By Adam Atlas
Attorney at Law
So, what is required to properly set up an ISO? The purpose of this article is to provide payment professionals who want to establish their own ISOs with general suggestions regarding what an ISO needs to operate - from a legal perspective.
I will discuss name selection, corporate identity and certain necessary agreements.
A number of limitations bear upon the kind of name a new ISO may use. For starters, Visa Inc. and MasterCard Worldwide rules prohibit the use of any name that is not registered with them through one of their member banks. In addition, the business name you choose should not already be taken in the jurisdiction where you wish to use it.
It's also important to discuss name selection with the acquirer accepting your merchants' transactions. For example, if your acquiring bank has one or more ISOs already using the name you have in mind, you might not be permitted to use it.
But even if the acquirer allows you to use such a name, consider using a different one so your new business will not be confused with other ISOs.
Once you've decided upon a name, purchase relevant URLs, and consider whether a federal trademark registration for the name you select is worthwhile. You can carry out a rough search of registered trademarks at www.uspto.gov. The site also provides a good portal for finding out what names have already been used.
It is recommended that an ISO operate under a corporate structure registered with a state's bureau of corporations, rather than as a sole-proprietorship or under a simple business name.
The main purpose in creating an incorporated entity is to limit the personal liability of the owner of the ISO from mistakes or unintentional wrongdoing in his business relationships.
For example, when the owner of an incorporated ISO signs an ISO agreement that does not include a personal guarantee, the individual owner of the ISO will not be liable for most of the liabilities that accrue to the ISO under the agreement.
Individuals may not, however, shield themselves from liability for fraud perpetrated by their corporations. Other circumstances, such as unpaid taxes and other matters, will also "pierce the corporate veil" or subject shareholders to liability for a company's illegal or reckless actions.
However, liabilities are far less likely to impinge on corporate shareholders than on business owners who choose, for example, to operate ISOs as sole proprietors.
After deciding to incorporate, an ISO must decide which state jurisdiction to use for incorporation and what type of company to incorporate. The choice of state and type of corporation should be made in consultation with an accountant and local business legal counsel.
Many businesses use Delaware because of its extensive experience in creating and adjudicating over companies. Be aware, however, that the jurisdiction used for incorporation of a new company is not necessarily the same jurisdiction that will govern the operation of the company or its agreements.
For example, a new ISO in Arizona could incorporate a Delaware company through which to operate its business. But the ISO's local operational issues, such as employment and local agent agreements, will be subject to Arizona state law and, if it has an agreement with a Georgia acquirer, for example, its acquiring relationship will likely be governed by Georgia law.
The ISO agreement delineates the main acquiring relationship of the ISO and can be made with a processor and bank or with a larger ISO that wishes to retain sub-ISOs. You may elect to have one, two or more of these agreements, depending on the particular needs of your new ISO and the markets you plan to target.
The ISO agreement is probably the most important agreement in your business because the revenue that you expect to earn under it will rely on the wording used in your agreement. In previous articles, I have discussed the specific provisions in this type of agreement that warrant particular attention. And I will continue to address such provisions in this column.
If you intend to have a salaried staff, you should retain those individuals under written agreements that protect both parties. Note that someone who is paid under a 1099 is not, because of that fact alone, an independent agent. In the eyes of your local department of labor, a whole suite of factors will determine whether someone will be deemed an employee or an independent agent.
The most important of these factors (but not the only one) is the degree of control you have over the individual. If someone comes to your premises and you tell him what to do all day, more or less, chances are he or she will be considered an employee.
Here is a list of criteria to consider when trying to figure out whether someone is an employee or an independent contractor (although this is not an exhaustive list): irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center.
Visa and MasterCard rules require you to use written agreements when retaining agents to assist in soliciting for your acquirer. There are specific legal requirements that should be part of the agreements, as well as elements dictated by common sense, such as nonsolicitation obligations preventing your agents from taking away the business that they bring to you.
ISOs receive business from sources other than agents. Local associations, banks and other business contacts are often willing to refer leads to a new ISO but will not want to take on the responsibilities associated with serving as an agent.
These less-involved sources are sometimes referred to as referral sources. The differences between an agent and a referral source might seem subtle, but you should use a different type of agreement with each.
The documents mentioned herein are not the only ones you will need, but they are essential. When creating your ISO, devote time to finding the right forms for these documents. A number of ISOs suffered disappointing outcomes because they failed to put in place the right legal structure and documentation. Don't let it happen to you.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.
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