Weekly Updates (8-19-2015)

————— Summary —————

• Instability In China

• The Growth Of Marketplace Lending

• Entity Importance

• Venture Capital Is The Place To Be

————— News —————

Instability in China

Although Chinese markets have seen rapid growth in the past years, the recent decline in currency has caused some panic on the investment front. Although many investors have remained in the market, recognizing the size and influence of China’s economy, its stability is very unclear. Recently the Chinese government has implemented several measures to slow the market slide such as bans on malicious short term selling. These measures have taken american investors by surprise and caused added difficulty when maneuvering through the market. Although the Chinese government has worked to stabilize the market, no one can be certain how effective the methods will be. Hedge fund investors have indicated that everyone wants to play the China market but no one knows that rules, which can change at any time. As a result, there will likely be continued turmoil as american investors try to navigate the tumultuous waters of China.

Growth Of Marketplace Lending

The marketplace lending industry has been growing rapidly with projected growth to be roughly 47% compounded annually through 2020, according to Morgan Stanley. This growth has opened up new markets for young startups that seek to provide analytics to the marketplace lending industry. Every day, hedge funds and other investors wait for prospective small loan lists posted by service providers, such as Prosper Marketplaces. These loans are snatched up in seconds leaving little time for investors to analyze the strength of each loan. As a result Orchard Platform and other startups develop programs that allow investors to crunch the numbers on the potential loans before shelling out the cash. As the marketplace lending industry grows, there will be a growing need for analytic programs that can streamline the decision making process for hungry investors.

Entity Importance

Entity selection is often an overlooked but crucial step in the development of any startup. It can affect “the number and identity of shareholders and partners, equity structure, control and management,” as well as what kind of funding your business may be eligible for. Contrary to what many entrepreneurs believe, choosing an entity should not be a game of trial and error. Although switches can be made, there are often tax and other consequences attached to the switch. When selecting an entity, there are two important things to know: first, entity selection is state specific meaning that different states may treat the same entity differently, and second, the choice of entity on the state level does not automatically constitute a tax election on the federal level. The major types of entities include:

• Sole Proprietorship - Limited formalities for creation; personal liability of the sole proprietor for entity debts; and no separate tax return required.

• General Partnership - Limited formalities for creation (requires two or more individuals working as co-owners in a for-profit business); individual liability on all partners for partnership debt; pass through taxation only on individual partner level.

• Limited Partnership - Similar to a general partnership, but requires at least one general partner (decision maker/manager) and one limited partner (passive investor); limited partners may be protected from personal liability on partnership debts under state law; taxed as a pass through entity only on the individual partner level.

• Limited Liability Partnership - Similar to a general partnership, but requires that the LLP be registered with the state; limited personal liability can vary by state; taxed as a pass through entity only on the individual partner level.

• Limited Liability Limited Partnership - Recognized in a few states; limited partnership with limited liability.

• Limited Liability Company - Most popular form of business entity; liability protection of a corporation if corporate formalities are followed; choice to be taxed as a partnership (passthrough) or a corporation.

• C Corporation - Typical corporation; owned by shareholders, directed by a board, and managed by officers; shareholders have limited liability; double taxation at the corporate level and individual distribution level.

• S Corporation - Unlike an entity, an S Corporation is a tax election, meaning that another entity may make the election and receive the benefits of pass through taxation, similar to a partnership.

Venture Capital Is The Place to Be

Tech start-ups in Asia have grown at the same fast pace as in the US. 46 Asian start-ups, compared to 48 in North America, had fund-raising rounds of $100 million or more in the first half of this year. This is an indication of the increasing decentralization of global technology investments. International corporations are growing more willing to invest in domestic start-ups with advantages in their respective home markets. This shift in investment has focused primarily on the Asia and India markets. But, the recent turmoil in China’s stock market has raised some questions about the long-term availability of funds as larger investors have less cash to throw around. According to a former vice president at Google, the slight economic downturn in China may create some hiccups but will not halt big investments. On the other hand, India is one of the youngest countries with very minimal mobile penetration. As a result, many investors feel that it will be one of the next major tech hubs.