Looking for Investors? Consider the Kansas Angel Investor Tax Credit
If a startup does not manage to entice the right investors, the company is often left to seek funding through bootstrapping or bank loans which may be hard to obtain. Without access to the right investors and capital, startup may not be able to grow and succeed. For business owners in Kansas, the Angel Investor Tax Credit may be the additional incentive that entrepreneurial companies need to attract investors.
Seeking investors is an all too familiar hurdle for many new companies. If a startup does not manage to entice the right investors, the company is often left to seek funding through bootstrapping or bank loans which may be hard to obtain. Without access to the right investors and capital, startup may not be able to grow and succeed. For business owners in Kansas, the Angel Investor Tax Credit may be the additional incentive that entrepreneurial companies need to attract investors.
The Kansas Angel Investor Tax Credit program offers an opportunity for certain investors in qualified startup companies to take a 50% tax credit for every dollar invested in a Kansas business certified by the Kansas Department of Commerce, up to $50,000 per business. Additionally, there is a limit of $250,000 per tax year per each Angel Investor. Those investors who wish to be considered for the tax credit must register as Angel Investors, just as those businesses wishing to become qualified Kansas businesses must apply. It is important to remember that even registered Angel Investors are not guaranteed a tax credit as the program is usually a first-come, first-served program. Thus, an investor may not be certain that he or she will receive a tax credit prior to making the investment.
Company Criteria The program is designed to help Kansas businesses in the early stages of financing and promote job growth in Kansas. Companies seeking certification must meet the following criteria:
1 The business has a reasonable chance of success and potential to create measurable employment within Kansas.
2 In the most recent tax year of the business, annual gross revenue was less than $5,000,000.
3 Businesses that are not Bioscience businesses must have been in operation for less than 5 years; bioscience businesses must have been in operation for less than 10 years.
4 The business has an innovative and proprietary technology, product, or service.
5 The existing owners of the business have made a substantial financial and time commitment to the business.
6 The securities to be issued and purchased are qualified securities.
7 The company agrees to adequate reporting of business information to the Kansas Department of Commerce.
The ability of investors in the business to receive tax credits for cash investments in qualified securities of the business is beneficial, because funding otherwise available for the business is not available on commercially reasonable terms.
The business will also be asked to provide an executive summary, business plan, company financials and other relevant information.
Angel Investors
An Angel Investor is an individual or an owner of a permitted entity investor, who has a high net worth. This means that a) the individual’s net worth, or joint net worth with a spouse, exceeds $1,000,000 or b) the individual’s income is in excess of $200,000 in the two most recent years ($300,000 if joint with spouse) and the individual has a reasonable expectation of reaching the same income level in the current year. Anyone who serves as an executive, officer, employee, vendor or independent contractor of the certified Kansas business is not eligible for a tax credit for any investment he or she makes in that business.
More information on the program and how to apply can be found at Kansas Angel Tax Credits. If you believe that your business could benefit from the Angel Investor or are an Angel Investor seeking to invest, please contact Sheila Seck at sseck@seckassociates.com or call 913-815-8481.
Phantom Equity Agreements
Most entrepreneurs are always looking for ways to incentivize and reward key management and top performing employees in order to keep them within the organization. A common incentive is to offer ownership in the company to key employees through a stock plan. While ownership may seem to be an attractive option, adding an owner to the business creates risks for the current and potential new owner.
Most entrepreneurs are always looking for ways to incentivize and reward key management and top performing employees in order to keep them within the organization. A common incentive is to offer ownership in the company to key employees through a stock plan. While ownership may seem to be an attractive option, adding an owner to the business creates risks for the current and potential new owner. Risk could arise from disagreement between new and old owners in leadership styles, the direction of the company and use of company funds. Additionally, key employees may not have the financial capability of purchasing their shares of ownership or dealing with the consequential tax burden.
An alternative to offering key employees ownership is to set up a phantom equity plan. Phantom equity is a promise by the company to pay key employees a bonus equivalent to the value of the company’s shares or the increase in the company’s shares over a period of time. The key employees would receive this deferred bonus based on a particular vesting period. Essentially, phantom equity allows key employees to participate in the upside of company as the company’s shares increase in value without the burdens of ownership.
Phantom equity generally is non-taxable until the bonus is paid. At that time, the employee recognizes income and the company may take a deduction. Compared to offering ownership, the key employee does not have to purchase ownership or face an immediate tax burden upon introduction into the phantom plan.
Phantom equity plans may be an ideal incentive for employees; nonetheless, business owners should consult with legal counsel to make sure these plans comply with IRS regulations and avoid complex ERISA rules governing employee benefits. If you have questions or are interested in implementing a phantom equity plan within your organization, we can assist you in implementing this plan.