SOPA Act Update

Opponents of the Stop Online Piracy Act (SOPA) are gaining momentum, reports paidContent.org:

Not long ago the controversial law known as the Stop Online Piracy Act was poised to sail through Congress. But it lost traction at a Congressional earlier hearing this month and this week it suffered an additional two setbacks.

The bill called SOPA is backed by Hollywood and would force a wide range of internet players—from search engines to ad networks to payment processors—to cut off services to so-called ‘rogue websites’ that sell fake goods. Journalists and tech companies responded by warning that the bill is a gross overreach and that it will result in censorship and technical damage to the internet.

See also How SOPA Would Affect You: FAQ, Declan McCullagh, CNet, December 21, 2011

Cross-posted at Nevada Business Law Blog.

Federal Internet Sales Tax Law Coming Soon?

The Washington Times reports that the era of sales-tax-free shopping on the Internet for residents of relatively high sales tax states like California may be coming to a close, as brick-and-mortar retailers pressure Congress to close the "loophole":

[Federal Internet sales tax] bills have come and gone for years [in the U.S. Congress], but the political winds took a turn this year, thanks largely to the efforts of lawmakers in California. The state waged a high-stakes duel with Amazon.com and won after the online giant agreed in September for the first time to comply with a state sales tax instead of fighting it in the courts or at the polls.

Amazon.com had vowed to spend tens of millions of dollars on a ballot referendum to overturn the law, which the state countered with a threat to pass the bill as an “urgency measure” that voters could not repeal. Amazon.com ultimately blinked and signed off on a deal in which remote sellers agree to pay the California sales tax after a one-year grace period unless Congress approves national rules.

The California move injected fresh enthusiasm into federal efforts to level the sales-tax playing field. Within weeks, the House and Senate had introduced bipartisan legislation giving states the option of collecting sales taxes from online sellers.

California law already requires businesses and individuals to report and pay use tax at the same rate as sales tax for goods purchased online or out of state and brought in and used in California. Enforcement and compliance on the personal side has been minimal, but the Board of Equalization, the state agency charged with administering the state's sales tax law, has required businesses grossing more than $100,000 per year to register and report and pay use tax on any such purchases since 2009.

See also California Governor signs sales tax law compromise

Things I'm working on...

There is a ton going on in the Birmingham startup ecosystem, some that is public knowledge and some that isn't.

Here's a small sampling of some at least semi public stuff that I've been working on and think is worth supporting...if anything seems like a fit, give me a buzz, we can always use good help.

1. Expanding our BAN Mentorship Program
2. Creating a Culinary Startup Incubator
3. Proposing and Passing a Startup Capital Tax Credit
4. Getting regularly scheduled PR for the Startup scene
5. Supporting and expanding Birmingham Startup Drinks
6. Creating a Deal Flow Clearinghouse for non-startup related alternative investments
7. Brainstorming on ways to fill the "concept validation" gap

That's probably a good start.

If any of that strikes your fancy...come on down.

***This post probably also shows that we could use an initiative that keeps track of the various ways to get involved, but that will have to wait till another day.

Statement of Information Filings with the Secretary State for California LLCs and Corporations

The California Secretary of State has recently changed its procedures such that -unlike other business entity filings - LLC and corporation Statements of Information filed over the counter will be processed on the same timeline and priority as those filed by mail. The current turnaround time for either filing option is approximately four months.

There are two workarounds, neither one without its own problems:

• Use 24-hour expedited filing, at a cost of an additional $350. Number one, this is too expensive to justify its use in most instances and, number two, if there is any mistake on the form, the Secretary of State's office will reject the filing but retain the $350 for its expedited review of the form.
  
  
• For corporations only, the Statement (Forms SI-100, SI-200 C, and SI-200 N/C) may be filed online. The online filing system, however, does not provide a file-stamped copy. And isn't available yet for LLC Statement of Information filings (Forms LLC-12 and LLC-12R). It is anticipated that in late 2011 or early 2012, corporations will be able to receive a filed copy of the Statement of Information online, and that LLC online filing will be available sometime thereafter.

Arguably, the processing times situation has reached the crisis point where the Secretary of State's office is dysfunctional, but, on the other hand, the office has reduced the filing backlog for most other types of filings, perhaps at the expense of Statement of Information processing.

California BOE Sales Tax Permit (Sellers Permit) Tips

The Board of Equalization (BOE), charged with collecting California's sales and use tax, will soon be revising its seller's permit application form to reflect that names, addresses, and products purchased from major suppliers (if any) must be provided whether they are California-based or not.

Some other tips when obtaining a seller's permit (also referred to as a resale certificate or sales tax permit):

• It takes an average of 2-3 weeks to obtain one by mail, but you may obtain one on the spot in person at one of the BOE's field offices
  
• Possibly the most common error when mailing the application (Form BOE-400-SPA) is forgetting to attach copies of drivers' licenses
  
• Signatures on the application must match those on the drivers' licenses
  
• Foreign corporations and LLCs will not be issued a permit unless they are registered with the Secretary of State
• Contrary to what many BOE employees believe and may tell you, a social security number is not required in order to obtain a permit for a limited liabilty company (this issue arises when the LLC members are foreign nationals without SSNs or ITINs)

Other assistance and tips are provided to our clients as relevant.

California Sales Tax Rates as of October 1, 2011

The statewide California sales tax rate is 7.25% but various county and cities add surcharges, for example, Los Angeles County adds 1.00% for a total sales/use tax rate of 8.25%.

Effective October 1, 2011, sales tax rates are as follows (includes state, county, local, and district taxes:

ALAMEDA CO. 8.75%
City of San Leandro 9.00%
City of Union City 9.25%

ALPINE CO. 7.25%

AMADOR CO. 7.75%

BUTTE CO. 7.25%

CALAVERAS CO. 7.25%

COLUSA CO. 7.25%
City of Williams 7.75%

CONTRA COSTA CO. 8.25%
City of Concord 8.75%
City of El Cerrito 9.25%
City of Pinole 8.75%
City of Richmond 8.75%

DEL NORTE CO. 7.25%

EL DORADO CO. 7.25%
City of Placerville 7.75%
City of So. Lake Tahoe 7.75%

FRESNO CO. 7.975%
City of Reedley 8.475%
City of Sanger 8.725%
City of Selma 8.475%

GLENN CO. 7.25%

HUMBOLDT CO. 7.25%
City of Arcata 8.00%
City of Eureka 8.00%
City of Trinidad 8.00%

IMPERIAL CO. 7.75%
City of Calexico 8.25%

INYO CO. 7.75%

KERN CO. 7.25%
City of Arvin 8.25%
City of Delano 8.25%

KINGS CO. 7.25%

LAKE CO. 7.25%
City of Clearlake 7.75%
City of Lakeport 7.75%

LASSEN CO. 7.25%

LOS ANGELES CO. 8.75%
City of Avalon 9.25%
City of El Monte 9.25%
City of Inglewood 9.25%
Pico Rivera 9.75%
Santa Monica 9.25%
South El Monte 9.25%
City of South Gate 9.75%

MADERA CO. 7.75%

MARIN CO. 8.00%
City of Novato 8.50%
City of San Rafael 8.50%

MARIPOSA CO. 7.75%

MENDOCINO CO. 7.25%
City of Fort Bragg 7.75%
City of Point Arena 7.75%
City of Ukiah 7.75%
City of Willits 7.75%

MERCED CO. 7.25%
City of Gustine 7.75%
City of Los Banos 7.75%
City of Merced 7.75%

MODOC CO. 7.25%

MONO CO. 7.25%
Mammoth Lakes 7.75%

MONTEREY CO. 7.25%
City of Del Rey Oaks 8.25%
City of Marina 8.25%
City of Pacific Grove 8.25%
City of Salinas 7.75%
City of Sand City 7.75%
City of Seaside 8.25%

NAPA CO. 7.75%

NEVADA CO. 7.375%
City of Nevada City 7.875%
Town of Truckee 7.875%

ORANGE CO. 7.75%
City of La Habra 8.25%

PLACER CO. 7.25%

PLUMAS CO. 7.25%

RIVERSIDE CO. 7.75%
City of Cathedral City 8.75%

SACRAMENTO CO. 7.75%
City of Galt 8.25%

SAN BENITO CO. 7.25%
City of Hollister 8.25%
City of San Juan Bautista 8.00%

SAN BERNARDINO CO. 7.75%
City of Montclair 8.00%
City of San Bernardino 8.00%

SAN DIEGO CO. 7.75%
City of El Cajon 8.75%
City of La Mesa 8.50%
City of National City 8.75%
City of Vista 8.25%

SAN FRANCISCO CO. 8.50%

SAN JOAQUIN CO. 7.75%
City of Manteca 8.25%
City of Stockton 8.00%
City of Tracy 8.25%

SAN LUIS OBISPO CO. 7.25%
City of Arroyo Grande 7.75%
City of Grover Beach 7.75%
City of Morro Bay 7.75%
City of Pismo Beach 7.75%
City of San Luis Obispo 7.75%

SAN MATEO CO. 8.25%
City of San Mateo 8.50%

SANTA BARBARA CO. 7.75%

SANTA CLARA CO. 8.25%
City of Campbell 8.50%

SANTA CRUZ CO. 8.00%
City of Capitola 8.25%
City of Santa Cruz 8.50%
City of Watsonville 8.25%

SHASTA CO. 7.25%

SIERRA CO. 7.25%

SISKIYOU CO. 7.25%
City of Mt. Shasta 7.50%

SOLANO CO. 7.375%

SONOMA CO. 8.00%
City of Cotati 8.50%
City of Rohnert Park 8.50%
City of Santa Rosa 8.50%
City of Sebastopol 8.25%

STANISLAUS CO. 7.375%
City of Ceres 7.875%

SUTTER CO. 7.25%

TEHAMA CO. 7.25%

TRINITY CO. 7.25%

TULARE CO. 7.75%
City of Dinuba 8.50%
City of Farmersville 8.25%
City of Porterville 8.25%
City of Tulare 8.25%
City of Visalia 8.00%

TUOLUMNE CO. 7.25%
City of Sonora 7.75%

VENTURA CO. 7.25%
City of Oxnard 7.75%
City of Port Hueneme 7.75%

YOLO CO. 7.25%
City of Davis 7.75%
City of West Sacramento 7.75%
City of Woodland 8.00%

YUBA CO. 7.25%
City of Wheatland 7.75%

Assistance with, and advice regarding, sales tax permit registration is included in our full-service LLC formation and full-service incorporation packages.

Jerry Brown Signs Amazon.com Sales Tax Law Compromise

California governor Jerry Brown signed into law a compromise of the standoff between the state and Amazon.com over collection of sales tax.

Gov. Jerry Brown signs Amazon sales tax collection law, Los Angeles Times, September 23, 2011

See also Businesses continue to flee state

A VC: Difficult Is Good

After reading a great article (Build Something People Need: On Raising Venture Capital And Creating Startups That Matter) about proper entrepreneurial focus on the FastCompany Blog by Rod Ebrahimi, it reminded me of another article (A VC: Difficult Is Good) by Fred Wilson that I had saved earlier this year and meant to write about before now.

Both of these articles touch on two essential characteristics of successful entrepreneurs...they focus on value to customers and work incredibly hard. When those two characteristics are coupled with talent and a dash of luck big things can result and, as an investor, that is the canoe I want to be in.

Nevada Business Law Blog Launch

Introducing our Nevada Business Law Blog, launched today. The first post concerns Nevada's new single-member LLC law, and may be of interest to California residents and businesses, as well as Nevadans.



The blawg can be found at www.NVBizLawBlog.com

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP

Code Section 1202: Let’s Hope It Doesn’t Expire | Startup Company Law Blog | Davis Wright Tremaine LLP (LINK)

'via Blog this'

Joe makes some great points, but another reason is that many investors are just beginning to learn about Section 1202 and make plans that allow them to take advantage of it.

Let's face it, people don't usually live and breathe the tax code and many people didn't immediately realize (and many probably still don't) that the 100% exclusion even existed, so it is necessary to leave it in place for a reasonable length of time in order for it to have the intended effect.

California companies continue to flee state over taxes, regulatory environment

CNN ran another article on businesses leaving California for more favorable tax and regulatory climates. Lieutenant Governor Gavin Newsom is promising an economic development plan soon, but the bad news for most of my clients and for the state's economic prospects is that they are unlikely to be assisted by it, in that it appears it wiltarget only specific industries and even then likely primarily larger and more politically connected companies:

Newsom's plan will focus on California's premier industries, including biotechnology, agriculture and digital media. It will highlight the state's strengths in innovation and research and cultivate more manufacturing and exports. It also will examine how to address executives' concerns about regulation, taxes and layers of bureaucracy.

See also:



Amazon sales tax battle centers on jobs, LA Times, July 12, 2011



CEOs rank California 51st in the nation



California scheming



August 2011 Update: Lt. Governor Newsom released his short-on-specifics economic agenda for California, to a mixed response on July 29, 2011.

Recommended Reading List for Entrepreneurs and Angel Investors

After a lot of requests for "a book to read and get the basics" I have finally compiled a reading list that includes not just "a book" but a handful of the best books I know of for entrepreneurs and investors.

If I've missed a great one, please give me a shout so I can add it to the list.

*Note - the list is multiple pages, so don't forget to flip through.



**For future reference, this list is also on the bottom left of the main blog and is updated periodically.

Entrepreneur Resources - Getting an Education

So you are an entrepreneur wanting to learn about starting and running a high growth company or about the angel/vc finance world. Where do you go?

Right here:

1. For Videos - (LINK) YouTube
2. For Books - Check out the recommended reading list - (LINK)
3. For BAN information - check out our website (http://www.birminghamangels.com/)
4. For current topics/articles follow BAN on:

Facebook - (Page LINK)
Twitter - (Profile LINK) @bhmangelnetwork
LinkedIn - (Group LINK)

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

Although I'm thrilled to hear about these kind of initiatives in the Southeast, I would really love to see some in my home state for a change.

CAPCO all by itself, although great, is just not enough.

Gov. Haslam: TN to co-invest via INCITEinnovation and jobs-formation campaign on Venture Nashville

GOVERNOR Bill Haslam's new $50 million INCITE economic-innovation program will include co-investment for Tennessee ventures, new incubators, a push on both tech transfer and entrepreneurship, and a continuing role for Tennessee Technology Development Corporation (TTDC) and other allies, the governor said today.

Incorporation To Avoid IRS Tax Audits

According to this Wall Street Journal article, sole proprietors filing Schedule C with their personal (1040) tax return to report business income are 10 times more likely to end up involved in the stress, annoyance, and time consumed with an IRS tax audit:

IRS Statistics [Excel file] show that you are 10 times as likely to be audited as a Schedule C filer than if you incorporate your business and elect S corporation status. While it costs a bit of money to incorporate, the move affords you greater personal liability protection and reduces your chances of being audited. In deciding whether to change your business status, include both tax and non-tax factors.

Note: Forming a limited liability company for one owner will not give you any audit protection, because the owner still files a Schedule C.

"10 Ways To Avoid A Tax Audit," by Barbara Weltman, April 15, 2011

Online Notary Public Alert

California's Secretary of State has issued an alert regarding online notary services, purporting to provide notarization for California residents over the Internet using a webcam. A webcam is not a permissible substitute for appearing before a notary in person (or having the notary travel to you, if you are not mobile). Notary license may be checked online here. The full text of the alert follows:

Online webcam notarization is invalid and illegal in the State of California.

A private company claims to have the first online notarization website and has sent misleading information and made false claims to California notaries public concerning a new online notarization service. The web-based platform purports to allow a person to submit copies of identification over the Internet and to use a webcam in lieu of a personal appearance in front of a notary public. Appearance via webcam does not meet the requirements for notarization in California.

California notaries public are authorized under current law to perform electronic notarizations as long as all the requirements for a traditional paper-based notarial act are met, including the use of a seal for all but two specific documents used in real estate transactions. California law requires a person to appear personally before a notary public to obtain notarial acts like acknowledgments or jurats. This means the party must be physically present before the notary public. A video image or other form of non-physical representation is not a personal appearance in front of a notary public under current state or federal laws. The technology solution offered by this private company does not comply with California law.

(Article) The Four Main Things that Investors Look for in a Startup | Both Sides of the Table

This is a good overview that is worth keeping in mind. I still like the Blue Ocean Strategies factors, but this gets to the point too.

The Four Main Things that Investors Look for in a Startup | Both Sides of the Table

"1. Momentum,
2. Management Team,
3. Market Size, and
4. Money."

Misguided Nebraska Senators question angel tax credit benefit due to business risk

The legislative debate over the Nebraska Angel tax credit is instructive for Alabama because we will probably have some of these same issues raised when the (hopefully soon to be introduced) Alabama angel tax credit is debated.

Nebraska Senators question 'Angel' tax benefit - Omaha.com

Lincoln Sen. Danielle Conrad, who led a legislative study last year on how to improve the “economic ecosystem” for entrepreneurs, said Nebraska has done well attracting larger businesses but needs to be just as aggressive helping innovators capitalize on a good idea or a new invention.

But Schuyler Sen. Chris Langemeier questioned whether the state should spend $3 million on such tax benefits when it is cutting spending elsewhere.

He called LB 389 “a slot machine.” Research shows that up to 75 percent of such projects fail.

“I’m not against this. I just don’t think today is the day to make this investment,” said Langemeier, who drafted an amendment to kill the bill.

Senator Langmeier is probably a very smart and hardworking individual, but his comments are laughable.  There are no doubt risks for the success of an angel investor tax credit, but the good Senator is missing them.  Calling an angel tax credit proposal a "slot machine" simply because many small businesses eventually fail completely misses the point...and the point IS that 25% of them succeed (by his statistics).  Of those succeeding, some are also going to succeed in a large way and that is exactly what makes the entire process profitable for entrepreneurs, investors and the State.   If the Senator's reasoning were followed then no one should ever start a new business.

Nonetheless, to a certain extent he is exactly right, because the law of large numbers is critical to angel investing just as in casinos*...only he has the parties wrong because in an angel tax credit the State is playing the role of casino, not player.  *(meaning, like individual bets, it takes investment in a lot of individual companies to normalize the overall portfolio return) In fact, based on some table napkin math, the State stands to create a tremendous capital multiplier by increasing the creation of high growth startups (see prior posts).   The only real limitation on the upside is the State's ability to keep supplying potential investors with high quality candidate companies able to appropriately use investment capital and that is a risk worth talking about and trying to mitigate, but that is for another post.

Organized for success...

Many new (and even some experienced) entrepreneurs seem to struggle with the dizzying array of business entity choices and their various combinations. To name a few there are: proprietorships, partnerships, limited partnerships, LLPs, LLCs, Trusts, Corporations and S-corporations. Each entity has its place and time, but for high growth potential businesses I will choose a corporation almost every time. The reason is mainly tied to tradition and corporate governance.

"Tradition" you say...why in the world would that be a big deal? Well, the reason is rooted in a desire to maximize available resources and standard corporations have been the traditional entity of choice for high growth entities for a long time. That has resulted in most of the resources being created with a heavy Corporation bias and that bias runs the gamut from internet articles to professional expertise.

Corporate governance is the other reason and it is probably the biggest. By corporate governance, I mean the structure of how the entity develops, authorizes/makes decisions and holds people accountable.

Corporations have three main levels of authority to get these things done: (1) Board of Directors ("Board"), (2) Shareholders and (3) Officers. The basic process flow is: Shareholders elect the Board; the Board approves strategies and major decisions, including hiring/salaries of Officers; and Officers suggest strategies and actions to the Board for approval, then work to implement. As payment for their respective parts Shareholders receive profits, Officers (and employees) receive salaries and Board member compensation varies, but they typically receive a stipend of some kind.

By having the Board to focus on overall strategy and wade in on major decisions the company can ensure that planning is occurring (i.e. "doing the right things") while Officers focus on the day to day activities (i.e. "doing things right"). Meanwhile, Shareholders hold everyone else accountable for the end results.

This division of labor is critical in a high growth entity because, without the checks and balances, the high volume of necessary work makes it very easy for the favorite activities of the founders to take dominance to the detriment of other necessary activities. The typical result....Chaos and frustration reign.

In very small companies (startups or otherwise) maintaining a proper division of labor is complicated as well, which can be double trouble for a high growth startup. Small companies by definition don't have a lot of people involved, so it is easy not to properly maintain the division of labor because there aren't actually different people performing each function. When small size is combined with entities that do not legally require such a division of labor it is easy to understand why it may never occur at all and in companies where planning, implementation and accountability are not all treated with due respect (which can certainly happen in a corporation too) the results are going to be sub optimal.

So the net-net is that I usually recommend corporations for high growth potential companies, but I would always recommend that companies think hard about what structures are in place to address planning, implementation and accountability regardless of the entity choice.

2011 EDD Employer Payroll Tax Changes

The EDD has announced additional online services for small business, as well as highlighting other 2011 payroll tax changes.

Open Letter re: Supercharging Business Development in Alabama

I would humbly propose a vision. The vision is of a state in the heart of the Southeast that is an economic engine and a force in the global economy. That may sounds unachievable, but I firmly believe that it is within our grasp if Alabama can couple some measure of bold leadership with coordinated and efficient usage of current resources.

The strategic steps need to include solutions for two major bottlenecks in the high-growth company creation process by:

1. Increasing the number of investment ready high growth potential companies in Alabama; and
2. Encouraging investor participation in funding seed and growth stage high potential companies.

As a part of step one.

The state needs to use existing state resources to support the maturation process of quality high-growth potential companies.

Today, the Board of Alabama Launchpad is meeting to discuss the direction of that program and it is potentially a very important meeting in this business development process. Launchpad is a unique statewide organization that was established as a partnership among the state's research universities and the business community. The primary program run by Launchpad is an annual business plan competition that awards grants of $100,000; $50,000 and $25,000 for 1st through 3rd places respectively and it is a great starting point.

The reviewers and mentors already working with Launchpad are great entrepreneurial resources and their feedback is often worth significantly more than the prize money. However, Launchpad can be much more...

Ask almost any active angel investor or seed stage venture fund manager in any state and you will hear a lament about the typical sophistication and "readiness" of most startup businesses for outside capital. This is a huge bottleneck in the creation of high growth companies because regardless of the amount of capital available, it simply will not be effectively put to work if there are not proper risk/reward investment opportunities. Either the capital will under-perform or it will be put to work in other investments.

This is an opportunity Launchpad can grow to fill with a couple of steps:

1. Launchpad is expanded to include any innovative business, so that the entire state population can have the opportunity to participate.

2. A seed fund (or grant program) is associated to provide a stipend of $10,000-20,000 to the top 25 (approx. Phase 4) participants.

*this would be in addition to rather than replace the top 3 awards

3. Launchpad schedule is reworked to be a quarterly program rather than annual.

4. In exchange for receiving the seed funding, the top 25 participants agree to move company operations into the nearest business incubator for a three month program *(think TechStars on a state-wide basis).

Such program incubators could include:

5. During the three month program, mentors and advisors (many qualified candidates are already involved as judges) regularly meet with the participants in a combination of one-on-one company sessions, incubator-wide group sessions and program-wide webinars.

6. Following the end of the three month program all of the participants would come together for a graduation showcase of all the companies and the progress made by them during the term.


As a part of step two.

The state needs to implement a state tax credit that encourages increased investor participation with potential high-growth companies in Alabama at both the seed stage and growth stage.

Such a tax credit would be best if:

1. It is open to many industries and leaves the specific company and industry selection to the investing parties, so that profit motive may direct the investing activity without artificial manipulation.

2. It is targeted at seed stage investments (i.e. no previous 3rd party capital, less than 20 or so employees, less than $1 million investment, etc.)* because that is where the largest gap is located.

*the criteria need to be fully vetted to avoid unintended consequences

3. It is in the 20-40% range, so that the investor incentive is significant while not eliminating the need to properly evaluate prospective investments.

4. It is available for both direct investments into a target company as well as for investment into a qualified venture fund, so that those investors interested in participating, but without sufficient time, skill or interest may act through a qualified professional.

Conclusion

If both of these projects (Part 1 and 2) can be implemented, then Alabama could see the annual creation of 100 new investment ready high growth potential companies. If only 5% of those companies are able to achieve a successful exit, then Alabama could still be creating an annual addition of approx. $225 million* in new enterprise value to the state's economic base. Furthermore, those number would not include the economic effect of the other 95 companies and the "exiting" companies that choose to stay in Alabama and continue to grow, so the total economic effect could be many times the simple exit value.

*(5 companies annually multiplied by the $46 million median exit value in 2010 of venture backed companies...according to DJ VentureSource)

P.S. As always, take what you like and leave the rest.

IRS targets S corporation tax savings

The Wall Street Journal reports on a recent court case, David E. Watson P.C. v. U.S., in which the IRS took on an accountant-taxpayer for not paying himself enough salary as an employee of the subchapter S corporation he co-owned:

For Sub-S owners, this issue isn't going away. Last year it even turned up in legislation, when the House passed a provision that would have subjected all profits of shareholder/employees of personal-service firms—such as accounting, law and consulting firms—to payroll taxes. The measure died in the Senate, but the IRS would likely welcome its return. Cases like Mr. Watson's are expensive for the agency to litigate because each turns on individual circumstances.

Recent IRS statistics suggest why the agency might focus on Sub-S pay. Over the past decade and a half, when executive paychecks exploded, the salaries of Sub-S owners declined as a percentage of total income, from 52% in 1995 to 39% in 2007, according to the latest data available. (The remaining income is taxable to the owners as well, but doesn't incur payroll taxes.) During the same 12-year period, Sub-S income doubled, while salaries increased only 26%. The average pay for a Sub-S owner was recently was $38,400, according to Martin Sullivan, an expert with Tax Analysts, a nonprofit publisher near Washington.

Tom Ochsenschlager, former head of tax for the American Institute of CPAs, says pay and payroll tax issues are a frequent source of friction with clients: "Sometimes you have to take them to the woodshed and say, 'You need to report more income as pay for personal services."'

What is a fair ratio of profits to pay? There isn't one answer, experts say. A company with substantial capital or assets, such as a manufacturer, often is able to justify lower pay than one selling personal services like a law or accounting firm. Says Mr. Willens: "I would tell a client that for personal services, 70% would be the absolute floor and might not get the job done," he says.

Read more about S corporation tax savings.

Social Security Payroll Tax Holiday 2011

For 2011 only, there is a minor payroll tax holiday, where the employee half of Social Security tax will be paid out of the U.S. federal government's general fund, instead of deducted from employees' paychecks. This is part of the overall tax compromise bill, which Congress passed, extending the Bush tax cuts for two years, as well as adding this tax cut.

Employees will pay 4.2% of their wage earnings up to the $106,800 cap, instead of the normal 6.2% rate. Employers still pay their full half (6.2%). The self-employed, who normally pay both halves of the Social Security tax through the self-employment tax, will pay a combined rate of 10.4% (the employer's 6.2%, plus the employee's 4.2% rates).

To a minor extent, this limited payroll tax holiday - which is designed to spur consumer spending - will ameliorate some of the benefits of S corporation payroll tax savings.

AngelPool - First Deal Syndication Meeting Recap

We had the first of, hopefully, many regional web conferences among the southeastern ACA (Angel Capital Association) chapters as a part of AngelPool last week. Included on the meeting were representatives from:

460 Angels, Blacksburg VA
Active Angel Investors, Vienna VA
Angel Capital Group, Hendersonville TN
AngelLounge, Atlanta GA
Birmingham Angel Network, Birm. AL
Central Texas Angel Network, Austin TX
CEO Ventures, Atlanta GA
Charleston Angel Partners, Charleston SC
Concho Valley Angel Network, San Angelo TX
Global Angel Investor Network, Savannah GA
Go Beyond Network, Naples FL
Gulf Coast Venture Forum, Naples FL
Houston Angel Network, Houston TX
Huntsville Angel Network, Huntsville AL
Inception Micro Angel Fund, Winston-Salem NC
InvestIn Forum of Angel Investors, Dallas TX
Jefferson Corner Group, Charlottesville VA
Louisiana Angel Network, Baton Rouge LA
Nashville Capital Network, Nashville TN
New Dominion Angels, Warrenton VA
New World Angels, Boca Raton FL
North Texas Angel Network, Fort Worth TX
Piedmont Angel Network, Greensboro NC
South Coast Angel Fund, New Orleans LA
South Texas Angel Network, San Antonio TX
Springboard Capital, Jacksonville FL
Upstate Carolina Angel Network, Greenville SC
Virginia Active Angel Network, Charlottesville VA
Women Angels, Miami FL


Over the course of an hour or so, we heard from three new companies (including BAN portfolio company TransactionTree) and had a few minutes for Michael Price (AngelPool Chairman) to provide some thoughts and visions for the future.

Despite a couple of to be expected technical glitches, it was a nice start to streamlining the syndication process and providing a great new resource for our southeastern ACA chapters.

Apply to Birmingham Angel Network, LLC - Create Application

It's a new year and time to kick off a great new class of companies for 2011.

Birmingham Angel Network ("BAN") will be looking for a new high growth companies to work with at our next meeting on Thursday night (Jan. 27th).

If you or someone you know would be a great fit, please tell them to submit an application before Thursday or it will be another 3 months before there is another opening. General criteria may be found at: BirminghAmangels.com/entrepreneurs.php

Submissions may be made online through AngelSoft at: Apply to Birmingham Angel Network, LLC - Create Application.







If you are a potential investor, Thursday is a great time to visit and check things out as well. RSVP at: http://ban012711.eventbrite.com/

Median exit price was up 70% to $46 million in 2010, but either way the math still works.

"The $46 million median amount paid for a venture-backed company in 2010 was 70% more than the $27 million median in 2009."Exits and amount up in 2010 by Dow Jones Venture Source

Thankfully those numbers are still in line with the the $30 million average successful exit planning assumption we have been using in our portfolio pro formas. (See the Nov. 22 blog post for more detail)

Of course, we would all be even happier if a non-typical paypal/google type 1000x slipped in there too.