Tax Reform Could Distinguish Between Pass-Through Businesses

In April, the Trump Administration announced a broad outline for tax reform which included proposals to cut the top individual tax rate to 35% and reduce the top business tax rate to 15%.   This reduced business rate would also apply to "pass-through businesses" - the majority of U.S. businesses who report income on their owners' tax returns rather than paying corporate income taxes.

However, Treasury Secretary Steven Mnuchin recently indicated that the reduced pass-through rate may not be available to service companies.

From the Wall Street Journal:

The idea is to create a special tax rate that is equal to or higher than the corporate tax rate but lower than the tax rate that applies to wages. That new rate would apply to pass-through business income but with boundaries to prevent it from being used by people whose income from service businesses closely resembles wages. 

...

Under a system like the one Mr. Mnuchin described, the owners of an accounting partnership would pay the individual tax rate on both their salaries and their partnership distributions. But the owners of a manufacturing partnership would pay the individual tax rate on their salaries and the special, lower rate on their profits.
...

It could be a challenge to define which companies get the lower tax rate Republicans are planning and which owners of companies would continue paying higher individual tax rates on their business income. Creating that distinction would cut against another Republican goal for the tax code: simplification. Possibly affected industries include law, engineering, medicine, finance, architecture and consulting.

Although many details are still lacking from the proposal, such a distinction - if included in the proposed legislation - could have a major impact on closely held businesses. The White House and Republican congressional leaders hope to reveal the full tax reform plan by the end of September.

Packing Up A Business Entity

New business owners often have an understanding that certain legal formalities must be taken when a business opens - but they may not know that similar formalities apply if and when the business closes. In fact, if a limited liability company ("LLC") or other business entity has ceased operations, it must be formally terminated through a process called dissolution. 

Under Ohio law, a limited liability company ("LLC") must be dissolved if it has fulfilled its purpose or there is a unanimous agreement amongst the members to dissolve the company. A court may also instruct the LLC to wind up its business. As a final step after its affairs are concluded, the LLC and/or member must file a Certificate of Dissolution with the Ohio Secretary of State. 

Depending on the type and purpose of the entity, other actions may need to be taken at the time of dissolution. For example, businesses which are closing may also have certain federal or state tax responsibilities to fulfill before the company is officially out of business.

Most Small Businesses Unprepared for Disaster

Is your business prepared to survive a natural disaster?  Two-thirds of small businesses do not have a disaster recovery plan, often because owners believe developing a plan is a low priority or would be expensive. 

From the Columbus Dispatch:

Two-thirds of small-business owners don't have a formal disaster-recovery plan, even though about half say it would take at least three months for their business to recover from a natural disaster, according to a Nationwide survey released Tuesday.
. . . 
Formal plans can ensure everything from the safety of employees to having enough insurance coverage to keep a business in operation until it is back on its feet.

Nationwide's survey, for example, found that 71 percent of those surveyed don't have insurance coverage for lost revenue during a recovery period. Studies have found that 25 percent of businesses never reopen after a major disaster.
. . .
Although many businesses lack a formal plan, many have taken at least some steps to prepare for a disaster, the Nationwide survey showed, Many, for example, are able to work remotely in case of a disaster and have duplicated and stored vital records off-site.

iPhones and Overtime, Part II

From a French law limiting employees' responsibility for after-hours emails to a federal court ruling placing new federal overtime rules on hold, employment law governing overtime pay continues to adapt.

A previous post on this blog discussed a lawsuit in which Chicago police officers alleged that they were issued smartphones and required to use them while off duty, but were not paid overtime. Since that original post, a federal magistrate ruled in favor of the city of Chicago. The court determined that the city did not know that the plaintiffs were working overtime without compensation, in part because other officers did document their overtime use of smartphones and were compensated accordingly.

Wage & Hour Insights has a detailed analysis of the court's ruling:

In short, the rule is simple: employers must make a good-faith, reasonable effort to track all work time for non-exempt employees and pay employees accordingly. The law doesn’t mandate perfection, nor will it hold employers liable for employees who fail to report their time through no fault of the employer. 

An appeal is pending.  In the meantime, the takeaways for employers remain the same (whether considering the future of overtime regulations or employee smartphone usage): establish clear written policies, keep detailed records, and train employees accordingly.

Nine to Five? The Uncertainty of Federal Overtime Regulations

On November 22, 2016, a federal judge in Texas granted a nationwide injunction to prevent implementation of new federal overtime regulations doubling the minimum salary of exempt employees.The ruling, which was issued only days before the rule was to become effective, has created uncertainty for many businesses.

First, it is important to note that this preliminary injunction is only a temporary hold on the overtime rule. The regulation may be implemented in the future, but given potential appeals by the Labor Department, as well as possible changes under the incoming Trump Administration, it is impossible to know when, if ever, the rule may become effective.

What should employers do in the meantime?  At least three general recommendations are in order:

1. Continue to comply with the existing overtime regulations.  Because the new regulation is not in effect, employers are not required to pay overtime wages as provided under the new rule.
   
2. Assume that the new regulation will be implemented in some form, and begin planning accordingly. For instance, our recommendation is that all employers keep detailed records of employees’ hours, whether those individuals work full-time, part-time, or volunteer. Likewise, it is a good time to update employee job descriptions, company policies, and employee handbooks to include specific procedures and guidelines for working overtime (even including such issues as smartphone usage).
   
3. If a business has already advised employees about the salary increase or has actually implemented the increase to keep up with the new federal regulation, it may be best to uphold those changes. Although businesses are not required to do so, honoring such a commitment encourages a relationship of good will between employer and employee. In these cases, employers may wish to consider a written agreement in which the employer will pay overtime wages to those employees who would have been eligible under the new regulation for a limited time period in the discretion of the employer.  

More suggestions are available at The Ohio Employer's Law Blog or The Employer Law Report.

Negative Online Reviews: What Can You Do?

Recent studies have found that 88% of customers have been influenced by an online customer service review and that almost half of job seekers had researched companies on GlassDoor, an online company review site.  If these reviews are negative (and particularly false), however, they can have a lasting negative impact on your business.

In some cases, businesses may have a claim for defamation against individuals who post false negative reviews online.  Ohio courts have defined defamation as follows:

"Defamation is the publication or communication of a false statement of fact that injures someone by adversely affecting the person's (1) reputation, (2) business, or (3) position by exposure to public hatred, contempt, ridicule, shame, or disgrace. The essential elements of a claim for defamation are that (1) the defendant made a false statement; (2) that false statement was defamatory in the sense that it reflected unfavorably on the plaintiff's character or injured his trade or business; (3) the statement was published or communicated; and (4) the defendant acted with the necessary degree of fault."  Fuchs v. Scripps Howard Broad. Co., 170 Ohio App. 3d 679.

The Columbus Dispatch recently reported on a lawsuit between a tenant accused of making defamatory comments that injured the landlord's business.

[James] Raney was a tenant at the Meridian Apartments in the Fifth by Northwest neighborhood of Columbus, then owned by Connor Group. While living there, he commented online about what he saw as conditions that fell short of the “luxury” described in marketing materials.

He moved out the complex but continued blogging about Connor Group.

Connor Group said Raney’s claims were false and harmful to the company, while Raney and his attorney argued that the online postings were constitutionally-protected opinion.

As in this case, the most difficult questions are often: 1) Were the negative statements presented as fact or opinion? and 2) Did the statements result in actual damages to the business?  

If your business has been adversely affected by negative online reviews, please contact our firm to discuss the best course of action. 

All In The Family: Do Job Applicants Match Your Company Culture?

According to a recent survey by the Conway Center for Family Business, about two-thirds of local family-owned businesses plan to increase hiring this year despite worries about finding qualified workers.  One of the major difficulties identified by leaders was finding applicants who fit with the existing company culture.

From the Columbus Dispatch:

For the first time, the survey found a growing number of companies that said finding someone who was the "right fit" for the culture of the business was a challenge. These would be applicants who embody the value and the culture of the business. 
...
The problem with hiring partly reflects a growing economy in central Ohio and family businesses that are doing well enough that they need to add staff. It also reflects the region's low 4.4 percent jobless rate. 

Among the survey's other findings:

• 90% of respondents said the local economy was going somewhat well or very well.
• After concerns about hiring, businesses expected to face challenges related to the costs of health care and materials.

Ohio Updates Receivership Statute

Earlier this year, changes to Ohio’s statute governing court-appointed receivers became effective. The Ohio legislature passed, and Gov. John Kasich signed, legislation updating and clarifying various aspects of the law, including the qualifications of a receiver, the authority of a receiver, and the procedure for the sale of property.

In general, a receiver acts on behalf of the court to protect endangered property or assets, often while an underlying legal action such as a foreclosure is pending. Under the statute, a receiver may be appointed by the court to do such things as collect rents, take possession of property, or enter into contracts. The statute permits a receiver to be appointed in several specific circumstances, such as when a corporation has been dissolved, to carry a judgment into effect, or in some foreclosure actions.

It is important to note, however, that even if a court may appoint a receiver it is not required to do so. The court must use its discretion to determine if such an appointment is necessary to protect a party’s rights, in particular to prevent a party from suffering irreparable harm.

A detailed analysis of these important statutory changes affecting property and business owners is available from Porter Wright.

Forming an Ohio Nonprofit: An Overview

The Ohio Attorney General reports more than 42,000 registered nonprofit organizations in Ohio. How do you add your great idea to the list?

The first decision you must make is what type of nonprofit organization to form. Probably the most common is the nonprofit corporation, because it enables the founder(s) to limit liability. Under Ohio law governing nonprofit corporations, the founder must file articles of incorporation with the Ohio Secretary of State. In addition to an initial filing fee of $125, you will need, among other things, a distinctive name and a well-defined purpose for the organization.

Once your nonprofit corporation is formed, you must still meet additional requirements to continue operating. Ohio law requires you to regularly make filings. For example, every five years nonprofits must file a statement of continued existence. Additionally, the Ohio Attorney General requires an annual charitable registration filing.

In order for your organization to be tax-exempt, you must apply for tax-exempt status with the Internal Revenue Service, not the state of Ohio. The IRS lists a variety of different tax-exempt organizations  – each with slightly different rules – so it may be helpful to consult an attorney to ensure that your corporation meets the correct guidelines. Annually, you will have to file Form 990 with the IRS; if you do not, your tax-exempt status could be revoked.

More helpful nonprofit resources are available from the Ohio Secretary of State or the Ohio Attorney General.

Listen....Do You Want to Know a Secret?

“Three may keep a secret, if two of them are dead.” Benjamin Franklin, Poor Richard’s Almanack

Secrets, especially business secrets, are hard to keep, and companies may take extreme measures to protect their valuable confidential assets. There are times, however, when your confidential information may need to be shared in a limited manner.  When discussing a potential business sale, franchise agreement, collaboration, subcontractor hiring, or other transaction, it’s important to protect yourself from the intentional or accidental spilling of secrets.

Before you begin sensitive business discussions, we recommend that the two parties begin by signing a nondisclosure or confidentiality agreement. A nondisclosure agreement enables you to explore a potential business relationship without fear that your existing business secrets will be compromised. In essence, the parties agree that certain confidential information may only be used to evaluate the potential relationship and may not be disclosed to third parties.

Among the important questions to examine are:

1. What information must be kept confidential?
2. Are there any exceptions in which confidential information may be disclosed? For example, can the information be shared with your attorney or financial advisor? 
3. What efforts are required to prevent disclosure? 
4. How long does the confidentiality agreement last? 
5. If confidential information is disclosed in violation of the agreement, what remedies do you have? 

Because there are at least 45 tips to consider when reviewing a nondisclosure agreement, you may wish to consult an attorney to make sure that your secrets are well-kept.

The Benefits of Federal Trademark Registration

Registering your business’s trademark with the United States Patent & Trademark Office (USPTO) is not a requirement for protecting your mark. However, any “common law” rights based on the use of your mark are far more limited than the federal protections. For example, although you can file for trademark protection in Ohio, the state’s trademark statutes do not prevent someone from using the same mark in Indiana. A business which later discovers an existing trademark (like this North Carolina taco restaurant chain) could be forced to rebrand itself in order to avoid claims of infringement. 

Although you may still be able to establish rights based on your legitimate use of the mark, there are significant advantages to federal trademark registration.  The USPTO lists at least five important benefits of registration:

1. Constructive notice nationwide of the trademark owner's claim. Any potential users of the same mark are presumed to know that your claim is federally protected, even if the infringer does not have actual notice. For example, even if a soft drink maker had never heard of Coca-Cola and acted in good faith, his attempt to trademark the new drink name Koca-Cola would likely be denied because he is assumed to know that he is infringing.


2. Evidence of ownership of the trademark. Federal registration proves that you have the exclusive right to own and use the mark nationwide, barring others from trademarking the same mark or claiming ownership.


3. Jurisdiction of federal courts may be invoked. If your mark is federally protected, you can seek to have a trademark infringement case heard in federal, rather than in state, court.


4. Registration can be used as a basis for obtaining registration in foreign countries.  Marks can also be protected in foreign countries; however, in order to register your mark in a foreign country, you must first have a U.S. registration.


5. Registration may be filed with the U.S. Customs Service to prevent importation of infringing foreign goods. Once your mark is federally registered, it can be filed with U.S. Customs and Border Protection to stop imitation foreign goods from infringing on your protected mark. This can prevent infringing goods from being imported, as in recent cases involving counterfeit Hermes handbags or Levi’s jeans.

Other important advantages of federal trademark registration include the right to use the ® trademark symbol and the potential of receiving higher damages in a lawsuit.

As a result, in order to fully protect your business's trademark, federal protection is a must.

iPhones and Overtime

According to a recent Pew Research study, 55% of American adults have a smartphone and 63% of cell phone users use their phone to go online. The growth of smartphone usage has made it easier – and more acceptable – for employees to perform job responsibilities before or after the regular working day.

For employers, however, these technological advances can be dangerous. The Fair Labor Standards Act (FLSA) requires non-exempt employees to receive overtime pay for working more than 40 hours in a week. If non-exempt employees use their phones to work after-hours, the employer could owe them overtime pay.

A pending case in Illinois federal court, Allen v. City of Chicago, has brought this issue to light. In the lawsuit, a Chicago police officer alleged that he was required to regularly check his employer-issued Blackberry device and respond to e-mails, voice mails, and text messages while off duty but not paid overtime. While it is important to note that a final decision in the case has not been reached, the court has allowed the suit to proceed, finding that Allen made plausible allegations that the City violated the FLSA.

Whether or not Allen is ultimately successful, the case can already teach employers a few lessons:

1. As much as possible, only provide smartphones to exempt employees who are not subject to overtime pay requirements. 
2. If non-exempt employees need smartphones, establish clear written policies to detail who should be issued a phone and what type of after-hours use is permissible. 
3. Require the non-exempt employee to carefully track any after-hours work, and review the employee’s records for accuracy. 
4. Provide training to managers, supervisors, and employees, to ensure knowledge and compliance. 

For a more detailed look at these issues, visit For the Defense, the Legal Intelligencer, or Parker McCay.

Managing the Madness for Employers

As the NCAA Men’s Basketball Tournament tips off during the middle of the workday today with Ohio State’s opening game against Dayton, employers have a dilemma.

ThinkHR's Laura Kerekes put it this way:

So let’s face it: productivity is reduced somewhat during March Madness. But also consider that office morale and camaraderie can also be impacted favorably by this event, too. So what should an employer do? Embrace March Madness, ignore it, or manage it? 
 
Recent calculations by global outplacement firm Challenger, Gray & Christmas, Inc. estimated that office pools and online streaming of basketball games could cost America’s employers as much as $1.2 billion for every unproductive work hour during the first week of the tournament. In addition, office pools often violate state or federal anti-gambling laws.

Despite these dangers, employers gradually seem to be embracing, or at least tolerating the tournament. HR executives point to the positives of team building and employee engagement. At least one recent study says March Madness may even boost employee morale. In addition, employers likely realize that the ubiquity of smartphones allows avid fans to follow the games regardless of where they are.

So what should employers do to manage the madness? Recommendations include a free-to-enter company-wide office pool; televisions in break rooms; a relaxed dress code to allow employees to wear their team’s colors; or even flexible hours to catch the big game. And as always, well-defined and clearly communicated office procedures are a must.

New Tax Cut for Ohio Small Business Owners

Most Ohio small business owners are eligible for a 50 percent deduction on their first $250,000 of business income as part of tax cuts approved last year by the Ohio legislature.  As part of the tax cut, a business owner can exclude 50 percent of Ohio net business income from the adjusted gross income reported on the state personal income tax return.

Owners of and investors in, Ohio businesses structured as pass-through entities (such as sole proprietorships, partnerships, S-Corps, and Limited Liability Corporations) are eligible for the tax cut.  Owners and investors receiving income from the pass-through entity are required to pay personal income taxes on that income.

For more information, read the full tax alert issued by the Ohio Department of Taxation or check your eligibility for the deduction.

Three Reasons to Blog in 2014

As you consider the 2014 marketing plan for your business or organization, a blog can be an important part of your overall strategy. Why? 

1) Blogging improves the search engine results of your website.

2) Blogging boosts your social media marketing strategy.

3) Blogging gives your business a platform for thought leadership.

For more specific tips, including ideas on content and writing style, read the full post on ReachLocal Blog.  Although the article specifically targets law firms, the ideas are applicable to all businesses.

Telecommuting: A Reasonable Accommodation?

A recent analysis of telecommuting growth and trends found that between 13 and 30 million Americans may be working from home at least one day a week.

Employers may not realize that employees who work remotely may impact the organization's responsibilities under the Americans with Disabilities Act (ADA). According to federal Equal Opportunity Employment Commission guidelines, allowing a disabled employee to work from home may be a reasonable accommodation under the ADA.

The Employment Law Lookout blog has some good tips for employers who need to evaluate these reasonable accommodation requests:

So how does an employer decide whether working from home can be a “workable” accommodation? The answer lies with the essential job functions and their application in practice. 

First, identify the essential functions of the position. The job description is usually a good place to start – but make sure it is accurate. Second, decide whether some or all of those functions can be performed at home.

New Markets Tax Credit Set to Expire

An important tax incentive for investments in economically distressed neighborhoods is set to expire at the end of 2013.

The New Markets Tax Credit (NMTC) is designed to increase the flow of capital and spur investment and job creation in communities with high unemployment and other measures of economic distress. The NMTC provides private investors with a 39 percent federal tax credit for investments made in businesses or economic development projects in some of the most distressed communities in the nation.

Since 2003, NMTC investments have directly created over 350,000 jobs -- including more than 40,000 in Ohio – and leveraged $55 billion in capital investment to credit-starved businesses in communities with high poverty and unemployment rates. In Columbus, for example, the NMTC helped investors purchase land and construct a grocery store in a distressed neighborhood.

Legislation sponsored by Sens. Jay Rockefeller (D-WV) and Roy Blunt (R-MO) is currently pending in Congress to make the NMTC permanent. S. 1133, The New Markets Tax Credit Act of 2013, would extend the Credit indefinitely by making it a permanent part of the Internal Revenue Code, and enhance the potential impact of the Credit by increasing the annual NMTC allocation. However, Congress must pass the legislation before the end of the year in order for the NMTC to continue.

Learn more about the credit or congressional efforts to extend it.

Comprehensive Tax Reform Unlikely Before 2015

Experts at this week’s American Institute of Certified Public Accountants National Tax Conference predicted that Congress is unlikely to pass comprehensive tax reform legislation in the near future despite ongoing positive discussions.

The House and Senate tax-writing committees are on track to produce bipartisan tax reform legislation that will receive lawmakers’ approval, but it is unlikely to occur until the next Congress, said tax experts on November 4. Speaking at the AICPA National Tax Conference, Donald R. Longano, former Democratic chief tax counsel to the House Ways and Means Committee, said tax reform is “more likely to come to fruition in 2015,” despite the intense activity going on behind the scenes. 

Observers also predicted that lawmakers would not extend $64 billion in energy and business tax provisions scheduled to expire at the end of 2013.

Any proposals not enacted into law by the end of 2014 would have to be reintroduced in the 114th Congress in January 2015.

Read the full report from the CCH Group Blog.

Franchise Agreements, Part 2

In addition to carefully reviewing a franchise agreement, a potential franchisee has much more information to examine before purchasing a franchise.

Federal law requires that a franchisor provide detailed written disclosures to a potential franchisee. These disclosures include information on franchise fees, obligations of the franchisee, and more.

Ohio law also governs franchise relationships. In 2013, the Ohio legislature updated the Business Opportunity Purchasers Protection Act, which regulates many franchise agreements in the state. Similar to the federal rule, Ohio also requires detailed disclosures to the franchisee. Ohio also allows franchisees to sue the franchisor for damages or a rescission of the agreement, along with other opportunities for relief.

The Federal Trade Commission, Ohio State Bar Association, and Attorney General Mike Dewine have more answers for potential franchisees.

Franchise Agreements, Part 1

According to the International Franchise Association, more than 700,000 Ohio jobs are directly or indirectly related to franchised businesses.  When our clients consider whether to launch or expand a franchise, our attorneys carefully review these and other provisions in franchise agreements:

1. Does the franchise agreement necessitate revisions to your operating agreement? For example, it may require your limited liability company to have a certain number of officers or restrict the type of name.
2. What initial fees are required? What recurring royalty fees will have to be paid?
3. Typically, the agreement will require that the franchisee carry a minimum level of liability insurance. Does your LLC carry this amount of coverage? 
4. Franchise agreements frequently include noncompete clauses to discourage franchisees from operating a similar business nearby. For example, the contract might prevent a coffee franchisee from operating another coffeehouse within the same city during the term of the agreement and for 2 years thereafter. Are these time and geographic restrictions reasonable? 
5. Which employees are bound by confidentiality or nondisclosure agreements? 
6. When can the agreement be terminated? And if the agreement is breached, what are the required damages? 

Although this list is not exhaustive, it may give you an idea of some important questions to consider before finalizing a franchise agreement.