Next Economy bill provisions would make incorporating easier

Last updated on May 13th, 2019 at 02:22 pm

Reduction of fees, simplification key provisions

A bill that would make it easier and less expensive for new corporations to form and merge in Wisconsin – and ease restrictions on capital development — passed the state assembly Feb. 8.
At press time, the bill had not yet reached Gov. Scott McCallum’s desk but will be signed into law, according to sources within the governor’s office.
Senate Bill 333, dubbed the "Next Economy Bill," was designed to make it easier for limited liability corporations (LLCs) and domestic corporations to convert from one form to another, to merge and to restructure. The law will also ease securities laws to promote capital formation.
According to economic development officials, regulation in Wisconsin was causing many companies located here to incorporate elsewhere – often in Delaware. Regulation designed to protect investors was limiting the ability of private start-ups to raise capital, and fee structures for incorporation were complex and added expense to the process of incorporating in Wisconsin.
"I am committed to building Wisconsin, to growing our economic base and bringing more high-paying jobs to this state," McCallum said. "The New Economy bill, which grew out of the recommendations from the Governor’s Summit on Venture Capital last year, reduces the costs of organizing a corporation and simplifies securities regulations. This makes Wisconsin a more attractive environment for bringing the types of new businesses and jobs that we want in our state. I’m happy to see the legislature moving forward to help build Wisconsin and make our economy stronger and more vibrant."
Many of the provisions in the bill originated in a white paper presented at the 2001 Governor’s Summit on Venture Capital by Joseph Hildebrandt, an attorney with the Emerging Growth Companies/Venture Capital Practice Group at the Madison office of the Milwaukee-based law firm Foley & Lardner. Hildebrandt is chairman elect of InvestWisconsin, an organization started last year to encourage capital investment in the state.
"The main ones are the ones dealing with the securities law changes and the ones dealing with the interspecies mergers among different types of entities," Hildebrandt said of the provisions in the bill. "In connection with the securities, it loosened up some of the provisions to make it easier for people to go out and raise initial sums of money. The real need we have in this state is for start-up funds, seed funds to go into these emerging growth businesses where all the new jobs are coming from – the higher-paying jobs."
While the bill contains basic provisions that will close legal loopholes and allow for more rapid capitalization of start-ups, it is not a cure-all for the state’s economic challenges, according to one InvestWisconsin board member.
"I am not sure any legislation out there changes the world," said Allen Oelschlaeger, a founder and partner of Telaric, a Mequon-based business advisory firm serving entrepreneurs. "What is cool right now is that Wisconsin is doing some things in a lot of different areas to simplify life for the entrepreneur."

Easier to raise seed money
The Next Economy bill allows those starting businesses to raise more money by increasing the number of people that interest in a privately held company can be sold to.
"For example, previously when you are starting up a company, you could sell it to 15 individuals without doing any registration," Hildebrandt said. "This has increased to 25. After you sell to those 25, under the current law, you are permitted to make offers to another 10 people – that has also been increased to 25 within a 12-month period."
The bill also eases licensing requirements to sell interests in small companies to certain investors.
"One of the issues when companies go out to raise money, say it is a professor out of the university who has technology licensed by WARF (Wisconsin Alumni Research Foundation)," Hildebrandt said. "If it has great promise, he sets up a business plan. Then he needs to go raise money. He doesn’t have the contacts – and large brokerage firms have that experience, but to raise $100,000 to $500,000 – that is not enough money for a brokerage to get involved with. The law will permit licensing without taking an exam when you are only selling to accredited investors – wealthier individuals."
Oelschlaeger stressed that such a statutory change would reflect some things that are already happening in the market.
"The reality there is that there are an awful lot of people out there filling this role," Oelschlaeger said. "It turns out there are not many people who go through the exam and maintain the registration every year. Some people have gotten around the law by carefully crafting their agreement so it doesn’t look like they are a money finder. This bill allows people to play that role in a normal way and not have to go through the hassle of becoming a regular dealer/broker. And small companies really need that help. They are hiring people and developing their companies. And they still have to raise money."
The bill would also increase from $1 million to $5 million the amount that could be raised through private investors, and would for the first time allow LLCs to provide venture capital by investing in securities.

LLCs less limited
Hildebrandt noted that LLCs are a relatively new form of corporation, and when statutes allowing their formation were enacted, some necessary areas of corporate law were overlooked. The Next Economy bill would bring Wisconsin up to date with other states that are less restrictive of these typically small corporations.
"For LLCs, it updated the statutes in a number of different ways," Hildebrandt said. "The LLCs are relatively new, but there hasn’t been any change in Wisconsin in recent years. Therefore, certain companies are forced to go to other states if they wanted to change into a corporation or merge with another type of entity. Now under this new legislation, if two types of corporations want to merge of if they want one to convert into another, it can all happen here in Wisconsin."
This change is critical as according to Hildebrandt, the tax benefits of LLCs have lead to tremendous growth in their numbers.
"In 1994, 20% of new entities were LLCs," Hildebrandt said. "This last year, most companies starting up in Wisconsin were starting as LLCs."
Income flowing to an LLC is not taxed until it is disbursed to an owner, and according to Hildebrandt, this close tie between the company and its shareholder resulted in another restriction on LLCs the bill would do away with.
"When one member of an LLC decides to leave, there was some ambiguity as to whether that ended the entity," Hildebrandt said. "And now it has been clarified that it doesn’t terminate."
Statutory changes allowing for conversion from LLCs to corporations will also help small companies turn into big ones, according to Hildebrandt.
"If somebody ends up being largely successful and has really hit the big time, they may want to go become a public company and do an initial public offering," Hildebrandt said. "At this point in time, it is generally more successful to be a corporation – to be a public company. There are also certain advantages when you are a larger corporation. As you get larger, there are some things that are more settled with corporations than with LLCs. In those large companies, people end up getting their profits and returns on the appreciation of the stock rather than large disbursements of cash."

March 1, 2002 Small Business Times, Milwaukee

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