On September 27, 2010, President Obama signed into effect a new law directed at helping small businesses survive and grow in this economy. The most useful provisions of the Act, in my opinion, are those directed at making it easier for small businesses to obtain bank financing. Businesses borrow money when they want to grow, which in turn leads to job creation. Therefore, lending to small businesses can have a positive impact on lowering the unemployment rate. In particular, the Act:
- provides $30 billion in cheap capital to community banks for use in making loans to small businesses;
- temporarily raises the government guarantee on certain Small Business Administration’s loans to 90% and waives fees on 7(a) and 504 loans;
- increases the size limits on various SBA loans (for example, a maximum $5 million 7(a) loan instead of a $2 million one); and
- allows temporary refinancing of unfavorable terms on commercial real estate loans through the SBA’s 504 program.
A link to the full text of the Act is below:
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h5297enr.txt.pdf
However, the Act also has its critics. See yesterday’s article posted by Barbara Weltman (link below). Ms. Weltman makes some valid observations about whether small businesses will actually be able to use all of the resources now available to them. My favorite point made by Ms. Weltman is that the most effective way to help small businesses is by actually listening to their problems (such as high regulatory compliance costs) and then creating regulation directed at solving those precise problems.
http://www.openforum.com/idea-hub/topics/innovation/article/small-business-jobs-act-of-2010-does-little-for-small-business-barbara-weltman
Tuesday, September 28, 2010
What are corporate formalities and why are they important to observe?
One of the main reasons why a business owner decides to incorporate is to limit his or her own personal liability for business debts. However, simply incorporating is not enough to enjoy protection of limited liability. One also needs to observe corporate formalities. Otherwise, the courts may decide to “pierce the corporate veil” of the business entity and hold the owner liable for the company debts. So, what does a business owner need to do to properly observe corporate formalities?
First, I want to point out that observing corporate formalities is important even for one-person corporations. Second, regardless of what anyone says, even LLC owners need to do it, not just owners of corporations (please keep reading, I’ll discuss LLCs a bit later).
Corporate formalities for corporations consist of the following (this may not be an all inclusive list, but I believe is a good start):
1. Bylaws. Every corporation must have bylaws, a set of internal rules governing how the corporation is run.
2. BOD Meetings. The board of directors of the corporation (needless to say that every corporation must have a board of directors, although these individuals can also serve as officers, subject to some exceptions) has to meet regularly. The secretary of the corporation should record minutes of the meetings, reflecting resolutions and discussions that the directors had at that meeting. The minutes would then need to be adopted by the board at the next meeting and put into a minutes book. All major decisions of the corporation should be adopted in a board resolution pursuant to the procedure set forth in the bylaws (such as mergers, stock issuances, major financial decisions such as loans, dividends, guarantees, hiring of consultants and legal or other experts, transactions with insiders, executive officer compensation, etc.).
3. Shareholders Meetings. Shareholders of the corporation should also have regular meetings (at least annually to elect directors), the secretary of the corporation should take minutes of the meeting and add them to the minutes book.
4. Stock Ledger. There needs to be a stock ledger reflecting the stock ownership of the corporation and the names and addresses of the shareholders.
5. Bank Account. The corporation has to have a separate bank account, and there should be no commingling of personal and business funds.
6. Business Name. All business of the corporation with third parties needs to be conducted in the name of the corporation so that it is clear that the directors and officers are acting on behalf of the corporation and not in their individual capacity.
7. Filings, Taxes. The corporation should file all appropriate federal, state and local tax returns and pay taxes when due, as well as obtain all necessary permits and licenses.
8. Assets. The corporation must have adequate capitalization and maintain proper operating capital.
9. Debt Guarantees. Shareholders should be careful not to personally guarantee and pay the debts of the corporation (at least not on the recurrent basis). Otherwise, the courts may decide that the owners act as alter egos of the corporation and the corporation has lost its separate entity status. Board resolutions should be adopted allowing guarantees for specified purposes only.
LLCs generally require less corporate formalities to preserve limited liability of their members. However, it is still important to do the following:
1. Have an operating agreement that defines member roles, outlines distribution guidelines and specifies operational and taxation rules.
2. Hold regular member meetings (some states like New York require at least annual meetings), adopt resolutions, record minutes, keep a minutes book.
3. Follow guidelines #4-9 above.
Following corporate formalities should become a part of doing business for both corporation and LLC owners. Board, shareholder or member meetings should take place on ongoing basis, and minutes of such meetings should be kept regularly. After all, it may be difficult if not impossible to recreate corporate formalities retroactively if the limited liability protection has been challenged.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.
First, I want to point out that observing corporate formalities is important even for one-person corporations. Second, regardless of what anyone says, even LLC owners need to do it, not just owners of corporations (please keep reading, I’ll discuss LLCs a bit later).
Corporate formalities for corporations consist of the following (this may not be an all inclusive list, but I believe is a good start):
1. Bylaws. Every corporation must have bylaws, a set of internal rules governing how the corporation is run.
2. BOD Meetings. The board of directors of the corporation (needless to say that every corporation must have a board of directors, although these individuals can also serve as officers, subject to some exceptions) has to meet regularly. The secretary of the corporation should record minutes of the meetings, reflecting resolutions and discussions that the directors had at that meeting. The minutes would then need to be adopted by the board at the next meeting and put into a minutes book. All major decisions of the corporation should be adopted in a board resolution pursuant to the procedure set forth in the bylaws (such as mergers, stock issuances, major financial decisions such as loans, dividends, guarantees, hiring of consultants and legal or other experts, transactions with insiders, executive officer compensation, etc.).
3. Shareholders Meetings. Shareholders of the corporation should also have regular meetings (at least annually to elect directors), the secretary of the corporation should take minutes of the meeting and add them to the minutes book.
4. Stock Ledger. There needs to be a stock ledger reflecting the stock ownership of the corporation and the names and addresses of the shareholders.
5. Bank Account. The corporation has to have a separate bank account, and there should be no commingling of personal and business funds.
6. Business Name. All business of the corporation with third parties needs to be conducted in the name of the corporation so that it is clear that the directors and officers are acting on behalf of the corporation and not in their individual capacity.
7. Filings, Taxes. The corporation should file all appropriate federal, state and local tax returns and pay taxes when due, as well as obtain all necessary permits and licenses.
8. Assets. The corporation must have adequate capitalization and maintain proper operating capital.
9. Debt Guarantees. Shareholders should be careful not to personally guarantee and pay the debts of the corporation (at least not on the recurrent basis). Otherwise, the courts may decide that the owners act as alter egos of the corporation and the corporation has lost its separate entity status. Board resolutions should be adopted allowing guarantees for specified purposes only.
LLCs generally require less corporate formalities to preserve limited liability of their members. However, it is still important to do the following:
1. Have an operating agreement that defines member roles, outlines distribution guidelines and specifies operational and taxation rules.
2. Hold regular member meetings (some states like New York require at least annual meetings), adopt resolutions, record minutes, keep a minutes book.
3. Follow guidelines #4-9 above.
Following corporate formalities should become a part of doing business for both corporation and LLC owners. Board, shareholder or member meetings should take place on ongoing basis, and minutes of such meetings should be kept regularly. After all, it may be difficult if not impossible to recreate corporate formalities retroactively if the limited liability protection has been challenged.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.
Friday, September 24, 2010
NYSE Commission Announces Core Corporate Governance Principles
On Thursday, September 23rd, the New York Stock Exchange-sponsored commission on corporate governance issued a report that contained 10 core corporate governance principles. Even though these principles apply to public companies, private companies should also be aware of them and try to apply them on an ongoing basis. Apart from the principles themselves, the commission noted that:
- the objectives of a board of directors should be directed at long-term growth, and any measures by the management aimed at short-term stock price increases are inconsistent with the corporate governance principles of the company;
- it is not just the board’s responsibility to make sure that the company has sound corporate governance practices, but importantly it is the management’s responsibility to create an environment where these principles are created, respected and fostered;
- a board of directors should be comprised of a mix of independent directors and those who are not independent, so that all points of view can be presented and considered; and
- best corporate governance principles are those that are created by the market itself (ie, other companies), not those that are dictated from above by a rule-making authority.
I am copying below the 10 core principles from the NYSE news release:
• The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
• Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;
• Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
• Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;
• While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
• A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
• The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
• The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
• The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
• The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.
Here is a link to the press release: http://www.nyse.com/press/1285236224629.html
Here is a link to the full commission report: http://www.nyse.com/pdfs/CCGReport.pdf
- the objectives of a board of directors should be directed at long-term growth, and any measures by the management aimed at short-term stock price increases are inconsistent with the corporate governance principles of the company;
- it is not just the board’s responsibility to make sure that the company has sound corporate governance practices, but importantly it is the management’s responsibility to create an environment where these principles are created, respected and fostered;
- a board of directors should be comprised of a mix of independent directors and those who are not independent, so that all points of view can be presented and considered; and
- best corporate governance principles are those that are created by the market itself (ie, other companies), not those that are dictated from above by a rule-making authority.
I am copying below the 10 core principles from the NYSE news release:
• The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation;
• Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behavior;
• Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation;
• Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner;
• While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms;
• A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis;
• The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board;
• The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability;
• The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process;
• The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out.
Here is a link to the press release: http://www.nyse.com/press/1285236224629.html
Here is a link to the full commission report: http://www.nyse.com/pdfs/CCGReport.pdf
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