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COVID-19 – Reopening Businesses

The Covid-19 virus has dramatically changed the way we relate to each other and the way we do business.  As I write this, a million Americans have contracted the disease, sixty-thousand people have died and 30 million have been thrown out of work in under a month.  On March 22 the Director of the Ohio Department of Health issued a “Stay at Home” order requiring non-essential businesses to close.  “Social Distancing” was ordered and gatherings of more than 10 people prohibited.  Thousands of small shops, schools, universities, malls, factories, non-profits, travel and leisure operations, music venues and sports events had to close-up shop.

These steps were instituted so that our healthcare system would not be overwhelmed.  In Ohio it seems to have worked.  The Director allowed manufacturing and construction to open May 4^th and consumer and retail shops May 12^th.

If you are a business owner, you are in a difficult spot.  You must ask, “How do I keep my employees safe?”  “How do I keep my customers safe?” and “How do I show the public my efforts?”

You receive conflicting directions from the governmental entities, which have had to develop policies in a haphazard way as our understanding of the virus changes.  For instance, it was crazy to tell us first not to bother wearing masks and then two weeks later say, “Well, yes, you should wear them now.”  Of course, this was done so healthcare workers had first crack at limited supply, but this was confusing to the public.

The psychological damage of quickly flipping from a time of high prosperity to Depression levels of unemployment, coupled with the effect of forcing folks into prolonged confinement is causing serious problems.  Children are not getting educated, and are bored, desperate to go outside and play with their friends.  Parents are fit to be tied, having to home-school their kids, worry about their elderly parents, and bear concerns about job security.  My wife and I have not been able to hold our new grandson for two months or help with the rigors of daily life with an eight-year-old….

On the one hand, shutting us off from one another has slowed the virus, and prevented cases from spiking.  On the other, a prolonged stoppage may eventually wreck the economy, at possibly greater human cost. Yes, there is hope out there such as several promising drugs like Remdesivir that may lessen the severity of the disease.  And they say we will have a vaccine within several years.  Hope, however, is not a policy.  As pressure grows to fully open up, what is the proper balance for the business owner?  This webinar will address legal issues you need to think about. 

As business owners we owe separate duties to our staffs and to our clients and customers.  Let’s think about our responsibility to the public first. 

You can be sued under negligence law if you violate a duty to take reasonable care to avoid causing injury or loss to others where it can be foreseen that a given action or inaction may harm them.  “Foreseeability” suggests something an ordinary person of common sense would expect to happen.  Similarly, “reasonable care” means taking “ordinary” precautions.  Of course, the greater potential harm, the greater an “ordinary” precaution must be.

For example, if I drive drunk down a crowded, narrow street filled with cars and pedestrians, it is foreseeable I might well injure someone.  Similarly, if I am a contractor hired to build a building and I cheat and use substandard materials, it is foreseeable the structure may collapse.  If there is a collision with my car, or the building falls down, a jury is going to be easily persuaded it was my fault, because I breached an obvious duty of care.

Let’s think about things a bit more subtly…

You and I are not entitled to an opinion about how to properly design a bridge.  A government agency with the resources and expertise must do that job on our behalf.  So, let’s say the government sets a standard that a bridge must be designed for a 50-year life and the construction company builds it to those specs.  If 75 years from now the municipality that owns the bridge has done little maintenance and it collapses, should the bridge company be on the hook?

What if 10 years after the bridge was constructed a new superior metal is invented and the regulations change requiring it to be used in all new bridges?  Should the bridge company have to rebuild the bridge, if it was properly constructed according to the regulations that existed at the time it was constructed?

Let’s now think about things from the perspective of the people who drive across the bridge.  Maybe, it is really old, but it is the only bridge for 50 miles….  Maybe the economy is bad, and the motorist/taxpayers don’t want to pay the taxes needed to build a new bridge.  Maybe they are willing to take the risk of driving across it for a few more years…. Who is at fault if the bridge falls down?  The driver of the unhappy car that fell in the river?  The taxpayers?  The municipality?  The engineer?

These examples suggest risk must be assessed from many perspectives.  I might be willing to take a risk you would never consider.  It depends on our needs and motivations….

People in their lives constantly perform cost/benefit analyses without thinking.  They agree to accept certain risks all the time.  Naturally, if I never want to get in a car wreck, I should never get in a car.  However,  the country could hardly function without motor transportation—yet hundreds of thousands of people have been killed in car crashes.  Yes, everything we do carries some sort of risk and most of these we can assess using simple common sense. 

If you know about a risk and can reasonably evaluate it, you may well decide to accept it if the benefits are high enough.  Indeed, the law employs the concept of “assumption of the risk.”  If someone knowingly undertakes something risky and is injured, it is his/her own fault.  So, if I go skiing, cross my skis, and break a leg, that’s on me.…

However, you cannot “accept” a risk you do not know about, or one that you are not qualified to assess…. To size up some risks, common sense is inadequate.  You need help from experts and this is the case with Covid-19.

Thus, as a business owner thinking about operating in the time of Covid, I need to consider all this and ask:

• What is the Covid risk to clients and customers?
• If I have no expertise in this area, have I adequately informed myself of the opinions of the experts?
• What am I doing to mitigate exposure to the virus?
• Are the steps I am taking in line with the recommendations of the experts?
• If there is not perfect guidance, does what I am doing make common sense?
• How do I communicate the protective steps I am taking to clients and customers so they can feel safe doing business with me?

As suggested, I must ask myself if my company’s precautions are in line with any standard of care that has been established for similar businesses.  This is understandably problematic since we are dealing with a new phenomenon that is not fully understood.  However, standards of care are being worked out as our understanding of the virus increases.  Remember, the greater the threat perceived, the greater the duty of care….

So, what are the Ohio and federal experts at the Center for Disease Control and OSHA telling us about the pandemic and how might this affect current standards of care? 

• Covid-19 is highly infectious, apparently much more so than influenza. 
• It likely is at least several times as deadly as the flu and maybe much worse.
• Paradoxically, a large percentage of people, particularly younger ones, are asymptomatic, or have only mild symptoms.
• People may have been spreading the disease up to a week before they show symptoms.
• It is spread mostly by droplets.  As people sneeze and cough, they shed the virus, which others then breathe in, allowing the virus to attack the lungs.
• Wearing a mask both limits the infected from spreading the virus and protects the healthy from breathing it in.  N-95 masks are best, but any mask is better than none.
• It may be spread on surfaces where it may remain active from hours to days, depending on the surface and other conditions.
• Frequent hand washing limits spreading, as does avoiding touching the face.
• People should keep at least six feet apart.
• Fresh air and sunshine seem to limit spreading.
• The elderly are at far greater risk than children and young adults.
• Immuno-compromised people, and people suffering from diabetes, breathing issues and other co-morbidities are at high risk.
• The virus may be less active in warmer, more humid weather, but this is not clear.

As a businessperson, with this knowledge, what concrete steps should I take immediately to protect people doing business with me as much as reasonably possible?  Remember, liability flows from the breach of a duty which directly causes damages.  A duty flows from foreseeability and violation of standards of care.  If I take reasonable precautions in line with established standard of care, it will be harder for a customer getting sick to point to my business as the source of infection and sue me.

Listening to the experts in Ohio and at the Center for Disease Control and the Occupational Safety and Health Administration, and using common sense it would seem:

Store/office owners should:

• require staff—particularly older staff—to wear masks and gloves where there is any close contact with people,
• train workers in hygiene practices,
• sanitize premises regularly,
• require frequent hand washing,
• clean bathrooms frequently,
• provide readily available hand sanitizer to staff and customers,
• offer the option of curbside delivery where possible,
• provide separate operating hours for the vulnerable, including the elderly,
• carefully document all of the above.

Manufacturers would seem wise to:

• space workers at the six-foot minimum where possible,
• require masks and gloves for those in close proximity and provide the same at no cost,
• clean and disinfect between every shift,
• clean bathrooms frequently,
• discourage sharing of tools and equipment, if possible,
• give special protections to older workers.

All businesses should:

• educate employees about best health practices,
• allow flexible work practices, allowing work from home and considering staggered shifts,
• try to protect the most vulnerable workers, particularly older ones,
• require staff with a cough or fever to stay home for the quarantine period,
• clean and disinfect workspaces frequently,
• clean rest rooms and commonly touched surfaces frequently,
• make free masks and gloves available,
• make hand sanitizer readily available across the workspace,
• provide tissues, and no-touch trash cans,
• when temperature guns become available, institute their use,
• let fresh air in,
• consider the need for employee travel,
• place posters in the workplace promoting the above,
• talk with vendors and sub-contractors about their health practices,
• if an employee becomes sick, follow CDC guidelines for disinfecting,
• name a workplace coordinator to implement the above,
• consider reasonable leave policies for workers who must care for children or sick family members,
• encourage workers to report safety and health concerns.
• Document all of the above.

Employees who are sick should be given paid time off.  It has been widely related that half of Americans only have $400 or less to get through an emergency.  A boss does not want an infected person incentivized to stay on the job where he/she might be spreading infection.

Obviously, there has not been enough personal protective gear for general use, since masks and gloves must first go to healthcare workers.  Similarly, there still are not enough test kits to require every employee to be tested before coming to work.  However, as testing becomes available, its use may well become the standard of care. 

Now let us talk in more detail about dealing with employees.  Over a hundred years ago an injured worker was required to show her employer had done something negligent that caused her injury before she was compensated.  It was a tough, expensive and unequal burden to place on an employee.  Thus, during the Progressive period in the early 20^th century safeguards were passed for workers, notably the Workers Compensation insurance system.  An injured worker now receives a certain and speedy financial award, without having to show an employer’s negligence.

From the employer’s view the trade-off is a company that pays into the Workers Compensation system in normal circumstances may not be separately sued for injuries, death or occupational disease suffered by its workers.  There have, however, been negligence suits filed over the years by workers claiming that the particular action of the employer resulting in injury was so egregious that the company should be liable over and above the compensation provided by Workers Compensation.  To be successful a claimant has to show the employer committed the wrongful act with the intent to injure or with the belief that the injury was “substantially certain to occur.”  This is an extremely difficult bar for a plaintiff to clear…. However, as the body of evidence concerning the infectiousness and lethality of the virus continues to grow, it would seem that such claims may occur where an employer does little or nothing to protect employees. 

Be aware: Ohio R.C. 4101.12 does provide “[n]o employer shall require, permit, or suffer any employee to go or be in any employment or place of employment which is not safe” and that “[n]o employer shall fail to do every other thing reasonably necessary to protect the life, health, safety, and welfare of such employees.”

Other novel claims may be made.  Recently, a plaintiff in Cuyahoga County, Ohio was fired from her job as an event coordinator where she had worked for 12 years. She requested permission to work from home, but was denied. She also requested to use accrued vacation time, which was also denied.

She then retained a lawyer who wrote a letter to her company stating that requiring her to come to work was a violation of the Ohio stay at home order. The letter emphasized that she was willing to work remotely but would not report to work until the company complied with the safety order.  After the letter, the company complied, allowed her to use accrued time while they discussed a method for the remote employment. Less than a week later, she was terminated due to what the company called a “reallocation of resources.”  Plaintiff has now brought a claim of wrongful termination in violation of public policy. 

To summarize:  If a business suffers an outbreak among its staff, it wants to demonstrate it followed reasonable protocols to protect its people, as just described.  Similarly, it wants to put itself in a position that, bearing in mind the severity of Covid-19, it has taken reasonable, well-thought-out safety measures to protect the public.  Again, “reasonableness” is most easily proven by being able to show the company was using guidelines put forth by the state or federal government.  Best practices information for specific industries is on the websites of the Ohio Department of Health, the Center for Disease Control in Atlanta and OSHA.

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Business Succession Planning

I have previously written about the need for succession planning for a small firm, such as an insurance agency, small shop or professional practice. Today, let’s discuss planning for transitions in larger operations. Regardless of the product or service provided, CEOs and key employees of both family companies and public ones retire, take other jobs and sometimes die in the saddle. Plans should be in place that encompass each of these possibilities.

A succession plan is part of a company’s overall strategic plan, which addresses a firm’s vision, values, markets and growth opportunities. Bringing about both is the responsibility of the CEO. If a business does not have the right people to facilitate strategic and succession planning, a consultant should be retained. (It is often said that a consultant is someone that tells you what you already know you should do, but for which you do not want to take responsibility.)

Good governance suggests a planning process with realistic timelines set forth in the bylaws, vesting responsibility in an appropriate committee, guided by proven procedures.Strategic plan in hand, it should be asked if current executives are up to its implementation. In considering the personnel pipeline, one must ask what will be the effects of retirement, death or job-poaching by competitors? Are additional people needed now or will they be in the future? Is additional training needed for employees with potential? Annual performance reviews are invaluable for this process. Talented mangers should be identified, encouraged and incentivized to remain and compete for the high positions. Others should be informed what skill development needs to be undertaken to allow them to advance as far as possible.

A harder question is what to do with employee-relatives of a founder who typically have expectations of taking over some day. Let’s say CEO Dad wants his son to take the reins in a few years and Junior isn’t up to it. Many years of practicing estate planning and business law have made it clear to me a company should be run to achieve the greatest financial return for its owners – period!

Only a small fraction of family companies survives through the second generation, let alone a third and there is a reason for this. (I take some pride in that our law firm is now on generation four.)

Family companies have certain advantages. Owners, as opposed to operators, are more likely to be good stewards of both assets and beneficial values, plus, they tend to think more long term. But talent can skip a generation. If there are two children in a business and the younger one is the ball of fire, it does nobody any good to let the eldest take over and run things into the ground. Using a consultant can help deal with this sticky problem by letting skills assessments and recommendations come from outside. The goal is to keep the family and, therefore the business, united and contributing for the good of all.

A second challenge in succession planning is taking over from a founder. Entrepreneurs who start firms are hard-charging and hate to give up control. Depending on the age and vigor of the founder, it is essential to have reasonable procedures and timelines for retirement (or a reduction in responsibilities), rather than to leave things vague to the frustration of younger executives who may jump ship.

Every business has a natural growth and decline curve. Successful companies – family ones or not – must have the capacity to reinvent themselves. When growth hits the wall, one must diversify into new areas and sometimes it takes fresh blood to make this transition. A well thought out succession plan increases the likelihood that a business will adapt and make it beyond generation one.

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Qualified Opportunity Zones

After a 10-year U.S. economic expansion, taxpayers hold trillions of dollars in unrealized capital gains.

To encourage investment in economically depressed areas, the U.S. Tax Cut and Jobs Act of 2017 created a program that allows investors to essentially “roll” what would otherwise be taxable capital gains into investments into Opportunity Zones (OZ).

These zones were nominated by state governors in low-income areas determined from community census tracts and there are now about 8,700 around the country.

The Mahoning Valley contains 15, about which The Business Journal has already written. New U.S Treasury Department regulations have clarified a number of issues concerning Opportunity Zones.

An investment in an OZ must be made through a Qualified Opportunity Fund (QOF).

A QOF is an investment vehicle (partnership, corporation or LLC), 90% of whose assets hold OZ property, which can be:
• An equity interest in an OZ business.
• A real estate investment.
• An interest in an OZ business property, which is:
– Tangible property used in the business.
– Acquired after Dec. 13, 2017.
– Substantially all of which is used in the OZ.

After passage of the Tax Cut and Jobs Act, a large number of “blind pool” funds were raised geared toward making real estate investments, although single purpose funds seem to be becoming more popular.

With real estate, investment is seen both in new development and in rehabilitation projects.

With a rehab project, QOF funds must be spent within 30 months on a “substantial improvement.”

A commitment to a project is not enough. There must be a real plan and actual expenditures.

Almost any business can be conducted in the OZ, except “sinful” ones.

Thus, a massage parlor or liquor store may not work, while a restaurant serving liquor certainly would.

Investors have 180 days to roll their capital gains into a Qualified Opportunity Fund.

Unlike the requirements for tax deferral of real estate gains under Code Section 1031, there is no requirement that an investor work through a qualified intermediary or look for a “like-kind” investment.

Gain on the sale of any capital asset is eligible to roll into a Qualified Opportunity Fund.

Here are the tax incentives:
• The temporary deferral of capital gains invested into a QOF until the earlier of a sale of the QOF investment, or Dec. 31, 2026.
• A step-up in tax basis as follows:
– If the taxpayer holds less than five years, no more than 90% of capital gains is included in income.
– If the taxpayer holds more than seven years, no more than 85% included in income.
– If taxpayer holds more than 10 years, all gains accrued on the Qualified Opportunity Fund investment are tax-free.
Other points to consider:
• Code Section 1231 gains are netted.
• Gains are determined as of Dec. 31 and the 180-day period begins to run then.
• Single-member LLCs are not eligible.
• Only capital gains qualify (there is no ordinary income deferral).
• “Pass-through” entities such as Sub-S corporations, partnership or LLCs can be used.
• Property can be contributed to a QOF, instead of cash.
• Transfers on death of a QOF do not cause tax recognition.
• Transfers to a revocable trust do not cause recognition.
• One cannot buy raw land and qualify, unless there is a bona fide plan to develop it.
• Leases can qualify, but there are special rules for related party transactions.
• A Qualified Opportunity Fund business must earn at least 50% of its gross income from activities within the zone.

In sum, some would say that the economic expansion is getting long in the tooth.

A taxpayer, for instance, with substantial long-term stock market gains may consider selling and locking in gains and then investing within 180 days in a Qualified Opportunity Fund or Funds.

This will postpone tax recognition until the fund is sold or 2026 (the earlier) and may afford a 10% or 15% reduction in the ultimate tax rate.

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Public Records Requests in Ohio

National publications like the Washington Post and the Wall Street Journal have recently considered news of The Vindicator’s closing, and suggest generally that local democracies will go only as far as their local papers will carry them.  These articles assume that if the local news dies, so does an informed citizenry.  

Local news organizations unearth and disseminate truths that unorganized groups simply cannot. Having bright, articulate, experienced and credentialed journalists on staff give them a natural advantage; they know where to look. 

However, there’s something to be said for a curious citizen with a smartphone, a pen, a pad of paper, and a Twitter account.  By leveraging the provisions of Ohio’s public records laws with the wealth of public information already available on the internet, democracy just might have a chance. 

Ohio’s Public Records Laws

Section 149.43 of the Ohio Revised Code authorizes any person, at all reasonable times during regular business hours, to inspect public records. 

As defined therein, public records include “records kept by any public office, including, but not limited to, state, county, city, village, township and school district units.”  

However, this same law specifically lists items that are NOT public records subject to review, such as medical records, information regarding children under protective custody, law enforcement investigatory records, and the like.   

Moreover, the same law provides that if a person is aggrieved by the failure of a public office to promptly prepare and make available the public record, that person may commence a court action in which they may be rewarded monetary damages (up to a maximum of $1,000) and attorney’s fees.  

Notably, the above requests can be made by any person, and need not be made in any particular form.  But in my own experience, written requests are almost always more quickly fulfilled than those made verbally, especially if the written request is sent directly to the person who has access to the documents in question.  

Consider calling the office first to determine if they even possess the information you need, and then taking note of the person or persons responsible for those records.  And of course, be respectful, and be patient. 

Pounding the table and threatening a lawsuit will not likely motivate the clerk to fulfill your request more quickly.   

In sum, the importance of investigative journalism cannot be overstated. But that responsibility should not fall unilaterally on local news outlets, especially in light of the economic challenges they face.  

And even if you do not have a political axe to grind, you might just find that your local government (or a state agency) has data that could be valuable to your business. 

The good news is you are specifically authorized by law to access it. They may even want to help you.  

So pick up the phone and jump-start your journalism career.  Let us know how we can help.

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Selling Your Business

Baby boomers are leaving the workforce in droves. But a business owner who wants to retire cannot simply turn off the lights and head to the beach. Selling a company and getting fair value generally takes several years and careful planning.

Step One: Polish the apple.

Do not conduct a “Get me the heck out of here” sale. A buyer will not pay full value if it appears a seller is desperate. The seller should have a story that conveys a sensible reason for selling. Additionally:

•  A business history should be prepared; financials and corporate books should be in perfect order.
•  Three years of tax returns should be gathered.
•  Documentation for IP, licenses and employment agreements should be made available.

•  Computer systems should be modern and upgraded.
•  Relatives or children not being productively employed should be let go.
•  Work out lease extension options well in advance of the year in which the business is to be sold.
•  Environmental issues are deal killers. Fix them!
•  Dispose of dead inventory.
•  Buyers want to see growth, so sellers should consider increasing advertising and promotion to boost revenues.

Step Two: Determine a reasonable price.

A crazy price hurts a seller’s credibility regarding his other representations about the business. Setting too high a price may slow the deal and cause a seller to miss the window of opportunity for selling in our cyclical economy. The price a buyer pays reflects a determination of discounted future earnings. To value a business where the owner is actively involved, one must determine what a potential buyer would have to pay someone to do the job of the owner. Thus, if an owner takes $100,000 out of a company annually and it would cost $75,000 to hire someone to do the owner’s job, then a buyer is purchasing a $25,000 stream of income (not $100,000) and his offer will flow from that number. With a realistic number in hand, to come up with an asking price:

• Apply any rule-of-thumb metrics used in the seller’s industry, such as a multiple of sales or cash flow.
• Look for comparable sales of similar businesses.
• Run a capitalization of income calculation, applying the appropriate cap rate for your industry.
• A third-party valuation may provide comfort and be worth the cost.

A seller should know how much seller-financing he is willing to provide. However, an all-cash deal at a lower price is usually better than being the bank. A buyer wants to ensure a smooth transition with customers, so a seller should steel himself to work in the business for 12 to 18 months. The shorter the time, the better.

Step Three: Determine logical potential buyers.

Determine potential buyers, such as competitors, key employees and private equity. With believable narrative in hand, reach out.

Step Four: Consider using a broker.

Business brokers not only have a book of possible buyers, but sometimes have banking connections. Thus, their 5% to 10% commission can be worth it. Do not be seduced by a broker claiming he can get you an unrealistic price. Interview several brokers before you hire one.

Step Five: Size up the buyer.

Determine the likelihood of the buyer securing financing before the deal is signed.

Finally, let an experienced business lawyer handle the purchase and sale agreement, not the broker.

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Estate Plans for the Foreign-born

My namesake and great grandfather, Nils P. Johnson, was a Swedish immigrant who settled on “Swede hill” at the top of the Market Street bridge in 1905. He was a wholesale grocer and must have been an affable man. Foreign accent and all, he eventually was elected to the Ohio Senate.

Times were simpler then both for immigrants and business people. When great granddad came to town, immigration laws were lax and there was neither an inheritance tax nor an income tax – the latter arriving with the 16th amendment in 1913 and the former coming a few years later in 1916.

These days immigration issues are much in the news in all their complexity. For instance, with the unemployment rate at nearly historic lows, businesses in need of highly-skilled employees are pushing for the expansion of the H1B visa program that gives preference to such immigrants.

For that reason, attorneys must have at least some knowledge about immigration issues if they represent business clients. Furthermore, if they do estate planning, an attorney must also understand the tax implications of being foreign born.

Let’s consider how gift and inheritance taxes affect the foreign born.

First, a review of the rules for U.S. citizens:

• Each person has a tax credit that permits passing $11.2 million during life or at death to a non-spouse tax-free.
• In addition, a person can gift $15,000 annually (“annual exclusion” exemption) to an unlimited number of people. Spouses together can pass $30,000.
• The new Trump tax law allows the estate of a surviving spouse to employ the unused portion of the tax credit of the first spouse to die. This means a husband and wife, both citizens, can transfer $22.4 million tax-free to the next generation.
• A spouse can inherit an unlimited amount of money from the other spouse, using the so-called “marital deduction.”
• A large gift across generations triggers a second tax, the “Generation Skipping Transfer Tax,” on amounts above $11.2 million.
• In 2026, the Trump law sunsets and the amount of a tax-free estate returns to $3 million.

The rules are significantly different for U.S. residents holding Green Cards, domiciled in the United States at the time of death:

• One is subject to a gift/estate tax on the value of transferred assets worldwide.
• Each spouse enjoys the individual $11.2 million exemption.
• One can use the $15,000 annual exclusion.
• A surviving spouse is not entitled to use the unused portion of the tax credit of the first spouse to die.
• A surviving Green Card-holding spouse, himself/herself does not get the marital deduction.
• If a special trust (“Qualified Domestic Trust”) is used, the tax that would otherwise be triggered by the lack of a marital deduction can be postponed.
• One spouse can gift the other $149,000, without using up any of the $11.2 million exemption.

A nonresident alien (someone in the U.S. lacking a Green Card) is taxed only on property held in the United States. However, his estate tax exemption drops from $11.2 million to $60,000.

It is important that an estate planning attorney always ask clients about their nationalities, even if they don’t have an apparent foreign accent. (Yesterday I met with a woman who spoke American English perfectly, but who turned out to be a German citizen holding a Green Card.)

The time of benign taxation from great granddad’s days are long gone. The estate plan of a Green Card holder, or nonresident alien, will differ significantly from that of a U.S. citizen.

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How Lawyers Help New Businesses

It can be feverishly tempting to set up a new business without first consulting an attorney.

With 24/7 online business registration from the Ohio Secretary of State, a new legal entity can be formed in a matter of minutes, day or night. Why then, does our law office receive so many frantic phone calls from individuals who did it themselves?

Self-help like this often results in picking the wrong legal entity for the new business – partnership, S-corporation, C-corp., LLC, etc., as well as ending up without an appropriate operating agreement that states how the entity will be managed.  (A previous article discussed the need to have effective buy-sell agreements in place as part of the operating agreement to deal with the possibility of a partner dying, going bankrupt or getting divorced. Go to BusinessJournalDaily.com/legal-strategies.)

Another pivotal shortcoming of going it alone is complicating access to the court system. In our litigious society, businesses may become embroiled in civil litigation at some point during their operation. But under Ohio law, a corporation or other similar entity representing itself in court subjects itself to unauthorized practice of law claims.

To the self-starter, this may be maddening. However, this rule is rooted in the longstanding principle that corporations and limited liability companies are separate legal persons than their owners or shareholders.

Therefore, when an owner or officer of an entity represents that entity in court, they are attempting to legally represent another “person.”

In 2005, the Ohio Supreme Court created a limited exception to the above rule in Cleveland Bar Assn. V. Pearlman. The defendant, Mr. Pearlman, was a 99% owner of two businesses and represented both of them in 13 different cases seeking money damages from tenants or former tenants in the Cleveland Heights Municipal Court.

The Cleveland Bar Association sued Mr. Pearlman for the unauthorized practice of law. Surprisingly, the Supreme Court held that Mr. Pearlman was not engaging in the unauthorized practice of law.

Specifically, the court cited Ohio Revised Code Section 1925.17, which states:

“Any bona fide officer or salaried employee of a corporation may represent or defend the company’s claim in a small claims division arising from a claim based on a contract to which the corporation is an original party or any other claim to which the corporation is an original claimant, provided such corporation does not, in the absence of representation by an attorney at law, engage in cross-examination, argument, or other acts of advocacy.”

This narrow holding allows Ohio businesses to represent themselves only in small claims court.

With a limited jurisdictional limit (i.e. $3,000), small claims courts may not be able to award litigants the full extent of their damages.

However, certain business entities like those operating rental properties may still avail themselves of the small claims court system for evictions and collections below the $3,000 limit, subject of course to the restriction on cross-examination.

If the litigant desires more than $3,000 as damages or anticipates the need for cross-examination, they will require legal representation from a licensed attorney.

In our complex society filled with rules, regulations and legal pitfalls at all levels, forming a relationship with an attorney on the ground floor of the new business will free the business owner to do the things she is best suited for – running and growing a new company.

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Corporate Culture

Corporate culture is one of those terms that seems like it belongs in a psychology handbook. It’s something that we may not always be aware of, but it really defines our entire work experience.

Similar to investing in a quality mattress because, as they say, “You spend half of your life on it,” the prudent businesswoman occasionally examines their corporate culture because they spend the majority of her waking hours at the office.

Of course, part of the corporate culture involves legal preparations: making sure that the business has the appropriate policies in place. These take the form of employee handbooks, antidiscrimination policies, sexual harassment policies and the like. Generally, these are used by either human resources departments in hiring and firing or legal departments in navigating a crisis.

Of course, we frequently take calls from clients who wish that they previously had these policies in place. Sometimes because a lawsuit alleged that they didn’t exist, other times because a clear procedure to follow in navigating a crisis would have been helpful. You may want to institute your own policies and procedures. As per anything in life, the importance of being prepared cannot be overstated.

On the other side of the equation is employee satisfaction. Happy employees can mean a happy life for a business owner.

With respect to the physical health of employees, we are seeing more companies include gym memberships as part of their benefit package. This is helpful to the corporation as healthy employees generally results in fewer sick days. It also allows the employees to tap into a new social network and potentially make important business connections.

We are also seeing an increase in companies attempting to improve their employee’s mental health. This takes the form of telecommuting options, extended maternity leave, flexible hours or even yoga retreats.

Finally, there is also a wonderful movement of corporate giving that is continuing to grow. It has become popular for Fortune 500 companies and small businesses alike to match their employees’ charitable contributions.

On the Fortune 500 side of things, General Electric and British Petroleum made headlines for their policy of matching charitable contributions on a 1:1 basis up to $5,000 per employee. ExxonMobil matches on a 3:1 basis up to $22,500, according to DoubleTheDonation.com. Of course this easily can be, and frequently is, implemented at a smaller level.

Similar to a 401(k) employer match, the corporation sets the ratio and the maximum limit. The corporation may decide upon a list of its favorite charitable organizations or allow the employees to choose their own. In order to qualify for tax deductions, both the corporation’s structure and the structure of the charity must be considered. While the financial benefits are certainly valuable, the knowledge that the corporation is genuinely invested in helping others and making the world a better place is certainly one that would improve corporate culture.

With respect to corporate culture, a prudent businesswoman evaluates her employee happiness and policies and procedures regularly. Preparation and job satisfaction will pay off in spades.

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