responsibilities, among others.

Since the federal government does not consider an LLC a separate legal entity, an LLC with at least two members is, by default, classified as a partnership for federal tax purposes unless it files with the IRS and affirmatively elects to be treated as a corporation for tax purposes. An LLC with only one member is referred to as a single-member LLC and is treated as one and the same as its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it affirmatively elects to be treated as a corporation. An LLC may also elect to be taxed as an S corporation.

The business structure you choose will have significant legal and tax implications. In order to identify the best structure for you, it is important to understand your business goals and how the characteristics of each type of business entity can help you achieve those goals.

Article By:

Patrick J. Cannon
Of:
von Briesen & Roper, S.C.

You can still register for Inside Counsel's 14th Annual Super Conference in Chicago!

The National Law Review is pleased to bring you information about the upcoming 14th Annual Super Conference hosted by Inside Counsel. It’s not to late to register! 

Now offering an exclusive National Law Review discount until May 12. Register HERE.
IC Superconference 2014

When

Monday, May 12 – Wednesday, May 14, 2014

Where

Chicago, IL

The annual InsideCounsel SuperConference, for the past 13 years, has offered the highest value for educational investment within a constructive learning and networking environment. Legal professionals will gain the opportunity to elevate the quality of their performance and learn ways to become a strategic partner within his/her organization. In two-and-half days attendees earn CLE credits, network with hundreds of peers and legal service providers and hear strategies to tackle corporate legal issues that are top of mind throughout this comprehensive program. SuperConference is presented by InsideCounsel magazine, published by Summit Professional Networks.

Now celebrating its 14th year, InsideCounsel’s SuperConference is an exclusive corporate legal conference attracting more than 500 senior level in-house counsels from Fortune-1000 and multi-national companies. The three-day event offers opportunities to showcase your firm’s industry knowledge and thought leadership while interacting with GC’s and other senior corporate counsel during exclusive networking and educational opportunities. The conference agenda offers the perfect blend of experts and national figure heads from some of the nation’s largest corporations, top law firms, government and regulatory leaders, and industry trailblazers. The conference agenda and educational program receives consistent high marks.

EB-5 Visas: A Source of Funding for US Businesses But Not Without Risk

Poyner Spruill

China’s wealthy investors are known for seeking secure havens for their money overseas.  In addition to being considered a secure environment for their money, the US offers the EB-5 program providing the investor and his or her immediate family with permanent US residence, known as getting “green cards” in return for making an investment.

Basically, in return for an investment of either $500,000 or $1,000,000, which can be shown to the satisfaction of the US Citizenship and Immigration Services to create 10 US jobs per investment over a two year period, the investor and his family get green cards.  Since it started in 1990, the EB-5 visa program has brought approximately $6.7 billion to the US and has created 95,000 jobs.  In fact, the EB-5 visa program was not very popular until the 2008 financial crisis when traditional sources of financing became more difficult to obtain.  Since then, numerous businesses have attempted to use the EB-5 program to raise money.  For example, Vermont’s Trapp Family Lodge of “Sound of Music” fame advertises that it seeks EB-5 investors to open a beer hall and renovate its existing resort facilities.

There are two distinct EB-5 routes — the Basic Program and the Regional Center Pilot Program. Both programs require that the immigrant make a capital investment of either $500,000 or $1,000,000 (depending on whether the investment is in a Targeted Employment Area [TEA]) in a new commercial enterprise located within the United States.  A TEA is defined by law as “a rural area or an area that has experienced high unemployment of at least 150% of the national average.”  The new commercial enterprise must create or preserve 10 full-time jobs for qualifying US workers within two years (or under certain circumstances, within a reasonable time after the two year period) of the immigrant investor’s admission to the US as a Conditional Permanent Resident.

Entrepreneurs across the nation have set up regional centers for foreign investment to market local EB-5 projects to investors.  There are over 230 such regional centers, some of which are state-run  like Vermont’s Jay Peak. The flexibility offered by a regional center is attractive to both the investor and developer since the investor does not have to play a role in the company. With a direct EB-5 investment, the investor must have some sort of “managerial” function.  Seeing a lucrative opportunity when connecting an investor with regional centers, an industry has sprung up, particularly in China, to connect US businesses with potential investors. These go-betweens charge the regional center as much as $175,000 per investor for making the introduction.

Some projects have not produced the requisite number of jobs that would prompt US immigration authorities to withhold green cards – resulting in exposure to lawsuits from the investor against the developer or regional center that has solicited the investment.  Approximately 31 investors, 15 from China, filed a federal lawsuit alleging the only thing they had to show for a $15.5 million investment was an undeveloped plot of land across the Mississippi River from New Orleans.  In San Bruno, California, three Chinese investors alleged in a lawsuit filed last year that they lost $3 million when an EB-5 developer disappeared with his associates concocted a story about his death.

In contrast, the Marriot and Hilton hotel chains have successfully solicited and obtained EB-5 investment funds to build new hotels; Sony Pictures Entertainment and Warner Brothers have used the EB-5 program to raise funds for film projects; and the new home of the NBA’s Brooklyn Nets, Barclay Center, was funded through EB-5 investment.

Even if successful, EB-5 visa approval has become much slower due to suspicion of fraud and developers’ inaccurate estimate of creating 10 jobs per investor.  With the economic downturn, the USCIS has hired economists and securities lawyers to review EB-5 applications. Now showing it that it means business, the Securities Exchange Commission has filed its first lawsuit against an EB-5 project alleging that the promoters of a Chicago hotel and convention center project fraudulently sold more than $145 million in securities and collected $11 million in administrative fees from over 250 Chinese investors.

The Canadian government has decided recently to halt its immigrant investor program due to the number of Chinese applications.  This has left Chinese investors potentially turning their attention to the US equivalent as they seek a financially and politically stable haven for themselves and their families.

Article By:

Jennifer G. Parser
Of:
Poyner Spruill LLP

“Dual” Employment Contracts for US Executives Working in the UK

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Background

February 2014

Individuals, whether of British or foreign nationality, who reside in the UK are, in principle, taxable on their worldwide employment income. Many US executives who are “seconded” by their US employer to work in the UK may therefore become UK tax resident.

Such US executives who have not been UK resident in the three previous tax years and are not UK domiciled need not pay UK tax on their overseas earnings if they do not bring the income to the UK. Other US executives resident in the UK over the longer term may incur liability for UK tax on their overseas income unless their employer structures their employment duties under separate employment contracts, one with the UK subsidiary for their UK duties and another with the US parent for their overseas duties. These have become known as “dual contracts”. If the non-UK domiciled executive keeps the income earned under the overseas contract outside the UK, no UK income tax should arise on that income. He or she will pay UK income tax on the income earned in the UK under his or her UK contract.

“All Change”

In December 2013 HM Government announced that it would be clamping down on the artificial use of dual contracts for longer-term UK residents and has now published draft legislation that makes offshore employment income in a dual-contract arrangement taxable in the UK in certain cases.

The New Rules

Under the new anti-avoidance rules, which come into force on 6 April 2014, the dual-contract overseas income of US executives resident in the UK will be taxed in the UK if:

  • the executive has a UK employment and one or more foreign employments,
  • the UK employer and the offshore employer either are the same entity or are in the same group,
  • the UK employment and the offshore employment are “related”, and
  • the foreign tax rate that applies to the remuneration from the offshore employment is less than 75 percent of the applicable rate of UK tax. The current top rate of UK income tax is 45 percent, and 75 percent of this rate is 33.75 percent.

The UK employment and the offshore employment will be “related” where, by way of non-exhaustive example:

  • one employment operates by reference to the other employment,
  • the duties performed in both employments are essentially the same (regardless of where those duties are performed),
  • the performance of duties under one contract is dependent on the performance of duties under the other,
  • the executive is a director of either employer, or is otherwise a senior employee or one of the highest earning employees of either employer, or
  • the duties under the dual contracts involve, wholly or partly, the provision of goods or services to the same customers or clients.

Action

US corporations should urgently review the use of dual contracts for their non-UK domiciled executives seconded to their UK subsidiaries before the 6 April 2014 start date. The proposed legislation is widely drafted and has the potential to catch even genuine dual-contract arrangements. If one of the dual contracts is with a group employer in a low-tax jurisdiction, that contract may be especially vulnerable. Dual contracts will not necessarily become extinct, but in the future, careful cross-border tax advice should be sought in their structuring.

Article by:

Of:

Vedder Price

UK Financial Conduct Authority (FCA) Issues First Fine Under New Anti-Money Laundering Regime

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Financial Conduct Authority fines Standard Bank £7.6 million for failures in its anti-money laundering controls, underlining the importance of both having and implementing adequate policies in relation to money laundering.

On 22 January, the UK Financial Conduct Authority (FCA) published a decision notice[1] imposing a £7.6 million fine on Standard Bank PLC, the UK subsidiary of South Africa’s Standard Bank Group.[2] The fine was issued for failures relating to Standard Bank’s anti-money laundering (AML) policies and procedures for corporate customers connected to politically exposed persons (PEPs).[3] This is the first AML fine issued under the FCA’s new penalty regime and the first such fine by the FCA—or its predecessor, the Financial Services Authority—in relation to commercial banking activity.

Under Regulation 20(1) of the Money Laundering Regulations 2007, regulated institutions, such as banks, must establish and maintain “appropriate risk-sensitive policies and procedures” on customer due diligence measures and ongoing monitoring of business relationships, amongst others. The policies must be aimed at preventing money laundering and terrorist financing. Guidance issued by the Joint Money Laundering Steering Group states that enhanced due diligence (EDD) should be applied where a corporate customer is linked to a PEP, such as through a directorship or shareholding, as it is likely that this will put the customer at higher risk of being involved in bribery and corruption.

As part of its investigation into Standard Bank, the FCA reviewed a sample of 48 corporate customer files, which all had a connection with a PEP, and discovered “serious weaknesses” in the application of the bank’s AML policies and procedures. The FCA found that, from 15 December 2007 to 20 July 2011, Standard Bank breached the Money Laundering Regulations 2007 by failing to take reasonable care to ensure that all aspects of its AML policies were applied appropriately and consistently to its corporate customers connected to PEPs. In particular, the FCA found that Standard Bank did not consistently carry out adequate EDD measures before establishing business relationships with corporate customers linked to PEPs and did not conduct the appropriate level of ongoing monitoring for existing business relationships by updating its due diligence. The FCA noted the failings were particularly serious because the bank dealt with corporate customers from jurisdictions regarded as posing a higher risk of money laundering and because the FCA had previously stressed the importance of AML compliance to the industry.[4] The gravity of the failings was underlined by the FCA’s director of enforcement and financial crime, who stated that “[if banks] accept business from high risk customers they must have effective systems, controls and practices in place to manage that risk. Standard Bank clearly failed in this respect”.

This is the first AML case to use the FCA’s new penalty regime, which applies to breaches committed from 6 March 2010 and under which larger fines are expected. The FCA’s decision notice sets out how it determined the level of the fine, by reference to a five-step framework (as outlined in the Decision Procedure and Penalties Manual).[5] The FCA considered the fact that the bank and its senior management cooperated in the investigation and took significant steps to remediate the problems, including seeking advice from external consultants, to be a mitigating factor. In addition, Standard Bank’s decision to settle the matter at an early stage of the investigation resulted in a 30% discount on the fine. The original penalty was £10.9 million.

The FCA’s action against Standard Bank illustrates the increasingly tough approach taken by the UK authorities against financial crime and shows that the FCA is willing and able to enforce AML legislation. Banks and regulated firms are encouraged to ensure that they have effective policies and procedures against money laundering in place and that these are being adhered to.

[1]. View the FCA’s notice here.

[2]. The sale of Standard Bank to the Industrial and Commercial Bank of China has been agreed to and is likely to be completed during the fourth quarter of 2014.

[3]. A “PEP” is defined in the Money Laundering Regulations 2007 as “an individual who is, or has, at any time in the preceding year, been entrusted with a prominent public function”, or immediate family members and known close associates of such individuals.

[4]. The FSA published a Consultation Paper on 22 June 2011, availablehere, focusing on how banks manage money laundering risk in higher risk situations. It also published a Policy Statement on 9 December 2011, available here, providing guidance on the steps firms can take to reduce their financial crime risk.

[5]. View the manual here.

Article by:

Of:

Morgan, Lewis & Bockius LLP