Type of Entity

          On February 24, 2011, the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury issued final regulations under 31 CFR Part 1010 addressing the reporting of foreign financial accounts and the form used to file these reports (Form TD-F 90-22.1, Report of Foreign Bank and Financial Accounts, which is commonly referred to as the "FBAR" form). While the language in the final regulations is substantially consistent with the proposed FBAR rules that were published one year ago (read our March 10, 2010 summary of the proposed regulations), the FinCEN clarifies and revises certain provisions regarding which persons will be required to report accounts and which accounts will be reportable, as well as any specific exceptions to the filing requirements.

          The final rules are effective March 28, 2011, and apply to FBARs required to be filed by June 30, 2011, for foreign financial accounts maintained in 2010 and for reports required to be filed for all subsequent years. In addition, filers who properly deferred their filing obligations under IRS Notice 2010-23 (which extended the FBAR filing due date from June 30, 2010 to June 30, 2011 for certain groups) may, but are not required to, apply the provisions of the final rule in determining their FBAR filing requirements for reports due June 30, 2011, for foreign financial accounts maintained in years beginning before 2010.

          Note that the regulations under the Bank Secrecy Act (BSA) have been reorganized; therefore, the text of the final FBAR regulations have been renumbered for consistency. The regulations that were originally under 31 CFR 103.24 in their proposed form now appear under 31 CFR 1010.350 as the final regulations.

Applicability to Governmental Pension Plans

          The regulations still exempt governmental pension plans from the FBAR filing requirements. The proposed rules were accompanied by proposed revisions to the FBAR instructions which, among other things, specifically exempted governmental entities from the filing requirements, as follows:

A foreign financial account of any governmental entity is not required to be reported on an FBAR by any person. For purposes of this form, governmental entity includes: (1) a college or university that is an agency or instrumentality of, or owned or operated by, a governmental entity; and (2) an employee retirement or welfare benefit plan of a governmental entity. (Emphasis added.)

          While the FinCEN states in the preamble that the FBAR instructions have been revised to reflect the language adopted in the final regulations, the instructions were not included in the final regulations, and the rules do not explicitly make the above statement. However, when the final FBAR instructions are released, we expect they will include this exemption. In addition, the final rules retain the language from the proposed rules excepting from the filing requirements persons who have a financial interest in or signature or other authority over an account of any State or any political subdivision thereof. 31 CFR 1010.350(c)(4).

          Thus, the rules provide a filing exemption for the accounts of governmental pension plans, both with respect to the plan itself and with respect to the plan's employees with signature authority over foreign investments. The exemption is applicable for accounts held during 2010 and subsequent years. In addition, both pension plan employees with signature authority over accounts but no financial interest in those accounts who took advantage of the extension provided in IRS Notice 2010-23, and pension plans having commingled funds, none of which were mutual funds, which did not file an FBAR for prior years in reliance on Notice 2010-23, may rely on the final regulations to determine whether the delayed filing is now required.

          For more information about FBAR, the final rule, and how the FBAR materials may impact your governmental plan, please contact Mary Beth Braitman, Terry A.M. Mumford, Katrina M. Clingerman,  Lisa Harrison, or your Ice Miller LLP employee benefits attorney.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law No. 111-203 (Dodd-Frank) was signed into law on July 21, 2010.  Among other changes to securities law, Dodd-Frank imposes registration and other obligations, including fiduciary duties, upon municipal advisors who engage in certain activities with respect to "municipal entities."  See Section 975 of Dodd-Frank.  These new obligations include the requirement, which became effective Oct. 1, 2010, to register with the Securities and Exchange Commission (SEC).  In addition, Dodd-Frank grants the Municipal Securities Rulemaking Board (MSRB) regulatory authority over municipal advisors, so municipal advisors will be required to comply with the MSRB's registration and other requirements as well as those of the SEC.

Read the entire alert regarding municial advisor registration under Dodd-Frank Act.

In Notice 2010-91, the Internal Revenue Service (IRS) provided interim guidance on the application of the withholding requirements under Section 3402(t) of the Internal Revenue Code (Code) to payments made by payment cards, such as credit, debit and gift cards.  Code Section 3402(t) was added by the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) to provide that the United States government, every state and political subdivision thereof, and every instrumentality of the foregoing making any payment to a person providing property or services must deduct and withhold from such payment a tax equal to three percent of the payment.  TIPRA contains exceptions for several types of payments, such as wages, retirement benefits and retirement plan contributions, and also exempts payments made by state or local government if that entity makes annual payments of less than $100 million.  Under TIPRA, Code Section 3402(t) originally applied to payments made after Dec. 31, 2010, but with the enactment of the American Recovery and Reinvestment Act of 2009, the effective date was amended so that the withholding requirements apply only to payments made after Dec. 31, 2011.

For this trade mission, the decision was made to focus on four key sectors in Indiana: vehicles, life sciences, energy and agriculture. The format has been to engage in breakout sessions in each of these sectors and do on-site plant tours and meetings with various leaders from the host country. Today, we had numerous meetings set-up with various leaders in these areas.

The main purposes of this trade mission is to attract Asian companies to Indiana and to have them start businesses here. One entity on this trade mission, Sherry Labs, wants to introduce their services in China and are potentially considering a location here in China as well.

This is an incredibly engaged delegation. The majority of delegates either have businesses that are currently doing business in China, or are seeking to do business in China. China is an economy that is growing at an exponential pace. They are very interested in doing business with people in the U.S. China is rich with cash and has a tremendous amount of capital ready to be invested, so they do not need capital from the U.S. They plan to spend a few trillion dollars putting in roads and streets over the next couple of years.

China has great interest in our economy and our financial strength here in the state of Indiana. They were very inquisitive about how we fared in the recession, and they were very interested in how well our state has done compared to other states in the last couple of years. They do recognize Indiana as a leading state in the U.S. with regard to the economy, jobs and innovation. The leaders we've met are very impressed with our highly productive workforce and the number of colleges and universities we have. The Chinese leaders are also very impressed with our governor.

Currently, the delegation is in Hangzhou, China, a sister province to Indiana. Hangzhou means Paradise City. We have had an incredibly warm greeting from the various officials here in China as well as the business leaders. Last night, we attended a very impressive banquet with key leaders from Hangzhou where we toasted our continued long-term relationship. They had a group of young girls playing some of our favorite songs, such as Jingle Bells and The Old Swanee River.

         On Sept. 16, 2010, the United States Environmental Protection Agency (EPA) published a notice in the Federal Register soliciting stakeholder input regarding the agency’s role under the Pollution Prevention Act of 1990 in regulating or encouraging the "green" or sustainable products movement.  The EPA will consider and accept comments until Oct. 19, 2010, on the scope and nature of the agency’s proposed role in the identification, development, manufacturing of, designation and use of "green" or "sustainable" products, as well as views on the major challenges and opportunities in this area.

         Companies may be affected by the EPA’s action on this matter if they manufacture, distribute, label, certify, verify and purchase or use consumer, commercial or industrial products that may be considered as "green," "sustainable" or "environmentally preferable."  Potentially affected entities may include, but are not limited to those industries with the following North American Industrial Classification Codes (NAICS):  23, 31–33, 42, 44, 45, 54, 72, 81 and 92.

         The areas contemplated by EPA for regulation or other action include: 

1.      Assembling information and databases;
2.      Identifying sustainability "hotspots" and setting product sustainability priorities;
3.      Evaluating the multiple impacts of products across their entire life cycle;
4.      Defining criteria for more sustainable products;
5.      Generating eco-labels and/or standards;
6.      Establishing the scientific foundation for these eco-labels and/or standards;
7.      Verifying that products meet standards;
8.      Stimulating the market; and
9.      Developing end-of-life management systems (reuse, recycling, etc.).

         If you would like to discuss the EPA's request for stakeholder input or any of the potential changes to EPA’s role in the "green" movement, please contact Kristina Tridico, Susan Charles or Freedom Smith.  In addition, you can view the Federal Register notice prepared by the EPA to summarize its proposed actions.

This morning the delegation met with the Confederation of Indian Industry, which is an entity similar to a Chamber of Commerce.  During this meeting we talked with the executive director of Mahindra, Arun Nanda.  Mahindra is a $6.3 billion company that employs over 100,000 people across the globe.  They manufacture and market utility vehicles and tractors.  They also have a significant presence in information technology (IT), financial services, tourism, infrastructure development, trade and logistics.  The company has three plants in the U.S. (Texas, Tennessee and Georgia) that manufacture tractors and they cater to what they call the "hobby farm market."

We then met with members of the Bombay Chamber of Commerce and Industry, and Dr. Atindra Sen, director general of the chamber. The chamber was established in 1836 and is the oldest chamber in India.  The chamber has 20 subcommittees that focus on different segments of industry such as legal affairs, agribusiness and international trade.

During my conversations with Indian business leaders I've observed that clean technology and "green" or environmentally friendly practices are not widely used in India.  This may be an opportunity for various industry segments within the U.S. to bring their expertise to this market.

What this market is very interested in is quality.  This has been a shift partly because labor costs are increasing and, as a result, product quality has become a focus. 

We've also talked a great deal about the Indian legal system.  In general, the legal system is not highly trusted and people believe someone's word is sufficient to reach an agreement.  The legal system is based on common law and has been largely influenced by the British rule, so it's very similar to our system; however, there are some differences.  They have no juries and no tort law.  Areas such as real estate, corporate, commercial or most types of business transactions are very similar to the U.S. which make it desirable for U.S. companies to want to do business here.  An interesting fact I learned about the court system is that the India Supreme Court is clogged with property cases and it would take approximately 300 years to handle all of the property cases on the current docket.

I referenced a study by Dr. Geert Hofstede on intercultural business communications in my last post.  One area he studied is the Power Distance Index (PDI).  The PDI is a reflection on how much a culture does or does not have hierarchical relationships and respect for authority.  As I've mentioned, India places great importance on hierarchy.  For countries with a high PDI, like India, the study says that people can expect to encounter more bureaucracy in organizations and government agencies.  The property case backlog in the India Supreme Court is a prime example of this indicator.

After the meetings, we went to the Gateway of India, which is a monument located on the waterfront in the Apollo Bunder area in South Mumbai.  The Gateway is an 85 foot high arch.  It was used by fishermen as a jetty and later renovated to be used as a landing place for British governors and other dignitaries.  The arch combines both Hindu and Muslin architectural style and is striking.

During my visit I've come to appreciate many beautiful aspects of Mumbai.  The city lies on the Arabian Sea and has stunning views.  The Bandra Worli Sea Link bridge enhances the beauty of this coastline.  The bridge was recently completed and took six years to build.  It is an operator billed bridge, which means an operator provides the capital to build the bridge and owns it for a certain number of years, possibly 10 years or more, and gets the toll money that then pays for the building of the bridge.

Although Mumbai is a beautiful city, the traffic and congestion hinder its appeal.  Traffic is so bad that very large corporations use helicopters to transport people locally rather than dealing with the traffic.  Because it's so crowded and congested, it's acceptable to be late for appointments, although it's more acceptable to be late when you're meeting with government officials than corporate leaders.  People also honk constantly.  Honking is not considered rude and is used as a way of letting someone know that they're close to you. 

So with all the stress from traffic, how do people relieve the tension?  One way is cricket.  Cricket is the number one sport in India and it's everywhere.  If you go by any park, there are always people playing cricket.  As I mentioned in my last post, it's summer here and the temperature is about 106.  It's incredibly humid and very hot and people are still outside playing cricket!

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

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.

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.

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.

Indiana's General Assembly has passed House Bill 1280, Energy Efficient Buildings, which requires the environmental quality services council (EQSC) to study whether public entities should be required or encouraged to seek to achieve energy and environmental design ratings in the construction and renovation of buildings and structure and related issues. The General Assembly adjourned sine die March 14.  The Speaker of the House and the President Pro Tem of the Senate have seven days after sine die to sign all bills, after which they are sent to the Governor's office.  Once a bill reaches the Governor's office, the Governor has seven days to take action (sign, veto, or let the legislation become law without his signature). March 28 is the Governor's final deadline for signing bills. A technical corrections day, if needed, is set for April 15.  Both houses would convene at 1:30  p.m . The bill originally required a building constructed or designed under certain public works contracts entered into after December 31, 2008  to be designed with the goal of achieving the United States Building Council's Leadership in Energy and Environmental Design (LEED) rating system, the Green Globes Two Globes level or equivalent standard under an accredited program.  It contained provisions regarding state energy purchases and Energy Star rated equipment. It allowed the Indiana  Economic Development Corporation to adopt rules regarding priority for economic development projects that met or surpassed LEED criteria. The EQSC will likely consider these types of issues in determining whether public entities should be required or encouraged to seek to achieve energy and environmental design ratings.