February 2010 Archives

February 24, 2010

Banks Urged to Look Beyond Numbers When Lending to Small Businesses

The Board of Governors of the Federal Reserve System issued a press release this month urging banks to make small business loans based on a broader-based analysis of the viability of a business rather than simply a credit score. In essence, the Board of Governors is asking all banks to act more like community banks which are often more willing to lend to small businesses. Community banks often have a better understanding of the local market and the borrower as opposed to commercial lenders who simply rely on numbers and credit scores in their analysis.

The statement assures banks that "financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower's financial condition will not be subject to supervisory criticism for small business loans made on that basis. Financial institutions should understand the long-term viability of the borrower's business and focus on the strength of a borrowers' business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower's geographic location or industry."

As reported in a Business Week article by John Tozzi, "Banks have been pulled in two directions over commercial lending. The Obama Administration and members of Congress have urged them to expand lending to small businesses, but regulators want them to reduce their risk. In this statement, the regulators say they won't penalize banks for making loans to businesses in troubled industries or locations, as long as the bank has soundly assessed the borrower's ability to repay."

February 18, 2010

Proposed Tax Credit for New Hires in 2010

In an effort to stimulate hiring and increase employment, the Obama administration has proposed a one-year tax credit for businesses that hire new employees in 2010. Under the proposal, any firm that hires a new employee in 2010 would get up to a $5,000 tax credit for each hire. The credit is capped at $500,000 per company. In addition, firms that hire new employees or increase salaries of current employees would be reimbursed for Social Security taxes related to their increased payroll. The Social Security reimbursement would not apply to wages above the $106,800 Social Security maximum to make sure the benefit is tied to -- and encourages the hiring of -- less highly paid workers.

The administration estimates 1 million small businesses will take advantage of the credit, which is expected to cost the government $33 billion. The money would come from savings from the Troubled Asset Relief Program, which officials now think will cost $200 billion less than expected.  

February 16, 2010

New Credit Card Rules Don't Help Small Businesses

New credit card rules designed to protect consumers from overreaching practices by credit card companies take effect on February 22nd. These new rules, however, apply only to consumers--they do not cover credit cards issued to small business owners. So small businesses that carry credit card debt won't benefit from the new credit card rules unless they start charging business expenses on their personal credit cards. But, as noted by Emily Maltby in "Entrepreneurs Weigh Credit-Card Options,"while this may sound tempting, it's probably not a good idea. First, the new rules are intended to protect consumers, not businesses--they may not cover a personal credit card that is used too much for business purposes. Also, one of the first things most business owners do when they get started is to separate personal and business spending and expenses for tax and other reasons. Going back on this basic good business practice is not a good idea. 

February 13, 2010

Obama Proposes New $30 Billion Fund to Promote Small Business Lending

President Obama has announced a new lending plan which would provide smaller community banks with new capital to lend to small businesses. Under the proposal, which will require Congressional approval, the government would use $30 million it receives back from Wall Street banks repaying bailout loans under the Troubled Asset Relief Program (TARP) and set up a new Small Business Lending Fund. This fund would be available to banks with assets under $10 billion--primarily smaller community banks. These banks account for 50% of all small business loans.  

"These are the small, local banks that work most closely with small business -- they're usually the ones that provide them their first loan, and they watch them grow through good times and bad," Mr. Obama said. . . "The more loans these banks provide to creditworthy small businesses, the better deal we'll give them on capital from this fund that we've set up."

President Obama has also proposed continuing other small business lending incentives such as waiving fees and increasing guarantees for loans backed by the Small Business Administration. In his State of the Union address, President Obama also said he will be proposing new tax breaks for small businesses that create new jobs or increase hours and wages on existing jobs.


February 11, 2010

The L3C LLC: Low-Profit Limited Liability Company

In our last two posts, we talked about the series LLC and the nonprofit LLC. Here's one more: the L3C, or LLLC.
L3C is a nickname for a "low-profit limited liability company." Why would anyone go into business to make little profit? Similar to a nonprofit, an L3C is organized to perform services or engage in activities that benefit the public. But a L3C is run like a regular profit-making business and is allowed to make a profit as a secondary goal. 
A small but growing number of states, including Illinois, Michigan, Utah, Vermont, and Wyoming, allow L3Cs. These states' LLC statutes set out the purposes for which an L3C company can be formed; the statutes are modeled on the IRS requirements for program-related investments (PRIs). However, the IRS has not yet ruled on whether investments in L3Cs will qualify as PRIs. The idea behind an L3C is to allow public-spirited LLCs to receive seed money from large nonprofit foundations. But because the IRS has not yet ruled on this issue, because L3Cs are not automatically qualified as tax-exempt nonprofit organizations under federal and state tax laws, and because they may not be eligible to receive foundation funds without the addition of restrictions to their articles of organization or operating agreement, they face challenges finding credibility in the real world of nonprofit-foundation funding. 
Update: I just read a February 9 article on L3C companies written by Malika Zouhali-Worrall of CNN Small Business, focusing on a farmer-owned milk processing company in Maine. An interesting example of how the L3C structure can be used.

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).

February 6, 2010

A Nonprofit LLC?

In our last post we introduced a new type of LLC, the series LLC. Here we'll talk about another interesting way to use the limited liability company, the nonprofit LLC.
Nonprofit LLCs are usually formed by larger nonprofit corporations to house some of their activities. Some larger tax-exempt nonprofit organizations like to segregate nonprofit funds or assets in a nonprofit LLC. The assets of the nonprofit LLC must be irrevocably dedicated to nonprofit purposes, and the LLC cannot pay out profits to its members. 
As another strategy, some larger nonprofits form a regular profit-making LLC to place a limited liability shield around some of the nonprofit's unrelated business activities (activites that bring in a profit and are only tangentially related to the nonprofit's mission). As long as the LLC's income and activities are insignificant, relative to the overall income and activities of the parent nonprofit, this arrangement may pass muster with the IRS. The parent nonprofit has to pay income taxes on profits it receives from its LLC subsidiary. Next, up a hybrid LLC called the L3C, which has a mix of profit and nonprofit motives. 

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).

February 1, 2010

New Types of LLCs on the Horizon

There are three new types of LLCs (limited liability companies) that have come along in the past year or so: the series LLC, the LC3, or "low-profit limited liability company," and the nonprofit LLC. Each is unique and limited in scope and purpose. 
The series LLC allows LLC members (the owners) to own interests in different series of assets and to collect ifferent revenue streams from the LLC. So far, only fourteen states currently allow for the formation of a series LLC: Delaware, Florida, Indiana, Illinois, Iowa, Minnesota, Mississippi, Nevada, North Dakota, Oklahoma, Tennessee, Utah, Virginia, and Wisconsin. 
The main characteristic and advantage of the series LLC is that it allows the LLC to set up one or more series of assets within the LLC. Each series is administered separately from the other series, which means that separate businesses and properties can be subsumed into one LLC entity, but the business and assets of each series can be managed and operated separately from the business and assets of the other businesses. For example, each series can have separate owners and managers, a separate LLC operating agreement that specifies a separate division of profits and losses associated with the series, and other separate formation and operation characteristics.
An important aspect of some states' statutes regarding series LLCs is that each business is insulated from the liabilities of the other businesses within the LLC. A series LLC can work well to insulate multiple real property parcels owned by a real property developer. It may also work for an LLC engaged in separate lines of business that have unique legal liabilities attached to each business. Generally, however, for locally owned and operated small businesses, it is unnecessarily costly and complex to form a series LLC.
We'll talk about the nonprofit LLC and the LC3, or "low-profit limited liability company, in our next posts.

To learn more about making informed choices when forming an LLC, see Form Your Own Limited Liability Company, by Anthony Mancuso (Nolo).