Innovative Financing for New Businesses

 April 1, 1991

S Corporations – The New Crackdown

          The Internal Revenue Service has announced a crackdown on owners of S Corporations who avoid social security tax by not paying themselves any salary.  Instead, they receive their profits as dividends or distributions.  Two Appeals Courts have backed the IRS efforts to treat distributions as salary and impose FICA (now OASDI and Medicare) and other payroll taxes.  The IRS will, on a nationwide effort, check Forms 940 and 941 for non-filing by S-Corporations and compare those filed with their Corporation tax returns to see how S-Corporation profits were handled by shareholders on their individual returns.

Independent Contractors & 1099s

          The IRS is going after companies that misclassify workers as independent contractors.  A new Form 1099 matching program is beginning.  The IRS plans to pull data from 1099s that exceed $10,000 and represent the payee’s sole source of pay and check who paid them.  The IRS thinks that many payees are actually employees and that payers are avoiding payroll taxes by not treating them as such.  This is the result of a 1989 recommendation by the General Accounting office.  This will mean a 40% increase in payroll tax audits in 1991 much of it done by computers programmed to kick out the more lucrative targets first.

Innovative Financing for New Businesses

          The immigration Act of 1990 which goes into effect October 1, 1991 increases the amount of people who can immigrate to the U.S.  One of the more interesting categories of immigration groups is the “millionaire investor”.  This “investor” category is part of a larger preference group reserved for those seeking to immigrate based on their skills and or work characteristics.  To qualify for “investor” status the alien must establish a new business in the United States.

•  In which the alien has invested capital in the amount of $1,000,000 and
  
  
• which will create full time employment for 10 U.S. citizens or aliens fully admitted for permanent residence or other immigrants lawfully authorized to be employed in the United States (other than the immigrant and immigrant’s spouse, sons or daughters.

          To defer fraud, the permanent resident status or alien investors and their spouse and children will be granted only conditionally.  After two years the INS will review the case to determine whether to allow the alien to remain in the U.S.

          This represents an opportunity for those of you who want to start an asset intensive business or know of those who want to start an asset intensive business to obtain innovative financing.  We are currently in contact with an organization which represents Asian aliens looking to immigrate to the U.S.  They are mostly from Seoul and Taipei.

          Possible investments include:

• Franchise - these may be of the food or non-food type.  Can consist of a single location  or multiple locations of the same or different types.
  
  
• Distribution Company – newly created entity contracting with a manufacturer or source.  Can be in the form of a joint venture.  The manufacturer may or may not be a U.S.
  company.
  
  
• Manufacturing Company – a joint venture between the investor and a product developer for the manufacturing of a product.  The product may or may not be manufactured in the U.S. but the newly located company must be located in the U.S.
  
  
• Trading Company – an import/export company.  The majority of the investment here is in working capital.
  
  
• Restaurant – purchase a building and create an eatery.  This is separate of any chain or franchise operation.  It is a singular entity of your own creation.
  
  
• Hotel/Motel – find one that is non-operational.
  
  
• Vacant Real estate – purchase vacant properties and develop new businesses under investor’s ownership.  There are many empty stores available for manufacturing, retail, wholesale, etc.

          It is not necessary for the alien investor to own all or even a majority of a new commercial enterprise he participates in.

          If you are interested in pursuing the foregoing, please contact Howard Lisch for a discussion of our fees and further steps.

          If you have any questions about this or any other matters, please call us.