Inside Small Business | Small Business & Home Business Marketing

The Investor’s Lawyer: Common Stockbrocker Fraud

Joel Beck, The Beck Law Firm, LLC

In my last column, I detailed ways to check out the background and disciplinary history of your prospective or current stockbroker and brokerage firm. Today, we’ll begin a series on the 3 primary types of stockbroker fraud, starting with unsuitable recommendations.

A broker has an obligation to recommend that his or her client invest in only appropriate, or suitable, investments, given the client’s financial condition and the investment objectives for the account. In making a recommendation to a client, a broker should usually consider the client’s age, net worth, investment objective, risk tolerance, tax situation and other holdings to determine whether any particular investment is suitable for that client.

An example: A broker makes an unsuitable recommendation when he advises an unsophisticated, elderly client of limited means who wants to preserve his or her assets, to invest in a speculative investment.

So what do you do as an investor to guard against unsuitable recommendations? First, understand the product that your broker is recommending, and investigate it yourself. Ask your broker why the product is appropriate for you, and ask specific questions about the product. Find out what the risks are, what the fees and charges are, how long your money may be subject to withdrawal penalties and what those penalties are. Also ask how this product compares to other investments in your portfolio, and how purchasing this investment meets your investment objectives. And, be sure to keep your broker informed about changes in your financial situation so that he or she can make the most appropriate recommendations for you.

Joel Beck, a former Enforcement Department lawyer for NASD (now FINRA), is now in private practice in the Atlanta, Georgia area. He opened The Beck Law Firm, LLC in July 2007. Joel’s practice focuses on legal matters relating to the financial markets. He represents investors in securities arbitrations, among other things. Learn more at his investor’s law blog at www.theinvestorslawyer.com and at www.thebeckfirm.com.

Related Topics: Business, Entrepreneurship, Leadership, Legal, Money/Finance    No Comments    

LLC May be the Wrong Choice Part 2

Richard Chapo, Attorney

Part 2. Read LLC May be the Wrong Choice Part 1

The IRS rejects the filing.

Why? Well, there is only a single owner of the LLC, so how can a partnership tax return be filed? The IRS is correct in asserting that it cannot. You would need a second party to make it work.

At this point, things can get real nasty. Since the IRS views the partnership as invalid, it is going to require our single owner to treat the business as a sole proprietorship. This will require the payment of the 15.3 self-employment tax and usually the re-filing of the personal tax returns of the owner since the business tax information must now be filed on his or her Schedule C. You may also have to pay penalties and interest on any amount due.

Before you start complaining about the IRS, you should know that the position it is taking is entirely correct. The states are the responsible parties in this mess. Each state controls the laws regarding creating business entities within its boundaries. Despite the self serving statements of politicians about helping small businesses, the primary purpose of these laws is to generate fees. In California, each entity has to pay an annual $800 fee for the “privilege of doing business” in the state. This is how something like a single owner LLC can come into existence regardless of tax law or the position of the IRS.

Is there any strategy for avoiding this problem? Yes. Many small businesses are looking to “S” corporations instead of LLCs when there will be only one owner. The IRS treats these entities entirely different and one usually ends up in a better situation from a tax perspective. Make sure to speak with your CPA or tax professional regarding the options applicable to your specific situation.

About the Author

Richard A Chapo, Esq., is the lead attorney and owner of SanDiegoBusinessLawFirm.com. He provides legal services in the fields of business entity formation and internet law to large and small California businesses.

Related Topics: Business, Entrepreneurship, Legal, Money/Finance    No Comments