I guess my upcoming presentation on Climate Change Disclosures for the University of Kentucky College of Law Securities Law Conference this Friday, February 5, 2010, is more timely than I could have anticipated. While not opining on the science of climate change, the Securities and Exchange Commission (SEC) issued interpretive guidance (guidance) Tuesday, February 2, 2010, on existing SEC disclosure requirements as they apply to business or legal developments relating to the issue of climate change.  Proxy activism, investors interest on the impact of climate change on their investments, and the recent regulatory and legislative developments prompted the SEC to recognize that, for some companies, these developments could have a "significant effect on operating and financial decisions, including those involving capital expenditures to reduce emissions and, for companies subject to 'cap and trade' laws, expenses relating to purchasing allowances where reduction targets cannot be met."  The SEC noted that even companies that may not be directly affected by these developments could be indirectly affected as prices change for goods and services. Given this diverse and shifting regulatory landscape, what's a reporting company to do?  The intent of the guidance is to provide the reporting roadmap. The guidance does not change the landscape and notes specifically that a number of SEC rules and regulations may be the source of disclosure obligations for registrants under the federal securities laws.  However, the guidance identifies topics that are some of the ways climate change may trigger disclosures required by those rules and regulations:

• Impact of legislation and regulation - Developments in federal and state legislation and regulation regarding climate change, and provisions which relate to greenhouse gas emissions, may trigger disclosure of material estimated capital expenditures and specific risks registrants face as a result of the changes. The guidance advises registrants to "consider specific risks they face as a result of climate change legislation and avoid generic risk factor disclosure that could apply to any company."
   
• International Accords - Consider and disclose, when material, the impact on a registrant's business of treaties and international accords relating to climate change.
   
• Indirect consequences of regulation or business trends - Think increased or decreased demands for goods, services, products and energy sources depending on their greenhouse gas emissions. The guidance directs a registrant to assess its business and its sensitivity to public opinion.  A registrant may have to consider whether the public's perception of any publicly available data, relating to its greenhouse gas emissions, could expose it to potential adverse consequences on its business operation or financial condition resulting from reputational damage.
   
• Physical impacts of climate change - How do the physical impacts of climate change, (such as effects on the severity of weather [floods, hurricanes] or sea levels, arability of farmland or water availability or quality) affect a registrant's operations and results?  Registrations whose businesses may be vulnerable to severe weather or climate related events should consider disclosing material risks of, or consequences from, such events in their publicly filed disclosure documents.

See http://www.sec.gov/rules/interp/2010/33-9106.pdf for the text of the guidance.

Just days before the United Nations Climate Change Conference in Copenhagen, Denmark, the U.S. Patent and Trademark Office (USPTO) initiated the Green Technology Pilot Program on December 8, 2009 to expedite the examination of "green technology" patent applications. By offering the program, the USPTO hopes to accelerate the development and deployment of green technologies, help create green jobs, and promote U.S. competitiveness in the clean technology sector. In the press release announcing the Pilot Program, the Under Secretary of Commerce for Intellectual Property and Director of the USPTO, David Kappos explained "Every day an important green tech innovation is hindered from coming to market is another day we harm our planet and another day lost in creating green businesses and green jobs."

According to its own statistics, the USPTO takes on average 30 months to issue an initial office action for green technology patent applications and approximately 40 months to make a final determination on the patentability of such applications. In the normal process, applications are taken up for examination based on their filing date. Recognizing that over a three and half year wait is too long in the green technology sector, the Pilot Program provides a mechanism for green technology patent applications to be advanced, out of turn, to examination without having to pay any additional fees or provide any additional examination support documentation. The USPTO estimates that this Pilot Program will reduce the examination time of these applications on average by one year.

The Pilot Program broadly defines the term "green technologies" as technologies that pertain to environmental quality, energy conservation, development of renewable energy resources, or greenhouse gas emission reduction. Despite this broad definition, the USPTO currently requires that a patent application be classified in one of 79 specific U.S. patent classifications outlined in the Pilot Program to be eligible.

The Pilot Program only applies to non-provisional utility applications filed prior to December 8, 2009 that have yet to be examined. Applications that are either filed after December 8, 2009 or already being examined are not eligible for the Pilot Program. The Pilot Program is set to expire on December 8, 2010 and the USPTO only guarantees that it will accept the first 3,000 petitions to make an application special under the Pilot Program. Thereafter, the USPTO will evaluate whether the Pilot Program should be extended based on the USPTO's workload and available resources. Thus, time is of the essence for those wanting to take advantage of the Pilot Program.

While there are limitations on the number and type of claims that can be included in the application and a requirement that an applicant waive its right to object to a restriction requirement, the Pilot Program does provide an inexpensive mechanism to expedite the examination of a green tech patent application. Such an expedited examination can prove beneficial to those looking to enforce their patent rights as quickly as possible and/or those looking for funding options.

The Official Notice of the Pilot Program can be found at 74 Fed. Reg. 64666 (Dec. 8, 2009) (See http://www.uspto.gov/patents/law/notices/74fr64666.pdf ) and the USPTO Press Release for the Pilot program can be found at www.uspto.gov/news/pr/2009/09_33.jsp.

If you have questions about the Green Technology Pilot Program, you can contact Alex Forman or Bill Lyon, members of Ice Miller's Intellectual Property Group.

Today, we visited Zhejiang University and met with the president of the university, Yang Wei.  Zhejiang University has over 40,000 full time students at its five campuses.  In comparison, Indiana University (IU) has about 101,700 students on all 8 campuses; including 42,500 on the Bloomington campus.  There really isn't a school in China that's the size of our large universities, which is surprising considering their population.  We were at the largest campus and all of the campuses have names related to water.

Twenty-five percent of the people in China attend universities or technical colleges.  The government only spends money to educate the best and the brightest traditionally, although they're moving more toward private money paying for education.  Considering China has 1.3 billion people, the U.S. is behind in the number of students attending college.

Someone asked how students are accepted to these schools and we learned that students take a national entrance exam they must pass.  Students spend their entire last year of high school to prepare for this exam.  Zhejiang University gets a large portion of the top performing students.  The 2,700 students admitted this year to Zhejiang University were from the top 4,500 ranked students who applied to all colleges in China.  Meaning, of the top 4,500 students taking the national entrance exam, 2,700 of them went to Zhejiang University.

There are certain instances in which you can bypass this entrance exam to get into college.   They, for instance, can pick 500 students in specialty areas with special talents, such as students who are really excelling in language.  Also, high schools can recommend some of their very top students.

There were a lot of new buildings at Zhejiang University, including a new school for agriculture and life sciences.  This demonstrates their commitment to renewed energy and agriculture.  They also built a new indoor-outdoor stadium which was pretty fantastic. 

Yang, who has visited IU, spoke about the economics of the country and how its impacting the school.  He stated that Zhejiang University is looking at three main ingredients for economic growth: investment (which is doing well - it grew almost 30 percent in the last year); consumption (which is also doing well – it has increased about 15 percent); and import/export (which unfortunately has decreased about 15-20 percent over the last year).  The university wants to do more "internationalization," and by that they mean more international collaboration and also recruiting more international faculty. 

The research grants have increased dramatically since 1998 to 2008.  And patents have also greatly increased since 1998.  For the last three to fours years Zhejiang University has been the leader in the application of patents.  They have two different types of patents: invention patents and progress patents.  An important component of growing the number of patents is to train faculty on the importance of patents, and also the respect of having patents.

There are major reforms in place at Zhejiang University.   The first is dealing with their undergrad program.  In the past, they had 112 undergrad programs in 24 schools, and now they've put everything into just 6 categories.  They believe this allows students more time to develop their interests.  For the first two years they are exposed to a variety of classes because they take what we would consider "general studies" and in the last two years they focus on a specific area.  Each of the six different categories have different color t-shirts that the students wear so they can be easily identified.  This is obviously more ritualistic than in the U.S.

Another major reform in the university is that they've signed an agreement with the Hangzhou government to bring more investment and to grow the university in other regions.  They've added a national park and another university, and they're working to build campuses about the same size as the existing campus that we visited today in another location within the city. 

The university has a river on the main campus, and they're trying to connect the river to the main river locally, and then to the main river in Zhejiang.  This would allow a continual flow of water from the campus all the way up to Beijing. 

The university has a hospital system and a medical school on the main campus, which consists of seven affiliated hospitals and a staff of over 7,000.  The amount of money generated from the hospital system is significant; about $750 million in U.S. dollars.  This is approximately the same amount of revenue generated by the total university.  The university has joint research centers with other international universities, such as Singapore, Hong Kong, and the University of California. 

Important new initiatives the university is focusing on include sustainable energy, water pollution, e-service (which is a collaboration they have with IBM), social entrepreneurship (which includes a law school supported by a Taiwanese foundation), as well as a digital library which includes over 20 universities. 

Zhejiang University is in close collaboration with both Purdue and IU.  In fact, Zhejiang University has 16 students attending Purdue this year and they also have administrative staff that are going for training.  The Zhejiang University intends to double its student exchange in the next three years.  The majority of overseas students are language students.

In the afternoon, we attended a seminar dealing with investment and cooperation opportunities in Indiana for representatives of Chinese companies seeking to invest in the state.  There were over 84 participants at this seminar.

We also visited a "vineyard" for tea.  Tea is such a traditional drink in China that I'm going to go into more specifics in a later posting.

We ended the day at a banquet hosted by the governor of Zhejiang, Lu Zushan.

Tomorrow we are traveling to Japan and I look forward to learning about these very different Asian business and social cultures.

Day 3 - September 9, 2009 – Traveling to Hangzhou

I was really looking forward to traveling by train to Hangzhou and I was not disappointed.  It was a great opportunity for me to learn more about the Chinese culture and see more of China's beautiful landscape.

Hangzhou is in the Zhejiang Province located about 112 miles southwest of Shanghai.    Hangzhou has a population of over 6 million people, which is small by Chinese standards, and has a beautiful fresh water lake called West Lake.  West Lake is surrounded by mountains on three sides and is very well known in China.

Many Chinese homes, especially in farm villages, have temples on top of them to pay homage to their ancestors.  Ancestry and history play a large part of the Chinese culture and the temples are another example of these influences.

I also thought it was interesting, that unlike the U.S., Chinese grooms and their families pay for about 80 percent of the cost of their weddings.

It is early in the day of September 9, 2009 – 9/9/09 – and 9 is a very lucky number in the Chinese culture.  If fact, the Chinese celebrate the ninth second, of the ninth minute, of the ninth hour, of the ninth day, of the ninth month of the ninth year.  The luck of nine did not rub off on the number four in this culture.  Four is considered very unlucky, similar to the U.S. perception of the number 13.

I look forward to reporting more about this day's events in tomorrow's blog.

September 8, 2009 - Day 2

We spent the first part of our day with the American Chamber of Commerce for a discussion on "green collar" jobs.  Chinese carbon emissions are escalating and China has seven of the 10 most polluted cities in the world.  As a result, environmental protection has become more important to the Chinese.

Later in the day we traveled to Eli Lilly's facility at the Pudong Science Park.  Lilly has over 2,000 employees in China, which means China has the second largest Lilly operation in the world.  Pudong is one of Shanghai's newest districts with a focus on three main industries: life sciences, software and integrated circuits.

Some of us were also able to visit ShangPharma.  ShangPharma provides research services to pharmaceutical and biotech companies.  They currently have over 1,600 scientists.  An interesting question was raised about how intellectual property is protected for the company and its clients.  The uncertainty of intellectual property protection is not isolated to just ShangPharma.  It is an issue that China is addressing as a country.

Following these visits we had a traditional Chinese lunch that was again served on a lazy Susan.  There were six different courses that included duck, shrimp, squid, scallops, fresh vegetables, jellyfish and fried rice.  Beer and wine were again offered.  Chinese meals are traditionally very  large.  I was curious how the society remains so thin.  Meal preparation seems to hold the answer.  They use vegetable oils and other "waist friendly" and heart healthy preparation methods.

The day concluded with a Friends of Indiana reception.  Guests included companies that have a business connection to Indiana or have an interest in doing business in Indiana.  Eli Lilly, Cummins and Alison Transmission all attended.

I'm really looking forward to traveling by train to Hangzhou tomorrow.  It will be a great opportunity for me to see some of the rural parts of China and its landscape.

Lee Lurton - – Panel Member at the July 9 CEO Breakfast and Discussion
President, Benefit Concepts of Indiana Inc.

Benefit Concepts of Indiana Inc. is an employee benefits broker/consultant with over 100 small to medium sized clients, mostly in the central Indiana area.  There were several areas of the CEO survey that I found particularly interesting and wanted to comment on in this blog.

Comments Regarding Raising Capital:
More of our clients are in survival mode and trying less to raise capital. Few need additional capital for expansion of their business, and the ones who are in the survival mode do not qualify for bank loans.

Comments Regarding Indiana’s Economic Climate:
Thanks in part to the Indiana Economic Development Commission (IEDC) I believe the problems we have here are smaller than the states surrounding us. Indiana is certainly much more "small business friendly" since Mitch Daniels became governor and appointed Mickey Maurer as the first head of the IEDC.

Comments Regarding Talented Managers: 
In difficult economic times good business decisions are more critical than when profits are good and mistakes can be absorbed with good margins. Even a small mistake (bad business decision) in difficult times can have a catastrophic effect on a small business. Being part of the human resource team, we believe that for most businesses their human capital is their most valuable asset. Talented managers are essential at any time, but critical in difficult economic times.

Comments Regarding the Survey Finding that Large Businesses are Cutting Costs in the Current Economic Climate and That Small Business are Seeking to Increase Revenue: 
Upon getting an advance copy of the survey, I did my own small, informal survey and called a few of our clients. This, in addition to conversations with many clients over the last several months leads me to believe that small businesses are cutting costs, just like the larger firms in the survey. One example is of a commercial woodworking firm who told me that when bidding on a project in the past they would expect to bid against four to five competing firms. Now that number may be as high as 20 competing for the same job. Margins were expected to be three to five percent, now with margins lowered to 0 percent they are winning few, if any bids. As a result, for the first time they have closed their production lines for four weeks this summer. Most of our clients are having a difficult time increasing revenue and have been forced to cut costs. This includes any business related to the construction industry, auto, manufacturing and even the service industries.  The majority are taking a very conservative approach to revenue forecasts and many are deciding what additional cost cutting measures may become necessary if the economy does not rebound in the next two to three quarters.

The state in which you form your business may not seem important now, but it could have consequences in the future.  Administrative expenses, tax issues, attraction of future investors and simply the ease of governing your entity can all be affected by the state in which your entity is organized.

That being said, it is relatively easy to change the state of your company's formation.  As your business develops, the important thing is to periodically evaluate whether it continues to make sense to be organized in the state you originally chose.

There are three main issues to consider when determining where to form your business:

• Location of your business
• Tax issues
• Attracting investors

Particularly with new ventures, the location of your business should be a big factor in deciding where to organize.  Your business has to have a registered agent to receive service of process in each state where it operates.  If you organize in the state where your business is physically located, someone at your company can be the registered agent.  However, if you choose to organize in a state other than your "home" state, then you will have to use a paid service to act as your registered agent.  Generally, the fee must be paid for each state in which the service acts as your registered agent.  As you can imagine, this cost can add up quickly for a new business.

Clearly, a start-up business wants to keep its tax bill as low as possible.  Your company will have to pay state taxes in each state in which it operates.  While these taxes are unavoidable, the business can take steps to limit them.  For example, Delaware corporations are subject to the annual Delaware business franchise tax.  However, many states have no franchise tax, or at least a much smaller tax.  While there are certainly valid reasons to incorporate in Delaware, its franchise tax could hit a new corporation with a large tax bill that may be needless.

If you anticipate raising money from outside investors, Delaware might be a good state to choose.  Investors are generally comfortable with Delaware entities because of the certainty that Delaware's business statutes and courts provide. A lot of businesses have formed in Delaware, and that has led to detailed statutes and a well established body of case law.  Investors and businesses can use the relative certainty of Delaware law to plan their relationships in a way that hopefully avoids potential trouble areas and litigation.

We all know that a business owner has hundreds of decisions to make when starting a new venture, and the state of formation may seem inconsequential.  Yet, with a little forethought and periodic monitoring of its situation, a business could save itself a lot of hassle (and money) in the long run.

Robert Mackoy – Panel Member at the July 9 CEO Breakfast and Discussion
Associate Professor of Marketing, Butler University

There have been several common questions about the CEO Survey that have come from attendees of the panel discussion that I would like to address in this blog post.

1.  Was information learned about the impact the recession had on minority-owned firms and how much does this impact the overall economic stability of Indiana?

The CEO survey does not include questions about business ownership, so I am unable to answer this question specifically.  However, the survey does include a question about the ethnicity of the CEO respondent and I am able to examine results based on this variable.  Of course, there are ethnic minority CEOs of publically held companies and of non-minority-owned firms, and there may be non-minority CEOs of minority-owned firms, so the following does not directly address your question.

With the above caveat, it appears that there are only a few significant differences between the responses of minority and non-minority CEOs.  For example, minority CEOs on average rated the importance of “sustained and steady topline growth” and “corporate reputation” more highly than did non-minority CEOs.  They also were more likely to note they are planning to “add jobs” within the next 18 months.  On the other hand, they were less likely to rate the overall business environment of Indiana as an advantage relative to the business environments of neighboring states.

Specifically with regard to the current economic situation, minority CEOs were slightly more likely to agree that “major public works infrastructure projects will help to shorten the economic crisis.”  They were also slightly more likely to report dipping into cash reserves to help deal with the current economic situation.  Other than these two items, there are no differences in the mean responses of minority and non-minority CEOs.

This year’s survey also included an open-ended question which asked what, if any, specific activities “your organization is taking in response to current economic conditions.”  Because the question was completely open-ended, responses to it probably best capture how individual firms react to the recession.  On this question, there were no differences between how minority and non-minority CEOs responded.  Both were equally likely to use cost-cutting and revenue-generating measures and both were equally likely to use any specific measure.

Thus, in summary, it appears that there are many more similarities than differences in CEO perceptions of -- and reactions to -- current economic conditions.

2.  The CEO survey has been administered in Indiana for three years in a row.  Have the same people responded to the survey each of the three years, or are there different people in the sample each year?

This is an important question because we have seen generally consistent responses (across the three years) to “big picture” issues such as CEO priorities, strategic plans, perceptions of Indiana’s economy, etc.  If we are simply hearing from the same individuals year after year, this consistency may be less surprising than if we are hearing from different individuals at different points in time.

The simple answer is that “we don’t know exactly.”  The survey respondents are always anonymous to us, so there is no way we can track respondents over time.  We guarantee anonymity so that respondents are more likely to be completely candid in their responses.

Our sample frame, that is the listing of individuals we invite to complete the survey, grows each year.  Many of the same individuals are invited to participate annually, so there is likely to be some overlap each year.  On the other hand, the total number of respondents has grown from 210 in 2007 to 225 in 2008 to 360 in 2009, so we know that we are capturing the thoughts and opinions of at least some new respondents each year.

Finally, one should note that the survey has an exceptional response rate of over 21 percent.  In addition, our respondents mirror the profile of all Indiana firms in terms of industry classification and firm size (both revenue and number of employees), though firms based in central Indiana are slightly over-represented.  Thus, we believe that the thoughts and opinions captured in the CEO survey are generally representative of the thoughts and opinions of Indiana CEOs as a whole.

William Corley – Panel Member at the July 9 CEO Breakfast and Discussion
President, Community Health Network

During the panel discussion there were several questions written by attendees that I wasn't able to answer because of time.  I'd like to address those now.

1.  If the numbers are correct, there are about 47 million uninsured in the U.S.  How does the cost of the current proposal really come out favorable over an expansion of Medicare/Medicaid or other existing programs?

With nearly 47 million Americans without insurance the Obama administration has proposed a universal health care insurance plan.  This would require all Americans to be covered by a health insurance plan much like automobile insurance.  The cost of this health care reform plan will cause health care cost to increase.  Much like the state of Massachusetts plan enacted in 2006.  The cost of this plan has exceeded estimates by 300 percent.

Signed into law on April 12, 2006, Massachusetts health care reform launched the effort to reach near-universal coverage of the state’s population.  Currently, Massachusetts is looking for ways to reduce the cost of care.  Since 2006, the increase in demand for health care services in Massachusetts is associated with the shortage of primary care physicians (internists, family medicine and pediatricians) and has caused many people to seek health care services in emergency rooms—driving up the cost of care.

My recommendation is that if you do not have a primary care physician that you seek one before the Obama universal health insurance plan is enacted.  There are insufficient numbers of primary care physicians in Indiana.

2. With the potential for universal health care on the horizon and the implications of rampant cost increases due to lack of primary care physicians, shouldn’t the providers provide more alternative avenues of service for non-life threatening emergencies such as expanded med-check facilities and the use of nurse practitioners?

Community Health Network is implementing more health care access points to try to improve access to health care services in central Indiana.  We have over 200 primary care physicians, six MedChecks for non-appointment health care, nurse practitioners through Wal-Mart stores and Infinity where we provide employer health clinics and wellness coaches to improve the health and wellness of Hoosiers.

3. Health care represents 20 percent of our GDP.  If not universal health care, what is the solution?

We believe that universal coverage is one answer but it must be linked to an increased number of primary care physicians, nurse practitioners and physician assistants to improve the access issue.  Also all Americans should be provided a small incentive to take responsibility for maintaining healthy life styles of eating right, exercising and reducing stress levels.

4. Primary care physicians have had major shortages for 10 years or more.  What is the solution for this shortage?

We need to provide financial, and other, incentives to induce people to become primary care physicians.

After we had a few moments to enjoy Rio de Janeiro's view of the ocean, we met with their mayor, Eduardo Paes.  We aren't the only Hoosiers that Paes has talked with recently.  Last week he met with the Indy Racing League to discuss the possibility of bringing a race to Rio.  Paes, who is 38, spoke a lot about collaboration; both globally and within his own country.  Paes joked that the collaboration between the U.S. and Brazil should go as far as the U.S. letting Brazil host the 2016 Summer Olympics (the candidate cities are Rio, Chicago, Tokyo and Madrid).  After all, that would be the sporting thing to do since no South American country has ever hosted the Olympics.  I'm not so sure he can convince Chicago.

After our meeting with Paes, we visited the Brazilian Development Bank (BNDES), which is the second largest development bank in the world.  Their minimum financing amount is $5 million and they only finance Brazilian projects or projects that directly benefit Brazil.  By law, a focus of Brazil banks has to be job creation.  Social improvement is also a big focus.  In fact, the mission statement for BNDES includes reducing social inequality and financing social projects.  Doing what is right, for the Brazilian people and country, is more important than doing what is right for the bottom line of the bank.

The last company we visited for the day was Petrobras.  Petrobras is a semi-public Brazilian multinational energy company that is headquartered in Rio.  It is the largest company in Latin American (based on market capitalization and revenue) and the largest company headquartered in the Southern Hemisphere.  Petrobras has an output of more than 2 million barrels of oil per day and is a world leader in the development of advanced technology from deep-water and ultra-deep water oil production.  They are shifting their focus from fossil fuel to biodiesel renewable energy. 

We wrapped-up our day listening to Hispanic and jazz music at a local club.   Rio not only offered us the opportunity to learn more about their energy development and banking system, we were also able to enjoy their sun, sand and music.  Not a bad day at all.

When you are choosing an entity there are a number factors you should consider.  For instance, you should think of how you would like to manage the business, protection against liability and your preferred tax treatment.  Below are brief descriptions of several business entities that may suit your needs and some of the advantages and disadvantages of choosing those entities.

Sole Proprietorship
The sole proprietorship is the simplest form of business.  A sole proprietorship is not an entity separate from you.  Though the sole proprietorship is a simple and convenient way to operate your business, you should beware, you will be exposed to unlimited personal liability if you operate your business as a sole proprietorship.  The owner of a sole proprietorship is directly and personally liable to creditors and other claimants. 

Corporate Entities

Corporation
A corporation is a business entity created under state law and is as an independent legal "person" apart from its shareholders and directors. A corporation's shareholders are generally not liable for the obligations of the corporation and are thus generally shielded from the corporation's creditors even if the corporation cannot pay its obligations.  Corporations must comply with statutory rules which are typically more restrictive and require considerably more formality than limited liability companies.

C Corporation
The distinction between a C Corporation and an S Corporation relates to the corporation's tax treatment.  Some of the advantages of a C Corporation are that ordinarily you may deduct the entire value of the fringe benefits offered to shareholders who also serve as employees, the number of shareholders the entity may have is unlimited and they may be either individuals, entities, U.S. residents or foreign.  C Corporations also have significant flexibility to carry corporate losses forward to future tax years.  But, operating as a C Corporation usually subjects you to double taxation, i.e., tax at two levels.  First, the net earnings of the corporation are taxed, and then, the shareholders will be taxed on the earnings of the corporation distributed to the shareholders.  For example, if a corporation issues dividends to its shareholders, it has already paid income tax on that money, but the dividends remain taxable as income to each shareholder. 

S Corporation
An S corporation is a regular corporation that has elected "S corporation" tax status. An S Corporation provides the limited liability of a corporation and the tax treatment of a partnership or a limited liability company.  With respect to non-tax considerations, the S corporation is essentially identical to a C Corporation.  The significant tax advantage with the S Corporation is that the corporation does not pay any income tax on its earnings.  Some disadvantages to an S Corporation are that only once class of stock is permitted and you must limit the shareholders to 100 individuals, none of which may be an entity (with the exception of estates and certain types of trusts) and none of which may be non-resident aliens.

Unincorporated Entities - Limited Liability Company
The limited liability company (LLC) has characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of "pass-through" income taxation.  Unlike a corporation, few of the LLC statutory rules are mandatory and most of its governance is dictated by an operating agreement executed by its members  The management powers in the LLC can be retained by the members of the LLC or centralized within a board of managers (who may or may not be members).  Another advantage of the LLC is that its flexibility allows for much less administrative paperwork and record keeping than a corporate structure.  Some disadvantages of an LLC are that some investors are more comfortable with a corporate structure (although this may only be an issue once the company is ready to take on significant investors and not in the early stages of your business) and some creditors may require that you, and other members, personally guarantee a loan to your LLC. 

Partnerships

General Partnership
In a general partnership, each partner has full and equal control over the partnership.  The partnership is a "pass through" entity for tax purposes.  While partners have considerable flexibility in structuring their relationship, partners run a great risk of loss because there is no limitation to a partner's liability.  Partners have joint and several liability for the acts of each partner within the scope of partnership business. 

Limited Partnership
Under a limited partnership (LP), unlike a general partnership, the limited partners are not responsible for partnership debts, obligations and liabilities.  An LP may have an unlimited number of limited partners, but must have at least one general partner who is responsible for the management of the partnership.  The general partner remains personally liable for partnership debts, obligations and liabilities, but the general partner can be a limited liability entity to add a layer of protection to the individuals managing it.  Like the general partnership, the LP is treated as a "pass-through" entity.  A disadvantage of the LP is that the limited partners must be careful not to become engaged in the decision making of the business or they will run the risk of losing limited liability protection. 

Limited Liability Partnership
A limited liability partnership (LLP) is a variation of the LP which allows a limitation of liability without the restriction on active participation required with an LP.  Under an LLP, partners remain liable for their own acts and are generally not liable for the acts of others, unless the partner has acted negligently or committed misconduct.  As with the general partnership and the LP, an LLP is treated as a "pass-through" entity for tax purposes.

Bottom Line:  There is no "one size fits all" answer to the choice of entity question.  You should give careful consideration to your needs and the needs of your business before settling on an entity.  Since the factors in consideration may be significant and the tax analysis complex, it may be wise to consult your tax advisor or an attorney to assist you in the decision process. 

After an overnight flight from the U.S., we arrived in São Paulo, Brazil, the nation's largest city in the southern region of the country.  Brazil covers a very large area along the eastern coast of South America and includes much of the continent's interior region.  The county is equivalent in size to the continental U.S., but has less than two-thirds of the U.S. population.

Once we answered questions from the Brazilian hotel staff on the upcoming NFL season and the Indianapolis Colts, we meet with Scott Shaw, deputy senior commercial officer at the U.S. Consulate.  One of the main focuses for this trade mission is to learn about energy.  Brazil's advances in this area make it an ideal place to learn,  especially with São Paulo on the leading edge of energy independence.  The briefing provided a great overview of Brazil's energy programs and the impact they've made in energy advancement.

Brazil is 100 percent energy independent and they have virtually no carbon issues, which means they also don't have the cap and trade issues the U.S. is facing.  Seventy percent of Brazil's energy is from water.  The rainforests, which comprise about 98 percent of northern Brazil, help stabilize the atmosphere and environment and reduce manmade environmental impacts in the region.  In addition, Brazil doesn't use coal.  Another strong energy source for Brazil is ethanol with sixty percent of Brazil's ethanol being produced in São Paulo.  They've been using homegrown biofuels since 1973 and their ethanol is based on sugar cane.  Sugar cane is not a resource easily grown in the U.S. and our ethanol is based on cellulosic and corn ethanol.

Brazil is so committed to energy and global climate change that they have pledged that the 2014 FIFA World Cup soccer event will be carbon neutral.  The stadium currently under construction will use only solar energy.

After the briefing with the U.S. Consulate, we met with representatives of the Federação das Industrias do Estado de São Paulo (FIESP).  The FIESP is an industrial entity comprised of 127 industrial associations (which make up 42 percent of the industrial GDP).  The FIESP monitors and fosters business relations with countries worldwide.  Major projects for this group include renewable and sustainable energy, climate change legislation and solar energy for heating.

We then traveled to the Fundaçoa de Amparo a Pesquisa do Estado de São Paulo (FAPESP), which is the state of Sao Paulo Research Foundation.  FAPESP is one of the main funding sources for scientific and technological research in Brazil.  Funding is derived from a one percent tax to all employers and the board of directors is appointed by the government.  Even with the funding subsidized by the government, the group has autonomy in how they manage and invest the $350 million annual budget.

We were also able to meet with many Brazilian and São Paulo dignitaries at an evening reception hosted by the FIESP.  The reception again reinforced what we already learned .  Brazil, and São Paulo, has learned to use their environment to improve their country and the lives of their people, without harming the natural resources that provide so much.

Jim Krampen is the co-founder,  principal and executive officer at Seven Corners, Inc.

The diversity of industries represented at our roundtable discussion was encouraging, in that all were thriving!   Not once during the evening was there any note or comment of future “doom & gloom.”  Expressions of concern regarding the current state of the economy and government were mentioned, but then addressed with sheer commitment and confidence that companies, industries and the country will adapt and again return to profitable times.

The most prominent point I took away from our discussions was the emphasis of development and retention of human capital.   As markets fluctuate and revenues drop, the most valued resources are the management employees that will be able to foresee market shifts and guide a company through this period and adapt or create new business environments.  Chief executives need to not only cultivate these employees, but provide them with the opportunity and support necessary to implement a plan of action to accomplish both long and short term goals.

Many of the roundtable participants are involved in community and educational outreach programs.  Should commercial industry be engaged in education?   I think yes, to the extent that feedback to educators is needed in order to provide a curriculum that will be beneficial to both the student and industry.

I have had several occasions to speak to current or graduate MBA students from various universities.  It seems that the larger and more prominent the school, the more the MBA candidate is taught and believes in the “go big, or go home” philosophy.   This is great if it can be applied in a Fortune 500 company, flush with working capital and developmental infrastructure.  However, the plethora of MBA graduates far exceed the available positions in Fortune 500 companies.  The majority of MBA graduates are placed among small and mid-size companies, which are the backbone of the U.S. economy.  Does the “go big, or go home” philosophy work within these companies?  “Yes” in the emotional sense, but “no” in the working capital and infrastructure sense.  This is where developing human capital to adapt to realistic market conditions is key.  Everyone would love an employee ready to take on the world, but few companies can actually afford to employ all of the tactics and protocols presented in MBA classes.

I believe the state should continue in its quest to excel in educational outcomes from K-12 through post graduate programs.  However, the state and private educational systems also need to understand the needs of business and industry in the State in order to retain talent within the state.  Furthermore, the state needs to be more conducive for business.  It could be worse, but on the other hand, it could be better.   More business will create more employees.  More employees will create more tax base.  More tax base will create better schools and communities and thus more propensity to work, live and thrive in Indiana.

The two key documents for a new LLC are:

• Articles of organization
• Operating agreement

The articles of organization are filed with the secretary of state.  They contain some very basic information about your LLC, including its name and whether it is managed by a manager or managers.  If the articles do not say that the LLC is managed by a manager or managers, then it is automatically deemed to be managed by the members.  Articles of organization are required to include much less information than is required to be included in the articles of incorporation for a corporation. 

LLCs are also required to have an operating agreement.  The operating agreement does not have to be written.  It can be oral, but a written agreement is better for a number of reasons, including just as evidence of what the agreement of the members actually is.  Because there are fewer statutory formalities around the operation of LLCs than there are with respect to corporations, the operating agreement is a good place to memorialize the members' agreement with respect to the operation and management of the company. 

Matters that are addressed in a written operating agreement include the following: 

• the process for calling and holding members' meetings;
• the powers of the manager or managers and process for holding meetings;
• duties of officers and the process for appointment and removal of officers by the board;
• limitations on members' ability to transfer their ownership interests;
• repurchase rights  on a member's death, permanent disability, termination for cause or resignation from employment with the company;
• preemptive, co-sale, tag-along and other rights (these concepts are discussed in the context of corporations in the previous blog post "I'm Raising Raising Venture Capital for My Company and I Can't Understand Half the Jargon They are Using. Can You Help?");
• governance (for example, the agreement may require that significant management decisions require the consent of some or all of the members or the managers);
• allocation and distribution of the company's income; and
• miscellaneous (restrictions on competition, treatment of confidential information and dissolution of the company).

Jerome Peribere is president and chief executive officer at Dow AgroSciences.

I enjoyed this roundtable as it was a prime opportunity to talk about culture, state of mind and values which shape a community and a company.  These topics are especially relevant as it has been fascinating to observe the quality of our employees at Dow AgroSciences in the recent months.  Not only have they had to cope with the potential consequences of the global recession like everyone else has, but in our case it hit close to home when The Dow Chemical Company, our parent company, mentioned that it was evaluating the possible divestiture of several assets including Dow AgroSciences.  Of course employees went through the process of being shocked and feeling uncertain, yet the Midwestern values of hard work and self determination quickly took over.  The realization that we are a solid, highly performing technology-based entity valued for the quality of our output quickly reboosted confidence and determination to succeed.  The strength of every company depends on the state of mind of its employees and their thinking, which in turn shapes the company culture and brings results.  If we engage employees, the values of our communities will come out strong and respond.

Incentives are on the rise for businesses to provide "green" products and services.  Many consumers are willing to pay a premium for products that are environmentally friendly, and businesses have taken notice.  Buzzwords such as "organic," "recyclable" and "hybrid" are used to distinguish a product from its competitors.  Even the government has increased its focus on encouraging companies to provide environmentally friendly products and services by offering a wide array of tax incentives available to companies and consumers.  It is not surprising that many companies have responded to these incentives by embarking on green marketing campaigns.

However, companies engaged in green marketing are not only increasing their profits, but also their risk.  Lawsuits and class actions accusing companies of "greenwashing" - marketing the environmental friendliness of a company's product in a false or misleading way - have sprung up across the nation.  These lawsuits have been filed against companies in a variety of industries and trades, including construction companies, retailers, automakers, candy makers and manufacturers of cleaning supplies.

In addition to these consumer actions, the Federal Trade Commission (FTC) has also increased its scrutiny of green marketing.  In June 2009, the FTC filed suit against Kmart, Tender Corporation and Dyna-E International for making false and unsubstantiated claims that their products were biodegradable.  The FTC alleged that these claims did not conform with environmental marketing guidelines contained in the "Green Guides," a set of regulations used by the FTC to determine whether a company's environmental marketing constitutes consumer fraud.  A revised version of these guides will be released later this year and will address the changes and growth in green marketing over the past ten years.

Although green marketing is a potentially invaluable tool, companies should ensure that they understand and minimize the risks that are associated with its use.  For further information regarding green marketing and ways to manage its risk, please contact Michael McNally or Jacob Cox in Ice Miller LLP's Competitive Business Practices Litigation Practice Group and members of the Firm's Green Industries Initiative.

On May 12, 2009, Indiana Governor Mitch Daniels signed into law Senate Enrolled Act 450, which made several changes to Indiana corporate law effective July 1, 2009.  Most notable was the change mandating that publicly-held corporations stagger the terms of their board members into two or three groups, elected for two or three year terms, respectively, unless the corporation takes action by July 31, 2009 to opt out of this requirement (as further described below).
 
Read the entire article that highlights several of the substantive changes made by this legislation.

Due to economic challenges, many CEO decisions may be attributed to companies adopting a "maintenance" mentality as opposed to previous growth mentality strategies.

In the 2009 CEO survey, significant decreases in ratings from last year were observed for several issues which include: "sustained, steady top-line growth" and "employee retention and recruitment."  Similarly, "customer loyalty and retention" saw a slight increase of importance; emphasizing the new strategy of strengthening current resources in order to maintain and grow in the future.

Not surprisingly, within the next 18 months, the priority of adding jobs decreased since the previous 2008 results, while the prospect of reducing jobs increased.  Succession planning dropped significantly in importance.  "Customer loyalty and retention" and "corporate reputation" continue to be main concerns of CEOs.

When asked what specific activities organizations are taking in an effort to deal with the economic situation, larger firms were more likely to resort to cost-reducing activities, with the most frequent being "reduction in staff" (24.0 percent) and "salary reduction/freeze" (17.5 percent).  Furthermore, smaller firms were more likely to mention revenue-generating activities, the most frequent responses being, "more/different marketing activities" (14.2 percent) and "expand markets" (7.7 percent).

The decision made by many CEOs and their organizations to invest in maintaining their existing business will hopefully facilitate a stable recovery and lead back to a strategy focused on growth.

I'm forming a new entity for my business.  What are some of the key documents?

 

The three key documents for a new corporation are:

 

• Articles of incorporation
• Bylaws
• Shareholders' agreement (optional)

The articles of incorporation are filed with the secretary of state of the state in which you are forming your corporation. They contain some basic information about your corporation, such as its formal name, its registered agent for service of process, the number of authorized shares and the rights and preferences of any preferred shares.

 

Most states require a corporation to have bylaws. The bylaws generally set forth the following information: 

 

• the process for holding shareholders' meetings;
• the powers of the board of directors and process for holding board meetings;
• duties of officers and the process for appointment and removal of officers by the board.

A shareholders' agreement is not required by law but is often a good idea. It is an agreement between the shareholders of the company that governs the rights of the shareholders. A shareholders' agreement typically limits if and how a shareholder of the company may transfer his or her shares of stock. It may also contain the following provisions:

 

• Repurchase rights. Repurchase rights typically require the owners or the company to purchase a shareholder's shares in certain circumstances, such as death or permanent disability. A shareholders' agreement also will often require a shareholder to sell his or her shares of stock to the company or the other owners if the shareholder is fired for cause, voluntarily resigns or the breaches the shareholders' agreement.

 

• Preemptive, co-sale, tag-along and other rights. A shareholders' agreement may also provide for preemptive rights, rights of first refusal, tag-along rights/co-sale rights and/or drag-along rights. These concepts are discussed in the below blog post "I'm raising venture capital for my company and I can't understand half the jaron they are using. Can you help?"

 

• Corporate governance. A shareholders' agreement generally governs the manner in which the day-to-day operations of the company will be managed. For example, the agreement may require that significant management decisions require the consent of some or all of the shareholders or the board of directors. A shareholders' agreement may also establish the means by which the directors are to be elected.   

 

• Miscellaneous. Other matters that may be addressed in a shareholders' agreement include restrictions on competition, treatment of confidential information and dissolution of the company.

As expected, the United States Congress passed and the president signed into law, sweeping economic recovery legislation that expands existing, and establishes new, tax incentive programs to promote clean technology, renewable energy and green jobs.  The legislation also provides businesses tax relief in certain areas.

Read the entire alert on tax relief to promote clean technology and renewable energy.

Some Notices Must Be Given By April 18, 2009

On March 19, 2009, the U.S. Department of Labor issued four new model COBRA notices to implement the COBRA subsidy provisions of the American Recovery and Reinvestment Act of 2009.  These notices must be provided by employers who sponsor group health plans to individuals who become eligible for COBRA between September 1, 2008 and December 31, 2009.  At least one of the notices must be provided by April 18, 2009 (see below).  The notices may be used by any public or private employer that is subject to COBRA (whether through ERISA, the Internal Revenue Code or the Public Health Service Act).

Read the entire alert on COBRA Notices for Subsidy.