INC-centricity

Advantage: Nevada

For years, our company has put on a series of Corporate Boot Camp Seminars in Reno and Las Vegas to teach people about the basic essentials of forming and maintaining their new business entity, and becoming successful.  In our Boot Camp, I make a presentation about Nevada's past, present and future as an incorporation center that attracts tens of thousands of new corporate and LLC filings every year from people living outside of Nevada.  I am frequently asked to compare the benefits of incorporating in Nevada to that of incorporating in Delaware, which has a long-standing reputation as a corporate haven.

My answer to those questions is lengthy and technical.  But to boil it down to its simplest form, Delaware law is designed for large, publicly-traded companies and Nevada law is designed for privately-held companies.  Delaware protects stockholders by holding officers and directors responsible, while Nevada protects officers and directors - who are frequently also the owners.

I bring this up to provide some perspective to some interesting statistics that I stumbled upon.   The Ewing Marion Kaufman Foundation released a study that ranks all 50 states for their level of entrepreneurial activity.  It is no surprise that Nevada is ranked very high.

But guess which state is ranked dead last.  New York?  California?  Massachusetts?  No.  Last place belongs to DELAWARE!  While Delaware enjoys this great reputation for being a corporate haven, the truth is that for all the corporate filings it generates, it is a terrible environment for nurturing entrepreneurism.  Its corporate laws just are not designed for small business.

ADVANTAGE:  NEVADA

Download KIEA_state_052206.pdf

Nevada Rated #1 -- Again

The January edition of CFO magazine has an interesting article about the relationship between state development authorities and same-state taxing agencies.  The article documents that a number of state development organizations promise and deliver some nice incentives to encourage corporate moves and expansions.  The "hook" in some incentive packages is that state taxing authorities recoup the incentives (and sometimes more) through tax channels.

The magazine did a poll of CFOs across the country and asked them to rate the "business friendliness" of all fifty states when it comes to taxes.  The exact wording of the question was, "What is your overall impression of the tax environment in this state?"  Nevada was rated by CFOs who responded to this poll as having (the) most fair and predictable tax environment.

Procrastination: The Silent Dream Killer

We hear a lot these days about "realizing our dreams."  We are encouraged to be pro-active so that our "unplayed music does not die with us."  We live in a land of opportunity, yet we seize so little during our lifetimes.  Why?

I believe the number one killer of dreams is procrastination.

Lord Acton is quoted as saying, "A wise person does at once what a fool does at last.  Both do the same thing; only at different times."

Considering that achievement often requires great risk, vision and a steadfast discipline, it could be said that procrastination is the "flip side" of achievement.  Waiting to follow a dream and putting off what one knows must and should be done are not the measures of achievement.

We procrastinate on the little things in life because they do not have overly-serious consequences.  How many gallons of water were wasted before the leaky faucet was finally fixed?  How much more did that car repair cost after that strange sound was ignored for six months? 

But it is the major life-changing decisions where procrastination really takes its toll and kills dreams.  For example, how many times did the person who hated his job for 20 years tell himself it was time to be his own boss?

Several years ago my wife and I updated our estate plan.  We had put of doing so for more than a year.  And it had been ten years since the initial estate plan had been drawn up.  A lot had changed in that time.  Something as simple as picking up the phone got the ball rolling.  The process was simple.  On the ride back home from the attorney's office we both felt a sense of peace and organization.  Updating our estate may not be the world's greatest achievement, but it was big on our scale.  Getting it done gave us a sense that action had prevailed over procrastination.

Procrastination is the path of least resistance and it is the path that leads to unrealized potential.  What are you procrastinating about?

Internet Explorer 7...Another reason to incorporate

Recently I read a very interesting article in the Wall Street Journal that could have a big impact on unincorporated business's involved in e-commerce. In another attempt to keep the internet secure and free of "phisher" sites Microsoft Corporation is taking an aggressive leap forward with it's introduction of Internet explorer 7. IE7 has a security feature that will turn Web-address bars green and display owners' identities when consumers visit secure sites from businesses verified as legitimate. The color change will be a boon for consumers, who have been barraged in recent years with "phishing" scams designed to lure them to fake versions of popular Web sites, like eBay or their bank, to filch their account numbers. The hope is that the program will help reduce fraud, lift trust and boost e-commerce. But browsers won't turn green for everyone. Thats because sole proprietorships, general partnerships and individuals won't be eligible for the new, stricter security certificates that Microsoft requires to display the color.

Continuing Education: On the Highway to Success

Learning is a critical component to success.

If our ego is in check, we will recognize that there is always a new way to look at things.  In fact, the more we know, the more we realize that there is much more out there that we don't know.

There are many sources for additional learning.  Community colleges or universities are excellent places for continuing education.  Many have evening programs just for this purpose.  For those of us separated by distance from the nearest institute of higher education, many schools now offer certain programs or courses online. 

Evaluate your skills, experience, and interests, and then find programs to match. 

In addition to the university system, continuing education is available through credible seminars and courses offered by Fred Pryor Seminars, Dale Carnegie Training, and many others.  These programs are often less taxing on your time, affordable, and bring value to you as an individual.  Watch for them as they visit your city or go to their websites for more information.

Make a commitment today to expand your knowledge base through continuing education and training.  It pays.

California Franchise Tax Board cites "facts" that determine when an LLC filed in another state is doing business in California

In another court decision made this year involving the CFTB, the court ruled that a Nevada LLC with a California resident as the manager, which held ownership interests in other California partnerships and LLCs was "doing business" in California, and subject to the $800 annual tax.

The ruling supports the long-held position by the CFTB that any management activity - no matter how minor - that occurs in California will create a tax nexus there.  Here are the facts that existed in this specific case that led to the conclusion of the court:

California's LLC fee is unconstitutional

A couple of years ago, I had occasion to call the California Franchise Tax Board while doing research for one of my books.  I had heard that California was imposing a state tax on all of the world-wide income of any LLC formed or registered in California, and I didn't believe it.  The concept was so ridiculous on it's face that I never dreamed that even the CFTB would stoop to such an unconstitutional low.  My phone call to the CFTB, however, confirmed what I had been told.  They were completely ignoring the U.S. Constitution, and were imposing all the tax that they could get away with.

Well, as I was cleaning off my desk this week, I came across some information that I originally read last April but never got around to posting, that forces the CFTB to change its approach to LLC taxation.

Community: On the Highway to Success

An often overlooked, but extremely valuable resource available to us all is our own community.  Within our community are other entrepreneurs, teachers, leaders, and gurus with expertise in a variety of subjects. 

We should be familiar with our own goals, values, strengths, and weaknesses.  If we are honest in evaluating ourselves, it should be easy to align ourselves with others who share our goals and values. 

Look into joining community organizations that not only share your values, but are also of interest to you.  If you haven't done so already, join your local chamber of commerce, register with The Better Business Bureau, join your relevant merchant association, or volunteer to serve your favorite charity or charities.  These organizations offer opportunities to network, to learn new skills, and to hone our leadership abilities.  You may be surprised at the opportunities that come your way via your activity within these community organizations.

So be active in your community.  Be a good citizen.  Keep your mind open to new ideas offered by others.  In doing so, you'll find yourself a little bit further down the Highway to Success.

Reading: On The Highway To Success

A wise man once said, "All of the easy things have already been done; from here on out it is high adventure." 

Those of you who run your own businesses will certainly agree that the process is high adventure.  But what about the easy stuff?  There is no reason to re-invent the wheel.  Fortunately for us, many business topics have already been written about in depth by experienced authors.  These books can be a valuable asset to any business owner.

As if you needed another reason for tax planning

The US Department of Treasury has published a one-page summary of impact that increased taxes will have on millions of Americans if permanent tax relief is not passed by Congress.  To summarize a summary, unless permanent tax relief is passed, by 2011:

• A family of four with two children making $60,000 in annual income today will pay 58% more taxes.  If the family makes $50,000 per year, the taxes will be 132% higher.
• 115 million taxpayers will average a tax increase of $1,716.
• 26 million small business owners will average a $3,637 tax increase

The Highway to Success

I have a healthy appreciation for businesspeople who invest time in improving themselves and their businesses.  It is too easy to get caught up in the day to day transactions and status quo; consequently putting off planning and associated change.  The fact is that businesspeople who perform regular self-evaluations and then take action to correct areas of weakness are those who break from the pack in their respective industries.

2006 Small Business Survival Index names Nevada #2 in business climate

The Washington D.C.-based Small Business & Entrepreneurship Council released their annual survey which ranks the policy environment for entrepreneurship across the nation.  The Small Business Survival Index 2006 ranks all 50 states in order of their respective friendliness to business.  This ranking is based on 29 major government-imposed or government-related costs imposed on small business.  The top 5 states in the 2006 Index are:

1. South Dakota
2. Nevada
3. Wyoming
4. Alabama
5. Washington

I understand the top three on the list, but I am going to have to read the report to see how Alabama and Washington show up that high.

Family LLCs: Sharing the Wealth

For years promoters have touted the use of Family Limited Partnerships (FLP) as a tool for owning and protecting assets and providing a mechanism for passing them on to the next generation.  The FLP has been used so frequently that it could lead one to the impression that the FLP is a separate kind of entity.  It isn't.  It is simply a Limited Partnership used for family purposes.  Similarly, the LLC is becoming used for family purposes, which has coined the usage of the Family LLC.

What makes an Exceptional CEO?

I came across a fascinating website the other day called TheCEOProject, which released a report last July that outlines the factors they discovered which makes exceptional CEO's exceptional.  For the past 15 years, they have studied and worked with about 700 CEOs of fast growing, mid-sized companies with revenues between $15 million and $1.2 billion.  That experience has taught them the profound difference between run-of-the-mill chief executives and the peak performers.

Piercing the Corporate Veil Statistics

According to a study published by Robert B. Thompson, professor of law at Vanderbilt University Law School, piercing of the corporate veil has been granted in 40% of the cases where the issue was raised.  That is good news and bad news.

California attacking Montana LLC because manager is CA resident

The Board of Equalization has ruled that an LLC registered in Montana was doing business in California solely because the managing member was a California resident (Appeal of Mockingbird Partners LLC (May 17, 2006) Cal. St. Bd. of Equal. Case No. 306061). This is the second taxpayer to lose on this issue in the past few months and there are more cases to come.

Average U.S. corporation juggles 37 lawsuits

I don't know how I missed this one, but I'm glad I finally ran across it:  the international law firm of Fulbright & Jaworski L.L.P. (whose company slogan is "When you think litigation insight, think Fulbright), released their second annual Litigation Trends Survey last October.  It is a fascinating, 32-page glimpse at the impact of runaway litigation on the economy.  Here are some interesting facts from their findings:

Inc. Magazine names Reno best place for business

The May 2005 edition of Inc. Magazine examines 274 population centers in the United States and compares them in several important categories to determine their 2005 ranking of best places to do business.   Their methodology takes into account a weighted summary of current and historical employment growth rates and the mix of major employment sectors. For 2005, Reno, Nevada tops the Inc. list of Best Places For Doing Business in America.  You can read the Reno report, or an article from the local Reno newspaper on the ranking here.

Ready for an $8.25 minimum wage?

Nevada had a minimum-wage question on the ballot last year to increase the minimum wage by $1.  But was that only something to kick the minimum wage in Nevada up a dollar? Many people thought so, but a lot more was at stake than the news media let on.

According to the Nevada Policy Research Institute, that same proposal-with all its many built-in booby traps-has already passed the Nevada Assembly and received its first reading in the Senate. If the Nevada business community does not weigh in quickly, and massively, the Silver State's business climate will never be the same.

That's because:

• What's called the "dollar increase" actually means a dollar increase over the federal minimum wage. And while the AFL-CIO is leading the charge here in Nevada, it's doing the same in Washington D.C. There, it's pushing for legislation to increase the federal minimum to $7.25-which means the tab to Nevada business owners could easily be $8.25 per hour!

• The proposal on the ballot last fall-and now embodied in AB 87-also requires that Nevada's minimum wage be indexed to rise as much as 3 percent each year with the federal Consumer Price Index, as published each year by the U.S. Bureau of Labor Statistics. Thus the Nevada minimum wage will automatically rise each year by another amount, regardless of the state of the economy, or employment levels, or changes in competing states.

• Washington State was victimized in 1999 by a similar minimum wage law-cited approvingly by AFL-CIO representatives before the Nevada Assembly-and today the Washington minimum wage is more than 36 percent higher than the national average!  Worse, powerful evidence found by respected national economists Richard Vedder and Lowell Galloway, indicates that the Washington poverty rate almost immediately expanded by more than 20 percent!

Life Insurance Trusts challenged

The Wall Street Journal last Wednesday had an article in their Personal Finance section regarding the popular estate planning tool of life insurance trusts.   For years, the life insurance trust has been used to own  and become the beneficiary of a life insurance policy.  This strategy keeps life insurance proceeds out of the taxable estate of an individual, and so it eliminates estate taxes.  According to the WSJ article, there is a case currently under appeal in the Fourth Circuit Court of Appeals wherein the judge ruled that an insurance trust does not have an insurable interest in an individual.  Here are a few of paragraphs:

"Insurance laws vary by state, but to buy life insurance on an individual, generally the buyer must show he or she has more interest in seeing the insured person live than die, and would experience a financial loss if the insured does die.  The ruling in effect said that the trust stood to gain more financially upon the death of the insured than if the insured lived.

"Since there are few laws or court cases regarding whether a trust has an insurable interest in an individual, some planners are concerned that the ruling, if upheld, may be interpreted to mean that any trust could be found not to have an insurable interest.  However, many advisers believe the circumstances of the case were unusual and are likely to limit the scope of the case.

"Under laws concerning insurable interest, life insurance can usually be taken out on family members, or by businesses on key employees, for example.  The laws are intended to prevent people from taking out life insurance on, say, strangers in order to receive payouts when they die."

The article points out that this ruling's effect is probably limited to circumstances where an insurance trust is formed and then subsequently the insurance policy is purchased by the trust on the individual.  Where the insurance is originally purchased by an individual, and is subsequently transferred to the trust, these problems don't exist.  However, in those circumstances the insured has to live for three years after the transfer takes place in order that the insurance proceeds stay out of the decedent's estate.

 

Employees underestimate employer medical insurance costs

According to a report issued by CCH, very few employees realize the magnitude of the expense incurred by employers who pay medical insurance benefits, even though it is generally a well-publicized fact that medical insurance costs are skyrocketing.   A 2004 study by MetLife on Employee Benefits Trends showed that 28% of full-time employees believe that their employer spends less than $1,000 per year, per employee on health care benefits.  Almost half of the employees - 49% - believes their company spends less than $2,000.  Only 27% of employees correctly estimated that their employer spends at least $4,000 per year, per full-time employee on health benefits. 

This demonstrates a real opportunity to communicate regularly and effectively regarding company insurance and benefit costs.  Annual employee reviews are excellent opportunities to show employees the actual numbers.  And, by always including the costs of medical insurance into any discussion of compensation, employees will learn to recognize the real-dollar value of these benefits.

Two thirds of U.S. workers rate bosses highly, but 25% claim they can do the job better

From CommerceClearinghouse: 

"Although nearly two-thirds (69 percent) of U.S. workers rate their supervisors as excellent or good, over a quarter (27 percent) believe that they can perform their bosses' jobs better than their bosses. Workers aged 18-29 and those earning less than $20,000 annually were more likely to make that claim than their counterparts in higher age and income brackets, according to a national Hudson survey on managerial performance. Also, nearly a third of male workers say they could outperform their bosses, compared to a fifth of female workers. Nearly a third (31 percent) of U.S. workers work for supervisors who are about their same age, with one out of every six workers (16 percent) reporting to someone younger. Workers give almost identical performance ratings for both male and female bosses. Seventy-one percent of male employees rate their male bosses as good or excellent in comparison to 68 percent who rate their female bosses the same. Similarly, 69 percent of women employees rate their male bosses as excellent or good while 71 percent rate female bosses the same way. The Hudson supervisor survey is based on a national poll of 1,246 U.S. workers and was compiled by Rasmussen Reports, LLC, an independent research firm."

Structuring Family Limited Partnerships

The traditional family limited partnership (FLP) consists of a senior family member who had accumulated assets and wishes to transfer the business to family members, while at the same time protecting the assets against creditor's claims.  When this family member transfers the assets into a limited partnership, he/she typically receives 1% of the business value as the General Partner, and 99% of the value as a Limited Partnership interest.

The General Partnership interest retains control over the assets and makes all the management decisions regarding the partnership.  The Limited Partnership interests are used to make gifts over time to other family members, which achieves the goal of ownership transfer of the assets.  Because the transfer of ownership is staged over a period of time, the other family members usually have a minority interest in the partnership for many years.  Because the minority interest in a FLP is difficult to liquidate and contains no management rights, the IRS allows significant discounting of the partnership interest for the purpose of valuation of the gifts.  This allows the senior family member to transfer larger blocks of partnership interest under the Annual Gift Tax Exclusion.

The advantages of the FLP are significant.  Assets are transferred sucessfully within the family, out-of-state assets avoid probate; assets have centralized management; the senior family member retains policy and management control over the assets, including when and if profit distributions are made to the other partners; and asset protection against future creditors.

One potential downside to the FLP is that traditionally, the general partner has unlimited potential liability.  However if the FLP is formed in Nevada, it can elect LLLP status which protects the general partner, similar to the protection offered to corporate officers.

Don't Use Foreign LLC's in California

The California Franchise Tax board makes no distinction between a California domestic LLC and a foreign LLC qualified to to business in California.  As a result, they apply both the $800 annual  pre-paid tax, and an ADDITIONAL "fee" that is based not upon just the California-connected business of the LLC, but on the TOTAL WORLDWIDE GROSS INCOME of the LLC - even if the portion of the LLC's business that is connected to California is a very small part of the total income!

I am not sure how they get away with that from a constitutional perspective.  The Commerce Clause of the U.S. Constitution prohibits a state from imposing a tax on the intra-state commerce of foreign entities, yet California seems to entirely disregard that prohibition when it comes to foreign LLC's.  If anyone is familiar with a successful legal challenge to this issue, please let me know, and I will credit you with future updates.

Should you change your corporate status?

Way back in December 1997, Inc. Magazine published an article that discussed the circumstances under which a business may want to consider switching its corporate status.  Among the conditions it discussed were the following:

• The company needs capital. If you're simply contemplating raising your credit line or bringing in some informal investors, you can probably stay with whatever structure you've got. But if you're aiming for venture capital or a public stock offering, you'll need C- corporation status.
• You're exploring incentive compensation. A deferred-compensation arrangement will likely mesh with whatever corporate structure you've got. But setting up a stock option plan will be much easier if you switch to C status. The exception: you can use an S structure if the number of employees covered--plus the number of previous shareholders--doesn't exceed the new 75-owner limit for S corporations.
• The company is profitable and no longer capital hungry, and you're looking to boost your personal income. One quick solution might be to switch from C- to S-corporation status, thus eliminating the double tax on all dividends paid out to shareholders. But don't go this route if you're also contemplating an IPO: you won't be able to revoke your decision for five years.
• You've got great prospects, but the company is still losing money like crazy. Corporate losses, and the tax benefits they can provide, may be more valuable if you switch to a C corporation. That's because, in many cases, S-corporation owners can claim corporate losses only on their personal tax returns up to the amount of their total investment. With C corporations, most losses can be claimed (or carried forward into later tax years) at the corporate tax level.
• You're thinking about adding fringe benefits but are looking for ways to control their costs. It's time to get your accountant to do a cost-benefit analysis. Many fringe benefits for owners turn out to be cheaper with C-corporation status. But don't switch before figuring out whether the cost of double taxation would wipe out any benefits you'd receive from a switch.

• You're diversifying the company into a new business line. Wait! Although switching to an LLC structure is often too costly to make sense for an established business, you might be able to achieve real benefits by organizing your new venture from day one as a limited-liability company.

Business lessons from snow camping with Boy Scouts

This weekend I spent Friday and Saturday in the company of 11 young men and 4 adult leaders on an overnight snow camping expedition in the mountains.   This involves digging a cave in the middle of a snowfield, and spending the night in it.  For us, the temperature dropped to about 5 degrees.  I've done this before, but that doesn't mean I am acclimatized to January nights at almost 10,000 feet.  Like all such adventures, we had a mix of success and failures.  On the ride home today, it got me thinking about some of the comparisons between our experience and entrepreneurial business. 

Here is my list:

1. Leadership is a huge key to success.  All other things being equal, it is ability of the leader to inspire, drive, motivate, organize, build confidence in, respect, and appreciate his team makes the difference between success and failure.  Last night I watched a wise and experienced scout leader use all of those tools to keep a wet, tired and shivering young man not give up and feel good about his decision.
2. If you are in a difficult or tenuous situation, you are much better off keeping the troops well fed.  A positive distraction, well timed, can do wonders for the attitude of everybody.  The difficulty of the task may not change, but at least your approach to it is positive and healthy.
3. Don't let someone who has not already walked down that particular path make the key decisions alone.  It results in a finger-pointing frenzy.
4. The value of insulation cannot be overstated.  Those who were too quick into their snow caves without providing themselves with adequate protection from the cold and wet beneath them were soon sorry.  It was a little thing - that didn't take a lot more time or effort - that made all the difference.  In business, asset protection planning is the same way.
5. It can get dark and cold well before you are ready.  Planning with foresight is essential.
6. If you are haphazard in your planning and execution, it takes a long time to clean up after you.
7. At the end of a task, there is tremendous value in taking time to de-brief, press team members for input on what they have learned or would do differently next time, and to emphasize key performance points and standards.

Your next boss could be you! Prepare now to start your own company

There is a nice article on the website called "Business Owners Idea Cafe" written by Idea Cafe CEO Francie Ward, entitled "Get Ready! Your next boss could be you:  Turning the threat of downsizing into victory. Prepare now to create your own company."

In this article, Ms. Ward discussed 7 steps you can take while you still have a job to prepare to start your own company now.  You'll have to check out the article for the details, but the steps include:

1. Cinch in your spending appetite
2. Check into home refinancing
3. Maximize your credit card portfolio (which does not mean max out your credit cards!)
4. Review and correct your credit history
5. Complete your financing homework
6. Test drive the entrepreneurial life
7. Talk to entrepreneurs themselves

If you see the writing on the wall at your company, and are thinking of spreading your wings into the business world as a result, this is a quick, but worthwhile read.

AP Reports Nevada ranked among the Best States for Business

The results of a poll conducted by Chief Executive Magazine were released yesterday, with Nevada and Florida tied for send in being business friendly, followed by Arizona and North Carolina.  The worst state should be no surprise:  California, which ranked just below New York, Massachussetts and the District of Columbia. 

The editor-in-chief of the magazine, William J. Holsten, is quoted as saying:

"People are attracted to growth and attracted to the fact that there is a relatively uncomplex system controlling the business environment."