1. President signs the JOBS Act
President Obama recently signed into law legislation that is intended to ease the regulatory burdens for start up businesses to raise private outside capital. Under the Jumpstart Our Business Startups Act (commonly known as the JOBS Act) a private company will be able to raise up to $1,000,000 during a 12 month period from investors without having to comply with the otherwise applicable burdensome federal securities law requirements. This new rule is expected to enhance the ability of small businesses to attract outside investors through what has become known as “crowd funding”—which typically involves solicitation of funds by a business over the Internet. In addition, these new rules will raise the maximum number of shareholders a private company can have before it will be subject to a number of costly and onerous SEC reporting requirements from 500 to 2,000.
PRACTICAL COUNSEL: Small businesses can now fund their operations by raising cash on-line from individual investors without having to worry about most SEC disclosure and filing requirements.
2. Tax Credit for Hiring Veterans
The VOW to Hire Heroes Act extended the income tax credit for employers who hire qualified out of work veterans to the end of 2012, and expanded the category of unemployed veterans who qualify for this credit. The credit is equal to 40% of a portion of the wages paid to a qualified vet during his/her first year of unemployment. In order to be eligible for the credit, an employer must generally submit an IRS form within 28 days of hiring the vet.
PRACTICAL COUNSEL: Businesses can reduce their federal income taxes by hiring unemployed veterans.
3. Trap For The Unwary: Who Can Act To Legally Bind an LLC?
A major reason for choosing a limited liability company for a business is the flexibility it affords its owners as to the management of their business. Under the laws of most states, a limited liability company (“LLC”) can be managed either by all of its members—a so called member managed LLC, or by one or more managers—a manager managed LLC– who need not necessarily be owner(s) of the limited liability company. This latter approach allows for centralized management by professionals who are well versed and experienced in the business being conducted by the LLC. However, unless certain state formalities are carefully observed, each and every member- owner of an LLC, including members of a manager -managed LLC, will be able to legally bind the LLC to contracts and other obligations.
PRACTICAL COUNSEL: In creating an LLC which is intended to be managed solely by a manager, business owners should familiarize themselves and be sure to comply with the applicable state law requirements regarding LLC management, or else they well may find themselves with unanticipated contract obligations and liabilities resulting from member actions.
4. Legislative Efforts to Subject Earnings from Sub S Corporations to Payroll Taxes.
Business owners have often used the Subchapter S form of business to minimize their payroll tax obligations. Unlike earnings from an LLC or partnership which are automatically treated as wages and therefore subject to payroll taxes, only that portion of a Subchapter S corporation’s earnings paid as wages to its owners are subject to payroll tax— dividend payments are free from payroll taxes. Thus, business owners can realize payroll tax savings by limiting the Sub S earnings which they pay to themselves as salary and bonuses and instead distribute most of the Sub S earnings in the form of dividends.
The Obama Administration and Democratic members of Congress have vowed to eliminate this tax savings technique. A bill recently voted down by the Senate that was principally intended to prevent the increase of certain student loan interest rates, included a provision that would have subjected all Sub S earnings to payroll taxes in the case of Sub S corporations with three or fewer employees, each of whose annual taxable income was at least $ 200,000 ($ 250,000 for joint filers).
PRACTICAL COUNSEL:Stay tuned since it is apparent that the Obama Administration and certain members of Congress have made this change an important priority as a way to offset other revenue measures, and will undoubtedly continue their efforts to shut down this payroll tax savings measure.
If you would like any further information on any of these items or want to discuss how they might affect your business feel free to contact Norman L. Eule, the Chair of General Counsel’s Corporate and Tax Group at firstname.lastname@example.org or 703-556-0411.