Beware of New Business Identity Theft Schemes

by John Morrissey, Sr. Vice President, National Corporate Research, Ltd.

Over the last few years several Secretaries of State, such as Colorado, Massachusetts and Nevada, have issued warnings concerning fraudulent solicitations for annual report filing and meeting minute preparation services. The solicitations are disguised with official looking seals and language to make it appear that the notices come from a state agency. Now the Secretaries of State are starting to issue warnings about a potentially more costly fraud — business identity theft. Examples of these warnings can be found on the websites of the Secretaries of State of Colorado and Ohio.  

Fraudulent Changes to Business Entity Records
While the term “business identity theft” (also referred to as corporate or commercial identity theft) includes a wide variety of crimes involving the misuse of entity names, the Secretaries of State are principally concerned with schemes involving a criminal making unauthorized changes to the state’s business entity records of a target company to make it appear that the fraudster is authorized to act on behalf of the company. The fraudster will then use the altered records to make a fraudulent application for credit. The perpetrator may take other steps, such as establishing virtual offices and fake websites to support the fraud. The fraudster will then use the credit to purchase computers, gift cards and other expensive supplies easily convertible into cash.  After taking delivery, the criminal moves on leaving the supplier and target company to resolve who will take the loss.

For example, Colorado has reported that a fraudster changed the address of the principal place of business of a company on file with its office to a virtual office in another city. Mail sent to the virtual office was then forwarded to a second virtual office. In all, Colorado has had over 300 similar instances of business identity theft. North Carolina has reported that unauthorized individuals were reinstating recently dissolved corporations.

The schemes tend to target small and midsize companies with strong credit ratings because they are not as well known by the lenders and do not have the resources to continually monitor their records. As mentioned previously another favorite target is recently dissolved or revoked entities. Colorado reported that 80% of the reported victims were dissolved or delinquent companies.

Steps States Are Taking to Prevent Fraud
Due to the heightened awareness of an increase in business identity theft, Secretaries of State are taking steps to minimize the problem. For example, some states are prohibiting the online filing of reinstatements and are carefully scrutinizing documentation and information presented when an entity is reinstated. Georgia and Colorado send e-mail notifications to a registered contact at a company whenever a change is made to the public record of the company. For further protection of companies, some states are assigning passwords that must be entered before annual reports can be filed. The National Association of Secretaries of State has established a Business Identity Theft Task Force to further develop business identity theft prevention strategies.

How Businesses Can Protect Their Identities and Credit
A business should take many of the same steps that an individual would take to protect his/her identity and credit, including monitoring of invoices and credit card statements for any unauthorized transactions. Additional steps include:

• Signing up for e-mail notifications and user password on state websites where available
• Checking business records regularly, even if the entity has been dissolved
• Filing annual reports and tax returns on a timely basis
• Reporting any unauthorized changes to business records to the Secretary of State where the fraud occurred     

Unfortunately, the technology that supports the desire for states to streamline the process of business formation and online annual compliance lends itself to an increased risk of business identity theft. As mentioned above, Secretaries of State are taking steps to identify and prevent this type of fraudulent activity. Successfully reducing the vulnerability of businesses to this threat will also require that the businesses most likely to be targeted start taking a more active role in prevention.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Corporate Formation in Canada – NOT Just Like the U.S.!

By Teri Mayor, Vice President, National Corporate Research, Ltd.

Americans often think of Canada as not quite a separate country. After all, Canadians speak the same language with almost the same accent, eh? Both countries often celebrate holidays on the same day, many U.S. celebrities originally come from Canada and Canada has a similar form of government and economy. Because of all the similarities (and perhaps sometimes to the annoyance of our friends up North), there is a tendency in the U.S. to think that Canada is just like us. When it comes to corporate formation and structures, however, there are a number of important differences between the two countries. The following discusses one of those differences: the Canadian federal corporation.

Federal Corporations Formed with Corporations Canada
In the U.S., it is only possible to incorporate in a particular state. Canada, however, offers corporations two options: they can form in a particular province or they can incorporate federally. A Federal or Canada Corporation registers with Corporations Canada, and then registers as an extra-provincial corporation in the province or provinces where it wishes to do business.

There are two key advantages to incorporating as a federal corporation in Canada.

• Heightened Name Protection: Federal incorporation allows the business to operate using its own name in every province in Canada. While many provinces do check names against a nationwide database (the NUANS system) before allowing formation, differing regulations between the provinces can sometimes mean that a provincial corporation cannot use its true name when registering in another province. An approved federal corporate name can be used in every province in Canada (although in Quebec, a French version may be required).
• Flexibility: Under the Canada Business Corporations Act, a federal corporation may locate its registered office and maintain its corporate records in any province or territory in Canada. Annual meetings can be held in any location inside or out of Canada and electronic meetings are permitted.

Requirements for Canadian Federal Corporations
Federal Corporations in Canada have certain requirements, some of which are different from requirements found in the U.S.:

• Residency Requirement:  At least 25% of the directors of a Canadian corporation must be resident Canadians. If there are less than four directors, then at least one must be a resident Canadian.
• Numbered Corporations:  Instead of choosing a name, Canada corporations can choose to be “numbered corporations” instead. A number is automatically assigned to the corporation upon registering, followed by the word CANADA and the corporation’s choice of legal element (corporate indicator). Numbered corporations can be registered more quickly, as a NUANS search to determine availability and reserve the name is not required.
• Name Requirements:  If not a numbered corporation, the name of a Canada Corporation must contain three elements: a distinctive element (something which distinguishes the name, such as a surname or other unique element), a descriptive element (words which describe the function of the company, such as “consulting” or “manufacturing”) and a legal element — a corporate indicator such as Inc. or Ltd. Under Canadian rules, a company cannot be called “Nike, Inc.,” for example, as this name does not contain a descriptive element, but would need to be called “Nike Manufacturing, Inc.” or “Nike Sneaker Sales, Inc.”
• Other Registrations Needed: Once the company is incorporated on the federal level, it will need to register as an extra provincial corporation in the province of its registered office and any other province where it wishes to operate. It will also need to register for a BIN, or Business Identification Number with the Canadian Revenue Agency. There may be other permits and requirements depending on the activity and location of the company.
• Canadian Federal Corporation Annual Return: In addition to any provincial requirements, a federal corporation is required to file an annual return each year within 60 days of its anniversary date. The form requires only basic information to be provided and can be filed online for $20 Canadian. A corporation that fails to file its annual return will be deemed to be not in good standing and must file Articles of Revival to reinstate.
• Information on Directors for Federal Corporations: The names and residential addresses of the directors must be provided when incorporating. Although the residential address is not published on the website, it is part of the public record and can be obtained on written request. A “Changes Regarding Directors” form must be filed within 15 days when a new director is appointed, a director ceases to act in that capacity or there is a change in a director’s residential address.

With heightened name protection and flexible location requirements, a Canada federal corporation may be a good choice for certain companies wishing to form in Canada. Please note that this article is only a brief introduction to the concept of Federal Corporations in Canada and does not cover all the requirements and obligations of a federal corporation in Canada. We highly recommend consulting with Canadian counsel to understand the initial and ongoing obligations of a federal corporation prior to registering a corporation with Corporations Canada.

 

This article is provided for inormational purposes only and should not be considered, or relied upon, as legal advice.

Publication Requirements for Entity Filings – An Idea Whose Time Has Passed?

By Teri Mayor, Vice President, National Corporate Research, Ltd.

 

There are a handful of states which require the publication of notices for certain types of entity filings. Ostensibly, the purpose of these requirements is to protect the community by providing notice of formation of new businesses or changes to existing businesses. Many people in New York State are questioning the purpose of these requirements in the modern world of instant access to most public records via the Internet and the decline of print journalism in general. It is interesting to note that publication requirements in other states do not appear to be a source of controversy as they are in New York, likely due to the fact that the costs involved are much lower in those states.

Other states with publication requirements for entity filings include Arizona, Pennsylvania, Georgia, Nevada and Nebraska. Let’s compare the publication requirements and costs for Arizona, Georgia and Pennsylvania to those of New York. (Note that while Arizona, Georgia and a handful of other states have trade name publication requirements, these are not included in this analysis.)

PUBLICATION REQUIREMENTS BY STATE: 

Arizona: 

• Entity types: Publication is required for domestic and foreign business and nonprofit corporations, LLPs, LLLPs and domestic LLCs
• Filings requiring publication: formation, amendment, merger, dissolution, withdrawal and qualification
• Notice requirements: Three consecutive publications in a newspaper in the county of entity’s known place of business
• Proof of publication filing required?  Optional
• Average costs: $80 to $100

 Georgia:

• Entity types: Publication is required for domestic business and nonprofit corporations
• Filings requiring publication: Incorporation, name change amendments, mergers and dissolutions
• Notice requirements: Two consecutive publications in a newspaper meeting certain requirements in county of registered office. Listing of approved papers available
• Proof of publication filing required?  Not Required
• Average costs: $40 (set by statute)

 

Pennsylvania:

• Entity types: Domestic and Foreign Business and Non-Profit Corporations
• Filings requiring publication: Incorporation, dissolution, termination of authority
• Notice requirements: Single publication in two newspapers (general circulation and legal newspaper where possible) in county where business is located
• Proof of publication filing required?  Not Required
• Average costs: $40 – $60

New York:

• Entity types: Domestic and Foreign LLCs, LPs, and LLPs
• Filings requiring publication: Formation, Conversion, Qualification
• Notice requirements: Six consecutive publications in two newspapers (one a daily paper) in county of registered office. Newspapers designated by county clerk
• Proof of publication filing required?  Required
• Average costs: $200 – $2500

Why Publication in New York is a Source of Controversy

As you can see, publication in other states can affect a great many more filings and/or entity types than in New York. Yet, while Internet articles and blog postings condemn these requirements in New York, the same is not true for other states.  The likely reason for this is that New York’s process is both the most cumbersome, requiring publication for six weeks in two separate papers and subsequent filing of the proof of publication, and the most expensive, regularly costing hundreds of dollars and costing thousands of dollars for entities with registered offices in certain counties such as New York County. Many argue that such excessive start-up costs hamper small businesses and drive business away from New York State.

In June 2006, the legislature re-affirmed the publication requirements. By requiring that the papers chosen include both a daily and a weekly paper, it actually made them more expensive to fulfill, since the price to advertise in a daily paper is usually higher. (For further information on the changes made in June of 2006 , click here)

Repeal of Publication Requirement Coming Soon?

Since 2006, there have been efforts to get the publication requirement in New York repealed. Recently, on January 5, 2011 identical bills S437 and A885 were introduced in the Senate and Assembly respectively. Michael Kellner, the member who introduced the bill in the Assembly, states on his web site that the purpose is to remove unnecessary roadblocks for the start-up of small businesses. The bill, as introduced, repeals Section 206 which relates to publication requirements for domestic limited liability companies only. Publication requirements for limited partnerships, limited liability partnerships and foreign limited liability companies would remain intact. (To view the text of the bill click here.)Another bill (A06559) introduced in the Assembly on March 21^st, 2011 would repeal publication requirements for all types of entities. To view the text of this bill, click here.

These bills have been referred to the Committee on Corporations, Authorities and Commissions.  It is unknown whether they will continue to languish in committee or whether some action will be taken. It seems safe to assume that newspapers, struggling with a loss of both readership and advertising revenue in recent years, do not want to see a change that will further harm their bottom line. Yet, the argument that New York’s requirements are onerous for small businesses seems a valid one, especially when comparing our requirements to those of other states requiring publication. Finally, in this age where public records of entity filings are readily available on line, it is difficult to argue that a newspaper notice is needed in order to alert the general public.  Many feel that publication is an idea whose time has passed, but it is still a requirement in New York State and may be for some time to come.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

 

 

Avoid the Scrambling and Close Your Deal on Time!

By Colleen A. De Vries, Senior Vice President

Does this scenario sound at all familiar?

Panic is setting in. It is 1 AM two days before the closing and you still don’t have all of the Good Standing Certificates you need. Plus, you just found out today that the Delaware corporation that is merging into the other Delaware corporation as part of the restructuring for this loan transaction needs to complete and submit its current annual report and pay back taxes of $10,000 to restore good standing. You were also surprised to learn that this can’t be done online – even in Delaware, which is supposed to be so easy to work with.

You wonder how this could be happening. All of the entities for this deal were in good standing last week, but not today when you got the pre-closing bringdown results. You say to yourself, “If only I had researched what was needed earlier than three days before the closing date!”

The associate you are working with is also in a panic because he said that if you don’t have all of the good standing certificates, the Partner won’t be able to sign a clean legal opinion and she will be FURIOUS! You know from your last deal, when just one good standing certificate was missing, the lenders threatened that the deal could not close without it. A few years ago, that would be allowed as part of the post-closing delivery, but not in this economy. Lender requirements are much stricter and that is not likely to change any time soon.

As if the issues above were not enough, this deal also has companies in two international jurisdictions, which further complicates matters.

Tips for Avoiding the Last-Minute Scrambling
As the associate or paralegal charged with obtaining the good standing certificates to support representations and warranties in the transaction documents and legal opinion, as soon as you learn about an upcoming closing, go into “closing monitoring mode” and ask the following questions:

• What is the closing date?
• How close to the closing date do the good standing certificates need to be dated?
• Are there any international jurisdictions involved? Obtaining the required Good Standing Certificates for foreign (non-U.S.) entities can often be challenging, if not impossible. (Click here for more information.)

For your domestic U.S. entities, conduct an “entity compliance audit” at least two weeks before closing to check status AND the next due date(s) for any annual reports or tax payments due.  By knowing the next due dates, you can identify when a report is coming due between the date of your initial status check and your closing date, so that you can ensure the filings get done in advance of your closing.

A full entity compliance audit may include the following for each party to the transaction:

• Exact legal name, date of filing and organization ID number on record with state
• Current entity status, plus any fees or franchise taxes owed
• Next annual report due dates
• Principal business address on record for each entity so you can identify old addresses to be updated
• Current registered agent so you know who to reach out to if you have not received tax notices from certain states

When you first hear about a deal, you may not know the names of all of the entities that will be involved in the transaction. But if you know the type of deal and the states/countries for which you will need documentation, you can check general turnaround times in those jurisdictions. Any lengthy turnaround times can then immediately be communicated to the attorneys you are working with so that there won’t be any unpleasant surprises.

As retired four-star general and former Secretary of State Colin Powell once said:

“There are no secrets to success. Success is the result of preparation, hard work and learning from failure.” 

Ensure your closings are not delayed because of good standing issues by preparing in advance, knowing what to expect and learning from past mistakes.

Can you relate to this situation? Share your stories and solutions with us here!

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Sales and Use Tax Exemptions for Nonprofits

By Ron Barrett, Vice President, National Corporate Research, Ltd.

“In this world nothing can be said to be certain, except death and taxes.” When Benjamin Franklin wrote this sardonic proverb to Jean-Baptiste Leroy in 1789, tax exemptions were likely few, and he certainly wasn’t talking about tax-exempt charities. Nowadays, the only things more pervasive than taxes are exceptions, deductions and exemptions from taxes.  As for charities, not only are these entities potentially immortal in terms of their perpetual corporate existence, but they also have the keen ability to avoid most taxes.

Of course, immortality for nonprofit corporations is only assured if they make prudent business decisions, maintain public support and comply with state and federal laws and regulations. Many tax exempt entities died (or at least took a step toward death) last summer when the IRS revoked the tax-exempt status of more than 275,000 nonprofit organizations for failing to file IRS Form 990 annual returns in the preceding three years. Similarly, nonprofits that fail to file required annual or periodic reports with the state corporate and charity authorities may find that they are susceptible to death in the form of revocation or involuntary dissolution.

The Elusive Sales Tax Exemption
It is well known that most nonprofits are exempt from federal and state income tax. They are also frequently exempt from real property tax, but one tax exemption that even nonprofits sometimes find elusive is sales tax.* With sales tax rates approaching 10% in some jurisdictions that combine state and local sales taxes, it is an important exemption not to overlook. Some nonprofits, however, fail to take advantage of these exemptions because of the complexity of determining in which states an exemption exists and because of the lack of uniformity from state to state.

Though several states provide a variety of sales tax exemptions to various industries and organizations, most only make an exception for certain groups or types of nonprofits. For example, Georgia’s list of eligible sales tax exemptions is thirteen pages long, but there is no broad exemption for nonprofit organizations. In fact the opposite is true, with several narrow exemptions available to certain types or specific nonprofit organizations, such as nonprofit blood banks.

501(c)3 Tax Exemption is Key
In the majority of states the key to a sales tax exemption is the designation as a charitable, 501(c)3 nonprofit organization. Fortunately for the nonprofit sector, there are nearly a million such organizations in the United States. These are organizations recognized under the Internal Revenue Code as tax-exempt, charitable organizations. For other types of tax-exempt nonprofits, a state sales tax exemption is much less certain and requires a careful reading of each state’s tax code and regulations.

Even with a 501(c)3 designation, charitable nonprofits in some states are still not exempt from sales taxes and, even if they are, procedural requirements must be strictly followed to actually receive the exemption. For example, in Washington, D.C., a charitable nonprofit organization must be physically located in D.C. and file an application to qualify for a sales-tax exemption. Once an exemption application is approved and a Certificate of Exemption is issued, exemptions from sales tax are granted only if the purchases, purchaser and the method of payment are in accordance with the requirements to receive an exemption from sales tax. In other words, the purchases must relate to a charitable purpose, by a person associated with the tax-exempt organization and the payment must be made by that organization. If all of these requirements are not met, then sales tax may be imposed, even when an organization has a legitimate sales-tax exemption and a certificate to prove it. This is true in D.C. and nearly all states that offer an exemption from sales tax to nonprofit organizations.

In Pennsylvania, it is not sufficient just to be a charitable nonprofit in order to receive a sales tax exemption. Under Act 55 of 1997, an organization must complete a cumbersome, five-page application and quantifiably demonstrate that it meets all five of the following criteria in order to qualify for the state sales tax exemption:

1. advance a charitable purpose;
2. operate entirely free from private profit motive;
3. donate or render gratuitously a substantial portion of its services;
4. benefit a substantial and indefinite class of persons who are legitimate subjects of charity; and
5. relieve the government of some of its burdens

Sales tax exemption applications are frequently denied in Pennsylvania for failing to prove that an organization meets all of the above requirements. Fortunately, most states do not have such cumbersome requirements and the forms are somewhat consistent in terms of required information and supporting documents that must accompany a sales-tax exemption application.

General Requirements in Most States
Most states that broadly offer sales tax exemptions to charitable nonprofits (about 30) require the completion of a short application form along with some or all of the following items in support thereof:

1. IRS Determination Letter and/or IRS Form 1023 or 1024
2. Articles of Incorporation and/or Bylaws
3. Financial Statements and/or Form 990

A fee is rarely required and, in most states, this is a one-and-done type of filing. Some states such as Maryland, Missouri and Florida require annual, triennial, or quinquennial (every 5 years) renewal filings.

Varying State Requirements
Not all states require an exemption application or certificate to obtain an exemption from sales tax, but this does not necessarily mean that obtaining the actual exemption is any easier. For example, states such as Kansas and Illinois require a letter of request, while others simply require that purchasers provide to each vendor a form that claims they are exempt from state sales tax (e.g. Connecticut and Michigan). In North Carolina, charities must pay sales taxes, but nonprofit entities defined in G.S. 105-164.14(b) can file semiannually for a refund of sales taxes paid. In Wyoming, all that is required is for nonprofits to provide the state with a copy of the organization’s IRS determination letter in order to receive an exemption approval letter. Also, in a handful of states, there is no sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon), so everyone is spared the additional expense in these states.

For most nonprofits, a sales tax exemption usually makes sense only in the state they are domiciled or in nearby states where they conduct a lot of business. For larger nonprofits that conduct business in multiple states and regularly make exempt purchases from the same vendor(s), it sometimes makes sense to obtain sales-tax exemptions in multiple states. For these organizations, it might also be helpful to use the Streamlined Sales and Use Tax Agreement Certificate of Exemption (SSUTA-COE) when making tax exempt purchases.

Multistate Certificate of Exemption
The SSUTA-COE was created by the Streamlined Sales Tax Governing Board pursuant to the Streamlined Sales and Use Tax Agreement. This board and agreement were created by multiple state members with the goal of streamlining the administration of sales tax collection and reporting, including procedures for claiming an exemption from sales tax in multiple states. The SSUTA-COE is accepted by vendors in 23 states and in some nonmember states. Not all states, however, allow all exemptions listed on the form and, therefore, purchasers are still responsible for knowing if they qualify to claim an exemption from taxes in the states that would be due taxes on otherwise taxable sales. Also, nonprofits that use this form will be held liable for any tax and interest, and possibly civil and criminal penalties imposed by the member state(s), if the nonprofit is not eligible to claim a tax exemption. So, while this form can be a time saver, it does not relieve a nonprofit organization from first obtaining a sales tax exemption in the state(s) or performing the proper due diligence of knowing whether or not the organization qualifies for a sales-tax exemption in the states that accept this form.

Nonprofits Need Not Fear Death and Taxes
Varying sales tax exemptions from state to state, specific nonprofit, entity-based exemptions, specific charitable use, purchaser and payment requirements and multistate exemption certificates all add to the confusion of determining where, when and how a nonprofit organization qualifies for a sales tax exemption. Yet nonprofits need not fear death or sales taxes. Assistance in making these determinations can be obtained by consulting an attorney, tax advisor or knowledgeable service company.

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*For the purposes of this article, the term “sales tax” includes use taxes.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Two New Types of Corporations in New York: Benefit Corporations and Design Professional Service Corporations

By Teri Mayor, Vice President, National Corporate Research, Ltd.

The state of New York has recently authorized two new types of corporations with the enactment of Senate Bill 79-A and Senate Bill 2987:

Benefit Corporations 
In allowing the formation of benefit corporations in Senate Bill 79-A, New York joins California, Hawaii, Maryland, New Jersey, Vermont and Virginia, which have all passed laws creating this entity type. Benefit corporations are designed to allow for-profit corporations to promote goals which create a material positive impact on society and specific public benefits without risking claims by disgruntled shareholders that they are not fulfilling their fiduciary responsibilities by pursuing an objective that diminishes financial return.

In New York State, Article 17 has been added to the New York Business Corporation Law. This article provides that:

• Existing corporations formed under the BCL can become benefit corporations by amending their Certificate of Incorporation to include a statement that the corporation is a benefit corporation, while new benefit corporations must include that statement on the Certificate of Incorporation.
• Every benefit corporation will have a purpose of creating a general public benefit in addition to its other purposes. Additionally, the corporation may list one or more specific benefits. 
• Benefit corporations must deliver to each shareholder an annual benefit report  that:
  - indicates the ways in which the corporation pursued general public benefit purposes and any specific public benefit purposes listed in its certificate of incorporation. 
  - provides an assessment of the performance of the corporation, relative to its general or specific public benefit purposes, based on a third party standard.
  - indicates the director’s compensation and the names of all shareholders that own five percent or more of the outstanding shares (beneficially or of record).
• The above report must also be posted on the company’s website and filed with the Department of State, except that compensation and financial or proprietary information may be omitted from these filings.

To view the full text of Senate Bill 79-A, click here.    

Design Professional Service Corporations
The amendments to Article 1500 of the Business Corporation Law contained in Senate Bill 2987 create a new type of entity, the design professional corporation. These entities are unique in that they can practice one or more* professions in the fields of architecture, engineering and design and are allowed to issue shares to employees who are not licensed professionals. The justification provided for the change is to permit design firms the flexibility of offering an ownership interest in the corporation to their employees who are not licensed professionals, bringing the practice in New York in line with  other states and allowing New York to be more competitive both nationally and internationally.

A number of restrictions have been imposed to ensure that professionals maintain ownership, management and control of the entity:

• The provisions apply only to specific professional corporations. The professions to be practiced by these corporations are restricted to professional engineering, architecture, landscape architecture or land surveying or any combination of these professions.
• More than 75% of the outstanding shares must be owned by design professionals (persons authorized to practice one of the above professions).
• Shares must be issued to design professionals, employees of the company or an ESOP (Employee Stock Option Plan).
• An ESOP cannot constitute part of the 75% of shares required to be owned by design professionals.
• More than 75% of the directors and officers must be design professionals.
• The president, chairperson of the board, chief executive officer must all be design professionals.
• The single largest shareholder is either a design professional or an ESOP where 75% of the voting trustees and 75% of the committee members are design professionals.

The new statute also stipulates that a certificate of incorporation of a design professional service corporation shall also have attached a Certificate from the Department of Education certifying that each of the shareholders, officers, directors and owners has been deemed to have been of good moral character as may be established by the regulations of the Commissioner of Education.

When the Office of the Professions was asked how this was to be established, especially for non-professionals, they indicated that they were not yet sure what procedures would apply. Currently Regulation 28 of the Rules of the Board of Regents provides procedures for establishing “good moral character” for licensed professionals, but it is unknown if these regulations will apply to design professional service corporations.

The names of these corporations must end in either the words “Design Professional Corporation” or D.P.C.  There are no provisions which allow an existing professional corporation to convert into a design professional corporation.  A design professional corporation can merge with a professional corporation if the professional corporation practices one of the design professions.

For a full text of New York Senate Bill 2987, click here.

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*Other than these corporations, no professional service corporation may be formed to practice more than one of the other professions unless it is a single-shareholder Professional Corporation where the only shareholder is licensed in more than one profession.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Stricter Requirements in Illinois in 2012 for Authentication of Documents

By Tony Mackay ,Chicago Branch Manager, National Corporate Research, Ltd.

On January 1, 2012, the Illinois Secretary of State began imposing much stricter requirements on documents that are being submitted to its office for authentication. The state has indicated that it expects to reject hundreds of documents in the next few months based on these changes.

Many authentication requests are submitted with the text in English on one side of the page and with a foreign translation on the other side. When this is done, the translation often omits the names, addresses, etc. of the parties involved. While in the past, the Illinois Secretary of State would accept such documents, it will reject them if ALL of the information, including the party information, is not included in the translation.

In addition, both the English and translated version must be signed and notarized. This was also never the case before. In the past, one signature and one notarization and stamp were sufficient.

All notarizations must be accompanied by the proper form of notary statement. The state will no longer take only a notary signature and stamp. Click here and go to page 12 to view the acceptable forms of notary acknowledgment in Illinois. 

We have asked the Illinois Secretary of State’s office whether documents listing the translation as an exhibit without the names, addresses, etc. would be accepted or whether the exhibit would need to be completed in full, signed and notarized. They did not have an answer at this time, but indicated they would get back to us shortly. Until there is a definitive answer on this, we strongly recommend avoiding this approach with time-sensitive documents.

 For a sample of the correct authentication format when translation is involved, click here.

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Requirements Change for California Statement of Information Filings for Corporations and Limited Liability Companies

By Teri Mayor, Vice President, National Corporate Research, Ltd.

California’s Assembly Bill 657 became effective on January 1, 2012, amending sections of the Civil Code, Corporations Code, Financial Code, and the Government Code relating to corporations. There are a number of changes made to the requirements for Corporate Statements of Information, which are filed annually by registered entities in California.

The changes include:

•  Corporations must provide the entity number as well as the entity name on the statement
• Foreign corporations must now file a 90-day initial statement of information, as domestic corporations and limited liability companies do currently.
• Filers for both corporations and limited liability companies can now provide an email address on the annual report, which will allow them to receive reminder notices from the Secretary of State via e-mail.
• Limited liability companies will now need to include a mailing address if it is different from the principal business address.

The bill also made other changes which affect non-profit corporations formed to manage common interest development (CID).  For the complete text of the bill as passed, click here.

System Not Fully Updated to Handle Changes 
The California Secretary of State has advised us that they are in the process of updating all filing forms/sample packets and related correspondence, mainframe applications (corporations and LP/LLC) as well as their Statement of Information E-File application to comply with the new requirements.  Due to unforeseen circumstances, not all of the system modifications will be in place by January 1st, so the changes will be phased in over the next couple of months.

They have indicated that revised filing forms/sample packets and instructions will be posted to CA’s website early this week.  The new 90-day initial statement of information requirement for foreign corporations will be in place early this week.

These changes apply to documents received by the California Secretary of State after January 1, 2012.  California is currently only up to August in processing Statement of information forms submitted on a routine basis, meaning that only expedited filings and E-file documents will be affected right away. The Secretary of State has indicated that “For a short time, we will continue to accept mailed in statements submitted on the old forms after January 1st; however, since the new forms will be available early next [this] week, we strongly recommend using the new forms as soon as they are available for any new counter or mailed in submissions to ensure documents are not rejected for using outdated forms.”

More Privately Held Companies Affected by International Reporting Requirements

By Teri Mayor, Vice President, National Corporate Research, Ltd.

Due to increasing globalization of businesses in the U.S. and around the world, more privately held U.S. businesses are expanding internationally. In a press release dated 9/13/2011, PricewaterhouseCoopers, LLP reported that “the majority (51%) of U.S.private companies surveyed for PwC US’ Private Company Trendsetter Barometer plan to do business abroad in the next one to two years, and 48% already have an international presence.” As companies doing business abroad seek to register or form subsidiaries in other countries, they should factor ongoing corporate compliance requirements into their decisions. Once outside the U.S., a company often needs to provide a great deal more information on annual reports filed with the company registrar than is required in the U.S., resulting in a lot more information becoming part of the public record. This is especially true for companies that are not publicly traded and have no SEC reporting requirements. Ensuring a good understanding of the annual compliance requirements is a necessary first step when deciding to form an entity or register it to do business outside the U.S.

Countries with Minimal Annual Report Requirements
There are some countries where annual compliance is essentially a matter of paying an annual fee. In countries like the British Virgin Islands and the Bahamas, while the registered agent must maintain information on the shareholders, members, officers and directors of the company, there are no financial reporting requirements and, for the most part, this information is not public record. (In the Bahamas, a “register of directors” does get filed with the Registrar General.)

Canada: Annual Report Requirements Similar to the U.S.
Other jurisdictions, such as Canada, require the same basic information as is required in many U.S. States – changes made to the officers and directors, address, company location, etc.  In some provinces, such as Alberta, Manitoba, Saskatchewan and Quebec, shareholder information must also be reported and becomes public record.  If a company is interested in forming a Canadian subsidiary, rather than registering as an extra-provincial, i.e. foreign entity, it should keep in mind that in many provinces, the company books and records, such as share register, board minutes, resolutions and financial statements, along with other documents, must be kept at its “records office,” which must be located in the province. 

U.S. Territories: Annual Report Requirements Often More Stringent
Although one might expect there to be more similarity to U.S.requirements, reporting requirements are often more stringent in the U.S.territories. Guam is the exception to this rule, requiring basic information, although like Canada, names and addresses of the shareholders must be provided. In the U.S. Virgin Islands, the annual report must be accompanied by a balance sheet and profit and loss statement prepared by an independent accountant. Puerto Rico is the most stringent of the three; companies whose volume of business is over three million dollars must provide a report audited by a Puerto Rican CPA.  Companies whose volume is under three million dollars, still must provide a balance sheet, but it needs only to be prepared in accordance with GAAP (Generally Accepted Accounting Principles) by a person with general accounting knowledge.  This latter requirement has actually been revised this year to be more flexible than what was previously required. Earlier, corporations whose volume was under three million dollars needed to provide a balance sheet with an opinion letter drafted by a Puerto Rican CPA attached.

Annual Financial Statements Required in the European Union and Elsewhere
There are also a large number of jurisdictions where financial statements must be filed annually with the registrar and become part of the public record for the company. Most countries in the European Union, including the U.K., Ireland, France, the Netherlands, as well as other popular jurisdictions like Hong Kong, Singapore and Australia, require financial statements to be filed annually. These become part of the public record for the company and are often available online. 

For a small or mid-size privately held company, these financial reporting requirements can be burdensomely expensive (especially when audited accounts are required) and cumbersome. If forming a subsidiary entity, it is important to evaluate whether parent companies will be required to file group accounts in the jurisdiction. U.S. companies also have to worry about the differences in accepted accounting principles. Although some countries, like the U.K., allow financial reports to be prepared in accordance with local accounting standards, others require the use of International Financial Reporting Standards (IFRS). While publicly held companies may be aware of and already planning to change from GAAP to IFRS in anticipation of the upcoming decision of the SEC, that is less likely to be true for a privately held company.

Corporate Annual Reports:  A Small Part of Overall Compliance
Of course, annual reporting requirements are just one part of compliance when you form or register a company to do business outside of the U.S.  Tax obligations, hiring requirements, business licensing and many other factors must be considered and planned for.  When a company decides that the time is right to expand outside of the U.S., it should ensure it has competent legal counsel, who is well versed in all legal, tax and other compliance and maintenance obligations of a company registered or formed in the target jurisdiction.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Two New Types of Corporations in California in 2012

By Teri Mayor, Vice President, National Corporate Research, Ltd.

Effective January 1, 2012, California will be allowing two new types of corporations to exist; the flexible purpose corporation and the benefit corporation.

In allowing the formation of benefit corporations, California joins a number of other states in creating this new type of entity. Benefit corporations are designed to allow for-profit corporations to promote goals which create a material positive impact on society and specific public benefits without risking claims by disgruntled shareholders that they are not fulfilling their fiduciary responsibilities by pursuing an objective that diminishes financial return.

California is the first to differentiate between “flexible purpose” and “benefit” types of entities. Under the new law, flexible purpose corporations require the managers and directors to find ways to “measure the impact of the flexible purpose corporation’s efforts relating to its special purpose” and report back to shareholders.  Benefit corporations will have the impact of their actions related to the special purpose assessed against a third party standard.

Maryland was the first to pass benefit corporation legislation in April of 2010. Other states where benefit corporations can be formed are:  Hawaii, Virginia, Vermont, New Jersey, and, most recently, New York. (New York passed this legislation on December 12, 2011, and it will be effective 60 days from then). Legislation has been introduced and is pending in Colorado, North Carolina, Pennsylvania and Michigan.

California does not expect a large number of companies to form or convert to benefit or flexible corporations and is not, at this time, providing precedent forms.  To view a memo from the California Secretary of State’s office about these new corporation types, click here. 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.