INC-centricity

Psychology of Recession

That's a bit of a pretentious heading - as if I'm qualified to comment on either psychology or economics. However, as an amateur observer of the human condition, it does strike me that a significant component to our current economic quagmire is largely in our head. It seems that while we have transitioned over the years from an agricultural economy to a manufacturing economy to a service economy to an information economy - what we really are is an economy of confidence. When we lose that intangible, psychological element of our collective selves, we perceive ourselves to be in huge economic trouble. And, because we are an information-based economy, we have an amazing ability to measure, calculate, survey, report, broadcast and share our lack of confidence with the world. 

But the reality is probably much different from our perceptions. Just as the roaring real estate bubble led us to believe things were better than they actually were, the constant talk about foreclosures, layoffs, and economic "crisis" of all kinds probably has us believing things are now much worse than they actually are. 

I liken this to following my favorite sports team: The Wolf Pack of the University of Nevada. I am a huge college basketball fan, and because I don't live in Reno, I follow my team at a distance, which means - because I am also a geek - I lurk on the main message board devoted to my beloved Pack. 

What I see there from game to game is, I think, a microcosm of our overall reaction to economic news. When the Wolf Pack wins, the fans are elated and ready to take on the champs. When the Pack loses, the fans angry, frustrated, depressed, and evidently prone to drown their tears at the local pub. The confidence swing from week to week can be really amazing. 

A small losing streak of a couple of games has the diehards prepared to fire the coach, complain to the Athletic Director, cancel their season tickets and commit hari kari. A modest winning streak and the fans have the basketball team back in the Sweet 16. Same team. Same coach. Same talent. Same season. Yet, wildly different perceptions of how good or how bad the team really is.

I've learned that you just can't trust the fans to accurately judge the team's performance. And you can't trust the talking heads at CNN, CNBC or the Dow Jones Industrial Average to accurately judge the performance of the economy. In all of these cases, the commentators are biased - one way or another - by the psychology of the moment. 

Bottom Line: It probably isn't as bad as it seems.

War on "tax havens"

This from The Guardian:

The world's most secretive tax havens are to be prised open after Barack Obama's new administration endorsed far-reaching legislation to crack down on them.

The decision to force "secrecy jurisdictions" to reveal the identities of the super-rich and major corporations who use them came from the US treasury secretary, Timothy Geithner, at a congressional hearing and will be seen as a blow to places such as Jersey, the Cayman Islands and Switzerland.

"We fully support the legislation … on offshore tax centres, and we look forward to working with you as part of the broader effort to address international tax evasion and close the tax gap," Geithner told the House ways and means committee late on Tuesday.

Key measures in the new legislation, now likely to be in force within 12 months, include revealing the beneficiaries of secretive trusts and identifying "offshore secrecy jurisdictions" that "unreasonably restrict US tax authorities from obtaining needed information" as well as severely increasing penalties against tax evaders and closing numerous loopholes.

What have I been saying?  At the end of the day, asset protection strategies that rely solely on secrecy will bring you nothing but trouble.  Rely on statute for your protection, not on snake-oil secrecy.

Protecting Your Credit in Economic Decline

The "credit crisis" has become ubiquitous.  It is being blamed for everything from home foreclosures to a plummeting stock market.  Many individuals and most businesses are feeling the pinch from the credit markets today.  Which is precisely why it is so important to carefully manage and protect your personal and business credit profile during these turbulent times.  Those who are able to survive the current recession with their credit profile intact will have so much the advantage in the economy to come.

Lynette DeNike wrote a worthwhile article for the the Washington Post last week on this topic, Five Ways to Protect Your Credit in Tough Times.  Here are some of her recommendations:

• As soon as you know your income will not be adequate to pay your bills, develop a worst case plan. While I prefer to think optimistically about finances, this is the time for a conservative [Call it negative if you must.] approach. Since you may only get one opportunity to renegotiate your accounts, you want the best terms for your business and yourself.
• Examine your spending with a virtual microscope. When we are accustomed to sufficient cash flow, it can be difficult to recognize excess outflow for ourselves and our businesses. For example, if you eat out for lunch instead of taking it, habitually buy refreshments at convenience stores, make regular visits to Starbucks or the bakery or yogurt shop, and cannot resist a sale . . . there are dozens of places you can make effective spending cuts.  Find any excesses; cut them. If you’ve never had to severely scale back spending, a true shift of consciousness is required for habitual buyers. It can be difficult because you acquire a different mindset when you spend for what is needed rather than buy what is wanted.
• Share the situation with your employees. Ask for their suggestions. Enlist their help to recognize cost-cutting opportunities, which will get your business through these challenges and preserve their jobs. A team effort can produce more successful results than the efforts of the captain acting alone.
• The tough step comes after you develop a new operating budget. Call your suppliers and business creditors while all your accounts are current.   
• When you’re contacting a major company, ask to speak to a manager. After the person comes on the line, get the correct spelling of their name, ask for their title, and ask how you can reach them directly if you have follow-up questions after the call. Keep this information in your records. With small local vendors, you probably know the person you’re contacting. If not, ask for the accounting manager.  
• Explain that your business is slowing down due to the recession. Tell them you’re prepared to hunker down and make it through to better days and you’d like to enlist their help to do that. 
• If your supplier accounts have standard 30-day terms, ask to have the terms changed to 90 days until business conditions improve. You might have to compromise at 60. However, they may grant 90. If you’re able to pay invoices early, your business credit scores will increase. Having a time cushion for bills during an uncertain economy can provide stress relief while it preserves your positive credit history.  
• Major credit card accounts are likely to be more difficult to negotiate than vendor accounts with standard business payment terms because banks tend to be less accommodating, even today. With a true commercial credit card, which means you did not provide your social security number to open the account, you are more likely to get your interest rate reduced or terms relaxed than you will with an account where you’ve guaranteed it by providing your social security number. Again, talking with a manager can be key to achieving acceptable results. 
• Stop charging on credit cards except for small amounts you know you can pay in full each month. We have no idea how long this economic downturn will last. Due to the complexity and impact on foundation segments of the economy, the road to recovery is likely to be longer than we prefer to anticipate. You want as little debt as possible – in your business and personally. Don’t close accounts. Just use them minimally to keep them active on your credit reports.

Entrepreneurs Tale of the Tape

The numbers are compelling, but perhaps not surprising: entrepreneurs make our economy - period.  Our economy isn't driven by social programs, or by AIG/Lehman Bros/Morgan Stanley/General Motors or any other combination of banks or big business.  The concept that "What's good for GM is good for America" has been turned on it's head:  "What's good for America is good for GM"!  And, what IS good for America?  NEW BUSINESS CREATION!

The Kauffman Foundation compiled statistics that make this irrefutable. Among them:

• All net job growth in America from 1980 to 2005 came from companies less than 5 years old.
• One-third of all new jobs come from the creation of new businesses.  That doesn't factor in the job creation from companies that are just a few years old. 
• In 2007 - which wasn't a "great" year economically speaking - 495,000 new businesses were created every month.  During that year one-third of 1% of adults created a business per month. 
• 40% of young people between the ages of 8 and 21 would like to start a business someday - or already have. 
• New businesses are 3% more productive than mature businesses.  And, 5-year old companies are 5% more productive than mature businesses. 
• On average, 75% of startup capital comes from equal parts owners equity and debt, including credit cards. 
• Angel investors average 27% return on startup investment. 
• Twice as many high-tech startups have founders over the age of 50 than younger than 25. 

If we are serious about economic recovery, we better get serious about helping entrepreneurs and would-be entrepreneurs start new businesses.  Need a job?  Start a business!

We Believe in Entrepreneurism

Zogby Interactive conducted an interesting poll of Americans to see where the nation is placing its faith in a better future. "Who will lead us to a better future?"  Here are the results:

• 63% - Small business and entrepreneurs
• 52% - Science and technology leaders 
• 38% - Family and friends  
• 36% - Ourselves 
• 32% - Non profit groups 
• 31% - The government 
• 21% - Big business 
• 13% - The media  

These findings shouldn't surprise us.  Capitalism provides inherent economic freedom and opportunity.   Because of that economic freedom and opportunity, capitalism connects us to our hopes and dreams. 

If we are to hope for a better economic future, it will be through our fundamental belief in economic freedom and opportunity that is manifest in this poll as faith in entrepreneurism and small business.

Swiss bank UBS problems show why privacy fails

Last week, the IRS asked U.S. District Judge Alan S. Gold to enforce "John Doe summonses" on 52,000 Swiss bank accounts holding almost $15 billion in assets.  This action demonstrates the folly behind using privacy and secrecy as the basis for asset protection or tax planning.  History has shown than any strategy that is based on privacy or secrecy is destined for failure.  Right or wrong, in our current global economy the nations of the world - and the financial institutions of those nations - provide the U.S. government with tremendous political power and financial influence in shaping privacy policies and standards throughout the world. 

I don't know how many times we have seen this sort of thing.  Years ago, it was the Cayman Islands, and the Isle of Man.  Before that, Panama.  Remember the crackdown on anonymous Visa debit cards?  A lot of people paid a lot of fines and served a lot prison time over those privacy scams.  Eventually, this Swiss banking fiasco will produce the same results.  It is just a matter of time.

It reminds me of tonight's episode of "24", where the bad guy had a surgically implanted chip containing the list of all the government conspirators and bad-guy financial records.  Jack Bauer had to literally carve it out of him.    The data was very private, but it wasn't very accessible - at least not without considerable blood and pain.  (I asked my wife how the bad guy was supposed to keep the files on the chip updated.  She laughed at me because I always over-think things.)

But the point is that relying on privacy is a losing proposition.  Laws and loopholes that allow for privacy benefits not only can be changed - they probably will be changed.  It is only a matter of time.  And, when that time comes, things will get ugly for everyone with their name on that list.  And, like the data chip implanted in the bad guy, relying on privacy makes it impractical - if no impossible - to actually have use of the hidden assets.

Plan your asset protection and/or tax strategy as though the day will come that you will have to lay all your cards on the table.  That way, at least you'll be able to sleep at night - which may be more than 52,000 Swiss bank account holders are doing these days.

How are small business owners dealing with landlords in today's economy?

Almost every small business owner that I know is either 1) currently renegotiating their lease with their landlord, or 2) getting ready to renegotiate their lease.  From business owners I have talked to, they are experiencing a wide range of reactions, communication and negotiations.  Some landlords are working with tenants to try to keep them, others have drawn a line that they don't renegotiate with tenants. I know one strip mall that has lost half their tenants solely because the landlord won't renegotiate with clients.  What are you experiencing?  Are you trying to renegotiate your lease?  Is your landlord open to talks?  DId you find a win/win resolution?  Share your experiences!

10 Keys to business survival in a recession

It seems to be the consensus among business and political leaders that our economy is worse than it has been in generations.  Statistics, for what they are worth, prove it.  In other words, most of us have never seen anything like today’s economic crisis, and there isn’t much in our own experience that gives us guidance in our business decisions.  A recession such as this requires a shift in our thinking, our planning, and our decision-making in order for our business to see the light of day at the other end of this economic cycle.

Economic cycles, by the way, are usually long.  The common chatter heard from talking heads and prognosticators is that we should see the beginnings of a recovery in 6 months - or 9 months - or 12 months - or 18 months, etc.  The truth may be that we are in for a longer ride than we optimistically expect. (For example, economists generally agree that we were in a bear market cycle from 1966 to 1982 - a period lasting 16 years; and that we experienced a bull market from 1983 to 2000 - a period of 17 years.) If history is our guide, the recovery might not come quickly.  Fixing the global mess will probably take years.

So, as small business owners and entrepreneurs, what do we do and how do we survive?  For what it’s worth, here are my Keys to Survival in today’s economy:

Nevada or Wyoming incorporation? No Contest.

Promoters of Wyoming incorporation have started to make brazen claims that Wyoming offers better asset protection benefits than Nevada.  This is a fair comparison for analysis, since the claim can be measured against the standards set by Nevada in three  specific areas of corporate asset protection.  

Corporate protection consists of three separate factors.  The relative asset protection strengths or weaknesses of state corporate law result from how state statutes or case law addresses each of these factors.:

Legal Tax Upstreaming

Blogger Diane Kennedy, a CPA who graduated from the University of Nevada, Reno wrote a recent post on her website, TaxLoopholes.com, about legally upstreaming income.  Diane points out several legitimate strategic uses of upstreaming strategies.  I will use her four stated uses, and add my own commentary:

1.    To upstream the income of a C corporation in your home state for the purpose of reducing state income tax.  For this have any benefit, the corporation must be generating sufficient “upstreamable” profits that justify the costs associated with making the strategy work.  It has to make sense financially.  We use a rule-of-thumb of 12:1 – for every $1 that the strategy costs you, you need to be able to upstream $12 to a state-tax-free jurisdiction to justify the expense.

2.     To divide out multiple streams of income within a company to separate active income from passive income.  This is particularly effective if your company has some active income that would be taxed at a lower rate, but where the more than 60% of income is passive, subjecting it to Personal Holding Company taxation on all income.

3.     To legitimize an asset protection plan.  In this scenario, the amount of “upstreamable” profits that exist are not really the deciding factor.  What DOES matter, is the value of the assets you are trying to protect.  When upstreaming to legitimize an asset protection plan, it is critical that the goods, services, or financing that is the basis of the commercial relationship between the two companies is REAL.  In other words, everything needs to be arm’s-length, and the services need to be provided; the products need to be real; or the loan must actually be funded – and repaid according to the terms of the agreement.

4.     To flunk controlled group issues for the purpose of implementing nondiscriminatory benefits.  This can be a sticky issue, and probably needs an attorney’s review before you run with it.

 

No matter what the strategy is, it won’t hold up unless it is completely verifiable, legitimate and documented.  And, the company that receives upstreamed funds must have a defensible nexus of operations in the target state.  Upstreaming demands crossing all your “t’s”.