Blog - Archives for June, 2011.



4 Common Branding Mistakes Startups Make

Posted On: Thu 30th Jun, 2011 at 10:56am

Branding is extremely important for small companies that want to grow and sustain their businesses for the long term. It is a major challenge for a small business to establish a brand because of the lack of funds, resources, people and time. Yet branding is what makes your company attractive to investors, consumers and future employees. Your brand is the relationship you have with your customers and relationships are not built overnight. A lot of entrepreneurs have difficulty with branding because they prioritize product development and sales before meaning and experience. A company that doesn’t have a well-defined brand will have trouble with differentiation in the marketplace and with generating media awareness. Here are some common missteps to watch out for.

1. They don’t define a set target market

In order to gain visibility in the marketplace, it’s imperative that you are specific with the types of customers you’re going after. You can’t be everything to everyone or you’ll be nothing to no one. Too many entrepreneurs think that they need a mainstream product for the highest potential sales. By defining and segmenting your audience, you can appear higher in search engine results and the “right people” will find you and want your product. Think about the age, gender, geography and lifestyle of the people you’re targeting and don’t be afraid to define your market in public. For example, instead of being just another law firm, you can position yourself as “legal counsel for young entrepreneurs in Charlotte.” If a young entrepreneur in Charlotte is looking for legal support, they will search online and your website will come up. Since you have a well defined position, they will choose you over a more generalist firm that doesn’t understand their needs.

2. They focus too much on advertising and not enough on PR

Sixty-three percent of small to medium-sized businesses advertise online, according to a survey by Affinity Express. While targeted advertising on specific blogs, websites, and through Google AdWords and Facebook Social Ads might help, it’s well worth the investment to get PR support and partner with brands. Public relations is extremely important because what other people say about your brand is more impactful than what you say about yourself. Self-proclamations don’t build brands; the media does. It’s far better to have a profile in Fortune magazine than it is to pay for a full-page advertisement in the magazine. Earned media is much more respected by customers. Small businesses typically don’t have well-known brands so they require third-party endorsements and partnerships in order to become established. If people haven’t heard of your company, then it’s helpful if you create strategic partnerships with companies that your market is familiar with. By associating your company with a well-known brand, your company becomes more credible and your brand grows.

3. They don’t build a strong Web presence to attract new customers

Every single business should have a website, but 55 percent of small businesses don’t have one, according to data analyzed by Formstack. How are potential customers supposed to find you? People are searching for you online and every time you don’t come up, there’s another missed opportunity to build your business and brand. Consumers turn to the Web first before making a purchasing decision. A strong Web presence allows you to point people to where they can find more information about who you are, what you do and what products and services you offer. Instead of blowing money on advertising, invest your resources in social media and your website. Consumers also turn to their friends, through social networks, when deciding what company to purchase from. That’s why it’s crucial, more than ever before, to create your own profile pages, and engage with your customer base. Start by concentrating your efforts on the top three social networks: Facebook, LinkedIn and Twitter.

4. They disable their employees from building their brand

Forty percent of small businesses have a policy that prohibits employees from visiting Facebook, reports Webroot.  Small business owners should let their employees use social networking sites as long as they are doing it for the benefit of the company. Consumers want to hear your story and connect with your employees to get a better sense of your company. If you enable your employees to become evangelists for your company, then you will be able to scale your marketing and foster stronger relationships with your customers. Your employees should be able to build and develop their own personal brands because then they become more valuable to your company.

Client letter on compensatory stock options

Posted On: Mon 13th Jun, 2011 at 08:23am

Dear Client:

Many employees receive stock options as part of their compensation packages. From a tax standpoint, there are two kinds of options—statutory and nonstatutory. “Incentive stock options,” or ISOs, as they are commonly known, are statutory options, because they are specifically provided for in the Internal Revenue Code and are subject to numerous qualification requirements. Options that don't meet these requirements are nonstatutory stock options or NSOs (also known as nonqualified stock options or NQSOs).

Both kinds of options have tax advantages, but there are quite a few differences between them. Here's some basic information on the taxation of compensatory stock options that may help you better understand how best to benefit from them.

Option grant: If you have ISOs, you are not taxed on option grant. The same is generally true of NSOs. An NSO is taxed at grant only if it has a “readily ascertainable” fair market value (FMV), which is seldom the case. IRS rules say that an option doesn't have a readily ascertainable value at grant unless: (1) the option is actively traded, or (2) (i) the option is immediately transferable; (ii) the option is fully exercisable; (iii) the option and the option stock are unrestricted; and (iv) the value of the “option privilege” is readily ascertainable. In the unlikely event that an NSO is taxable at grant, you have compensation income at that point.

The deferred compensation rules under Code Sec. 409A —which tax deferred compensation to the extent not subject to a “substantial risk of forfeiture” unless specific requirements are met—don't apply to the grant of an ISO. However, these rules can apply to the grant of an NSO, unless the exercise price can never be less than the underlying stock's FMV on the date the option is granted and certain other conditions are met.

Option exercise: No regular income tax is owed on the exercise of an ISO, but the alternative minimum tax (AMT) may apply. The bargain purchase element at exercise, which is the difference between the value of the ISO stock (i.e., stock acquired through the exercise of an ISO) at exercise and the lower price you pay for it, is considered to be income when figuring your AMT. Even if you're usually not subject to the AMT, exercising ISOs may push you into its range. (If you are subject to the AMT in the year you exercise ISOs, then you may be entitled to an AMT credit carryover for use in some later year.)

Any remuneration that arises when stock is transferred on the exercise of an ISO isn't subject to FICA or FUTA taxation.

When you exercise an NSO that wasn't taxed at grant, you're taxed at ordinary income rates on the difference between the value of the option stock at that time and the price you paid for it (plus any price you may have paid for the option, although generally that will be zero). This is compensation income that is subject to payroll taxes and income tax withholding. Taxes may be withheld from your salary or other compensation income, or you may have to sell some of the stock to cover the withholding or make some other arrangement with your employer.

However, if the option stock is nontransferable or subject to a substantial risk of forfeiture, then you aren't charged with compensation income until those restrictions no longer exist. In that case, you can choose to pay tax on exercise so that all gain from that point on would be capital gain.

Sale of option stock: When you sell ISO stock, you generally are taxed at favorable long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale. However, if you sell the stock within two years of the option grant or within one year of the option exercise, you're hit with compensation income to the extent of your bargain element at exercise. The balance of your gain is capital gain, which will be taxed at favorable rates if you've held the stock for more than one year on the sale date.

It's important to know how long you need to hold the stock to qualify for long-term capital gain rates on the difference between the price you paid for the stock and the amount you realize on its sale or, if you don't hold the stock long enough for this favorable tax treatment, how much additional compensation income will be attributed to you. We can determine this from information on a statement from your employer. You should receive this statement by January 31 following the close of the year in which you exercised the ISO.

If the option was exercised after October 22, 2004, any income on disposition of the stock isn't subject to FICA or FUTA taxation. Additionally, any income resulting from a disqualifying disposition of stock acquired under an ISO isn't subject to withholding.

When you sell stock acquired by exercise of an NSO, you have capital gain if you were subject to tax either at option grant or exercise, or when restrictions on your option stock lapsed. Otherwise, you have compensation income at the time of the sale.

Gifts of options: Some people would like to give stock options to family members as part of their overall estate planning. Transferring property before it increases in value helps lower or eliminate estate and gift taxes.

This can't be done with ISOs, because they can't be transferred during the optionee's lifetime and can't be exercised by anyone but the optionee during his or her life.

NSOs have an edge here if the option plan allows options to be transferred to family members, as many plans now do. However, the IRS has ruled that an option transfer isn't complete for gift tax purposes until the option is no longer conditioned on the performance of future services. That usually means that the gift will be subject to gift tax at a time when the option's value has increased.

The IRS also has issued some complicated rules for valuing gifts of NSOs. For income tax purposes, a gift of NSOs to a family member isn't a disposition that triggers tax. Instead, the employee will be taxed when the transferee exercises the options.

As you can see, the tax rules for compensatory stock options are quite complex. Please call for an appointment if you have additional questions about your options, or if you would like to do some tax planning for them. 

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