Starting a Business

Legal issues Comparing Loans and Equity Investments

by Fred Abramson on July 5, 2011 · 0 comments

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When starting a business, you probably need to finance part of it. After looking at you own pocketbook, which usually includes any savings, raiding your retirement account or if you are lucky any inheritance money from Aunt Matilda you probably need more money. There are two sources of outside funding: equity investment and loans.

Loans: The Pro’s and Con’s.

You probably don’t need me to tell you what a loan is. If you want to open a lemonade stand, your parents lend you $10 with interest of 2% and you promise to pay them back with interest at a later date.

While your dad was able to simply open his wallet to provide you with an infusion of $10 when you were eight, he might not be able to lend you a more hefty sum now. One step is to contact a commercial lender. I have the name of a fantastic bank lender that could help you out. However, the bank needs to make sure that it will be paid back. This requires security, often in the form of a mortgage. Bank loans often require a personal guarantee, which means that you are responsible if the business fails.

The big plus of obtaining a loan as compared to selling an equity stake is that if your business becomes successful and your profit is larger than you interest payment, you keep everything in the future and do not have to share them with investors.

If you have equity investors, you do not have to repay the investment that your investors put into your company if your business fails. However, you can also be subject to a lawsuit by your investors if they think that you misinformed them. Since an equity investor is a shareholder in the company, they may also require a voice in the running of the business.

The Law Office of Frederic R. Abramson represents start-up businesses in New York. If you have a question regarding equity investments and loans feel free to contact me at 212-233-0666.

Legal issues Comparing Loans and Equity Investments

When Should You Incorporate?

by Fred Abramson on January 7, 2011 · 0 comments

2839v3 max 450x450 When Should You Incorporate?
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You have this great business idea and perhaps you are short on funds. You know that you should speak to a lawyer. So you decide to call my office looking for some advice.  The first question that you will probably ask is if you should incorporate your business.  My answer is nearly always yes.  Here’s why:

  1. You own assets. Corporations are great because if play by the rules, your personal assets will be protected.  If you decide to sell a Amigurumi Zombie Panda on Etsy and it turns out that your cute toy is defective, you can be personally sued if you fail to incorporate. The lawsuit itself could take five years and a judgement is good for 20 years. Even if you don’t have any assets now, if you have faith in your idea (you should) your   For under a grand in legal fees, you could establish your company as a  S Corporation in New York.
  2. You have a partner. If you have a business partner, you are absolutely crazy if you don’t incorporate. You are certifiable if you don’t have an operating agreement.  There are millions of things that can go wrong. What happens if you are the one who has the great idea and your business partner is the money guy and you have a falling out? Who has ownership of the business?
  3. You want to borrow money. If you want an SBA loan, you are required to incorporate.
  4. You want to sell to the government or a large company. Many government contracts are only open to corporations. Due to the crackdown by the IRS on independent contractors, large companies rather hire a corporation rather than a sole proprietor.
  5. You want investors. Do you really think that an angel will be willing to invest your unincorporated business? How are they suppose to get a piece of the action?

For more reading: Top Ten Legal Mistakes Made by Entrepreneurs.

If you have a question regarding incorporating your business in New York, contact the Law Office of Frederic R. Abramson at 212-233-0666.

When Should You Incorporate?

Why do Startups fail? 10 Startup Ideas That Stink

by Fred Abramson on October 11, 2010 · 1 comment

300px MHV DeLorean DMC12 01 Why do Startups fail? 10 Startup Ideas That Stink

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Why do so many startups fail? You may be really smart, execute well and have the funding.  However, the bigger problem may that the problem is too big to handle. The blog Business Insider lists ten startup ideas that never work.  They are:

  1. Semantic Search/Any search company that’s not Google. When was the last time that you asked Jeeves anything?
  2. Social recommendations as a standalone don’t work.
  3. Local News Sites. Perhaps the Patch network of sites may work, but probably not because of lack of advertising dollars.
  4. Micropayments don’t work. The site with the best content, The New York Times failed charging by the article.
  5. Stop trying to kill email. Look what happened to Google wave.
  6. You can’t try to make a better car company. Tesla has sold only 2,000 cars.  How about the DeLorean? I vividly remember John DeLorean busted on tape selling cocaine in a ludicrous attempt to save his company.
  7. Music startups can’t get enough paying customers. I am a music geek and have  purchased music online occasionally on iTunes and rarely on Amazon. (I still purchase CD’s at J&R Music, so I may be a bit of a dinosaur).
  8. Marrying the web and the TV hasn’t worked out.  Even though all the cool kids in New York love Boxee, do you know of anyone who uses it? It remains to be seen what happens with Apple and Google’s latest offerings, but history is not on  their side.
  9. RSS Readers are not a business. Whatever…. Google does the job reasonably well.
  10. A startup focused on kids or making life easier for parents. I’m not sure I agree with this overboard generalization. Certainly my hometown of Port Washington,NY needs more daycare centers. However, if you are planning a startup to take on the big boys, ie Target, Wal-Mart et. al, you are looking for trouble.

What do you think? What is on your list for startup ideas that never work?

The Law Office of Frederic R. Abramson represents startups and small businesses in New York. If you have any questions, feel free to call me at 212-233-0666.

Why do Startups fail? 10 Startup Ideas That Stink

12 Things You Need to Know About New Small Business Jobs Act

by Fred Abramson on September 27, 2010 · 1 comment

President Obama signed into law today the Small Business Jobs Act. If you are an entrepreneur or run a small business, there are a number of key provisions that can help.

  1. Successful SBA Recovery Loan Provisions will be extended. The extension of these provisions provides the capacity to support $14 billion in loans to small businesses. That’s a big wade of cash which your business may be able to tap into.
  2. Maximum Loan Size for The Largest SBA Programs will be more than doubled.  This could help to provide greater access to working capital loans that small businesses use to purchase new inventory and take on their next order, which could help small business owners  create new jobs.
  3. A New $30 Billion Small Business Lending Fund. I am really interested to see how this is going to work. Currently, many small businesses are having difficulty obtaining access to capital because banks have cut off their credit. This provision would provide incentives to small banks to lend to small businesses.
  4. An Initiative to Strengthen Innovative State Small Business Programs – Supporting Over $15 Billion in Lending.  I am not sure how this will play out.
  5. Eight New Small Business Tax Cuts – Effective Today:
  • Zero Taxes on Capital Gains from Key Small Business Investments.
  • Extension and Expansion of Small Businesses’ Ability to Immediately Expense Capital Investments.
  • Extension of 50% Bonus Depreciation.
  • A New Deduction of Health Insurance Costs for Self-Employed. This is huge for self-employed individuals.  If you are self-employed, you can get a deduction for the cost of health insurance for yourself and your family members in calculating your self-employment taxes.
  • Simply deduction for cellphone bills. You can now deduct the full cost of your cellphone without providing documentation about each and every phone call.
  • An Increase in the Deduction for Entrepreneurs’ Start-Up Expenses. Entrepreneurs can deduct from their taxes for this year from $5,000 to $10,000 (with a phase-out threshold of $60,000) in expenditures.
  • Limitations on Penalties for Errors in Tax Reporting That Disproportionately Affect Small Business. If your business get audited, this should help.

What do you think of this bill? What more (or less) do you think the government should do to help small businesses.

The Law Office of Frederic R. Abramson represents small businesses in New York State.

12 Things You Need to Know About New Small Business Jobs Act

Nurturing Start-Ups is the Path to Creating New Jobs

by Fred Abramson on September 13, 2010 · 2 comments

nurture375 7i59 e1273843849519 Nurturing Start Ups is the Path to Creating New Jobs

Two-thirds of net new jobs are created by small businesses.  However, the National Bureau of Economic Research found that once the age of a business is taken into consideration, there is no systematic relationship between firm size and growth.

According to the New York Times, nearly all job growth occurs when businesses are starting up. When businesses mature,  job expansion essentially stops.

Our unemployment rate is at 9.6%. Any serious solutions for creating new must focus on how to create new start-ups and nurture new firms that are in their infancy.

Some argue that raising long-term capital gains, like the Obama administration is proposing, can hurt the prospects of start-ups.  Since angel investors calculate taxes when deciding how much to invest, they may decide to fund less start-ups.

On the other hand, most new businesses make  little or no income. Entrepreneurs focus on making it big, not on taxes. The  New York Times notes that when Microsoft started up, the top income tax rate was at 70%.

One cheap way of fostering start-ups is by granting more residence visas to skilled immigrants, especially those who attend American universities. On February 24, 2010 Senators Kerry and Luger proposed the Startup Act of 2010, which would permit immigrant entrepreneurs to stay or immigrate into the  United States if they have secured “significant” funds to start a new company. Since immigration is a sensitive issue and the mid-term elections are upon us, this bill seems unlikely to pass soon.

Start-ups are always in need of capital. Unfortunately, banks have tightened their lending to start-ups.  Since the private sector is unwilling to lend, the government may have to step in and start lending to start-ups.

Another possible solution is to provide funding for incubators. Currently, there is an excess capacity of commercial real estate. The government should provide tax breaks to landlords to provide below market leases to incubators. Incubators would be required to house no less than three different businesses and be in business for less than 3 years.

What to you think? Is funding incubators a good idea? What are your solutions for job growth?

Frederic R. Abramson is the principal of the Law Office of Frederic R. Abramson, which represents start-ups.

Nurturing Start Ups is the Path to Creating New Jobs

Simon Sinek: How great leaders inspire action

September 12, 2010

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Simon Sinek has a simple but powerful model for inspirational leadership all starting with a golden circle and the question  People don’t by what you do but why you do it. His examples include Apple, Martin Luther King, and the Wright brothers. Watch his TED talk.

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Startup Immigration Visa for Entrepreneurs announced by Senators Kerry & Lugar

February 24, 2010

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Senators Dick Luger and John Kerry introduced today a new piece of legislation entitled “The Startup Visa Act of 2010.” This visa would permit immigrant entrepreneurs to stay or immigrate into the  United States if they have secured “significant” funds to start a new company. The goal of the act is to bring new [...]

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Strategic Planning and your first consultation with a New York Business Law Attorney

January 15, 2010

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Whether you are interested in starting a business or looking for help with your existing corporation, your first meeting with an attorney should include strategic business planning.  This includes discussing what are the:

Desirable course of action your company should take among the different alternatives;
Feasability of each alternative;
Consequences of each course of action.

DESIRABILIITY ANALSIS
When discussing which alternative [...]

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Monday Inspiration: Grind it out and Crush it.

November 2, 2009

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It is gray and bit dreary today in New York.  After a weekend devoted to Halloween, football and Yankees, I can bet that you are not bringing your A game to work today. It’s time to grind it out.  Watch this video by Gary Vaynerchuck and go out and kick some ass.

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Why You Need to Practice Giving Value

October 28, 2009

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I have recently started reading The Magic of Thinking Big, by David J. Schwartz. The book, written in 1959, has been getting a lot of ink lately because his ideas are classic. Business thought leaders such as Seth Godin and Tim Ferriss cite the book as required reading.
Mr. Schwartz suggests that we should practice giving [...]

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