‘Borrowing’ from the government? Or ‘theft’ of government funds?

Trust fund taxes are taxes collected and paid by a third party — for example, money withheld from employees by employers to pay state and federal employment taxes or sales taxes collected by retailers.

“Employers and retailers, in these instances, are acting as trustees,” says Terry W. Vincent, a partner at Brouse McDowell. “When a company fails to remit those taxes, not only is the company at risk for penalties, the person or persons at the company responsible for making the payments is subject to personal liability because the trustee concept creates liability beyond a partnership or other business arrangement.”

Identifying businesses that have neglected to pay taxes has become much easier, largely because of technology, so state and federal governments can quickly identify who hasn’t paid.

“Now, because it’s so easy to determine who hasn’t paid, state and federal representatives will show up to ask a business questions. If the business is evasive, an investigation will be launched to see if the failure is criminal,” says Shelby L. Ranier, an attorney at Brouse McDowell.

Smart Business spoke with Vincent and Ranier about trust fund taxes and how failure to pay affects delinquent companies.

Why might a business fail to remit taxes it has already collected?

A business will usually fail to remit trust fund taxes because it has spent the money on another debt. It withholds the necessary tax amounts but ‘borrows’ from those withholdings to pay, say, outstanding vendor invoices or other operational expenses, and it snowballs from there.
Failure to remit taxes can happen because a business lacks internal controls, but sometimes it’s a result of simple, and often innocent, disorganization.

What are the consequences for failure to remit taxes?

Depending on the amounts and the reasons for nonpayment, there could be criminal penalties and even jail time for the offender — any person directly responsible for making the tax payment. There is a test to determine who that person would be. Typically, if the company representative is authorized to pay — is someone approved to sign checks on behalf of a business — that person could be held personally liable when there’s not remittance.

State penalties for nonpayment differ from federal penalties. Failure to pay federal taxes could result in up to five years in prison. However, federal criminal penalties are typically imposed when something else is done in addition to not paying the taxes — falsifying a statement, for example.

States are quicker to pull the trigger, and their penalties are as high as six months in jail and restitution. Some states are more inclined to pursue these crimes than others.

However, the tax-paying company can enter into a payment plan to pay off unpaid taxes. Some states have voluntary disclosure programs that can garner the offending company either reduced penalties and interest or give a shorter look-back period. But if the state sends the company a notice regarding failure to pay, then the company can no longer participate in voluntary disclosure programs.

Who should business owners turn to if they are challenged by the government for failing to properly remit taxes it has collected?

It’s best to consult with an attorney who has experience dealing with tax authorities. While an accountant or financial adviser can start with a review of the books and records to find where the missteps occurred and how much tax should have been reported, there is no such thing as accountant-client privilege in the criminal context. That’s why it’s best to engage a lawyer first and ask the lawyer to hire the accountant. Called a Kovel arrangement, this extends the attorney-client privilege to cover the relationship with the accountant, who, in this relationship, works for the attorney.

States, on the whole, are getting more aggressive in their pursuit of these taxes — Ohio among them. Pursuit of these failures to remit due taxes is expected to increase as much as 10-fold, a trend that’s already starting to show.

Businesses that are struggling may see trust fund taxes as a quick fix to catch up in other areas. But it tends to snowball quickly, get out of hand and lead to often-devastating consequences.

Insights Legal Affairs is brought to you by Brouse McDowell

Courts are shifting the cybersecurity onus toward companies

In early data breach and cybersecurity litigation, courts took the perspective that cybercriminals were bad-acting third parties and businesses should not be held responsible in negligence for economic losses. That’s changing, however.

“Courts, in general, are looking for ways to turn to companies that are the custodians of the data, versus the individuals who traditionally have borne the uncertain burden of potential future identity theft if their data is stolen,” says Molly Meacham, shareholder at Babst Calland.

Smart Business spoke with Meacham about data breach litigation trends.

What are examples of courts shifting their approaches to data breach litigation?

In Dittman v. UPMC, the Pennsylvania Supreme Court broke new ground, finding that companies have an affirmative duty of care to protect confidential personal data that they have collected. The court viewed the actions of cybercriminals as a foreseeable risk that’s not a shield from liability. The court also did not let UPMC point to the economic loss doctrine, which previously held that if the loss is only financial, it cannot be recovered under a negligence theory.

The Dittman decision drew nationwide attention, because litigants in other states will ask their courts to adopt or reject it.

In addition, courts are looking at data breach damages. Several federal judges rejected data breach class action settlements to demand a larger or simpler recovery for the individuals, including higher caps per plaintiff, larger pools of funds and/or easier hurdles toward getting those funds.

Courts have also pushed back against the threshold issue of whether plaintiffs have to show actual damages to participate in a class action, or whether the risk of future damage is sufficient. For example, Jeep owners are pursuing class claims of diminution of value, following a well-publicized white-hat hacking incident. The manufacturer fixed the vulnerability and no vehicles were maliciously hacked, but the suit has been permitted to proceed on the theory that the cybersecurity risk resulted in damages.

How should companies react?

First, evaluate what personal information the company collects — is it from employees, or does it include consumer information? Then, how does the business use and store the data? Who has access? What security measures are in place? Some businesses collect data through their products, i.e. sensors or the Internet of Things. This is somewhat unsettled law, but if a device can access personal information, how is that data collected, transmitted, stored and protected?

Courts tend to look at how the company fits into the industry standard for the size and type of a business, as well as the type of information. Large companies, with the resources to do more, are expected to meet a higher, more sophisticated standard.

The best way to defend against a lawsuit is to show that the company took reasonable steps to stay abreast of technological developments, and that it is in line with its peer companies with regard to cybersecurity and data privacy.

What are other risks to be aware of?

Targeted social engineering — a skillfully spoofed email, call or letter to someone in corporate or finance — is increasing. Beyond providing education about social engineering techniques, executives should examine their insurance policies to see what is covered and what exclusions may apply. The language may exclude coverage when an employee unintentionally (but voluntarily) assisted a criminal in breaching the company’s defenses.

Businesses also need to think about their contracts’ indemnity provisions, and who bears the risk in a cybersecurity incident or data breach. A company needs to accurately project a vendor’s ability to contribute after a breach or line up insurance to bridge the gap. In a cybersecurity incident where both companies are jointly liable, a court may turn to the larger, financially stable company to make up the shortfall if the smaller company is insolvent.

Bottom line, knowledge is critical. Do executives understand the exposure? Is the business keeping up with industry standards and documenting its risk management to show compliance with its duty of reasonable care? Are executives reading their contracts and insurance policies? The choices businesses make today have long-term impacts, so the sooner a company addresses these issues, the better.

Insights Legal Affairs is brought to you by Babst Calland

How scammers use phishing attacks to steal, exploit company data

Many people spend most of their day in front of a computer or looking at their smartphones, accessing personal or business email. Scammers exploit this through phishing attacks — emails the recipient believes comes from a valid/trusted source that asks them to open a link or an attachment, or go to a website and enter personal information.

“In every case, the scammers prey on people’s good nature, their fears, or anything that will cause them to essentially grab the apple that scammers are dangling in front of them,” says Robert R. Kracht, a principal at McCarthy, Lebit, Crystal & Liffman Co., LPA.

Smart Business spoke with Kracht about phishing attacks — how they’re perpetrated, what legal recourse companies have to recoup damages and how to mitigate their success.

What is a phishing attack?

Phishing attacks tend to fall within three categories, ranging from low-level of sophistication to very sophisticated scams. 

In one approach, a spoof email — one that looks legit but is fraudulent — is sent with the intent of getting the recipient to go to a website and enter personal data that the scammer can then use to gain access to other personal or business accounts.

In a second approach, a scammer sends someone a check and asks them to deposit it into their personal or business account. The recipient is told to take a transaction fee for themselves and then wire the balance of the funds to the scammer.

The check, however valid-looking, is worthless. The scammer is hoping that the recipient will deposit the check and remit the balance via wire to the scammer before waiting for the check to clear their bank.  

In another approach, scammers enter into a person’s home or company network by getting the recipient to open an email attachment. Once in, scammers can search and obtain personal and financial data that they can then sell or use to withdraw funds or buy goods or services. 

How can organizations recover losses incurred from a successful attack?

Attacks are commonly perpetrated by persons outside of the United States ,where their identities and location are difficult or impossible to trace. Even if the transaction can be traced back to the source, if the theft was accomplished by wiring funds to banks outside the U.S., the scammers can avoid any clawback attempts by initiating further wire transfers to multiple banks in other countries.

Speed in detection and quick notification of the FBI may be the best means of tracing back to the source. 

When a wire transfer between two companies is initiated because of a phishing attack, are there legal damages that either company can pursue against one another?

Yes. If a phishing attack causes damages in connection with a transaction between two or more companies, the party or parties that sustain losses as a result of that event can seek recourse from any source available.

That can include other parties to the transaction, their own business insurance policies, any outside network consultants that installed or maintain the company network, and, of course, the scammer(s). In Ohio, the party that is in the better position to prevent the loss will bear the loss.

In the matters that I have been involved in, I am not aware that any of the affected companies placed blame on any officer or employee of the company. In the end, the employees are just victims of very elaborate schemes that are designed to deceive. 

How can an organization insulate itself against successful phishing attacks? 

Educate all employees so that they know how to recognize a phishing attempt. Limit the number of people who can authorize transactions via company credit cards, or who can authorize the issuance of payments by wire. Also, require confirmation other than internal emails that the person who requested a wire transfer made the request.

Consider the retention of cybersecurity companies that will install software to monitor networks for cybersecurity threats. Companies also should review their existing commercial insurance to see if they have cybersecurity coverage, which could help them recover some or all of the damages incurred if they’re the victim of a breach.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

What to look for in a cybersecurity insurance policy

Generally, cybersecurity insurance mitigates the consequences and liabilities incurred due to a data breach or hacking that makes the policyholder’s computer system unavailable in some way, and sometimes it covers other ways computers are used to inflict damages on a person or entity, such as phishing scams. However, there is no industry-standard policy.

“The market is so varied with many entrants and so little formalization that it’s near-impossible to point to one thing and say, ‘That’s what cybersecurity insurance covers,’” says Lucas M. Blower, a partner in the Insurance Recovery Practice Group at Brouse McDowell, LPA.

Smart Business spoke with Blower about how to ensure cybersecurity insurance coverage protects an organization from critical cyber risks.

What should organizations understand about cybersecurity insurance coverage?

Buying a cybersecurity insurance policy not only helps on the back end in terms of paying for recovery from a data breach, but also on the front end because it helps the policy-holding organization become self-conscious about the procedures it needs to implement in order to avoid the problems from the outset. As organizations increasingly buy cybersecurity insurance, it’s having an overall positive effect because, as part of buying cyber insurance, organizations tend to tighten up their data handling protocols.

Certainly, the best way for organizations to protect themselves is to not have a data breach in the first place. However, sometimes insurance companies will, if an organization is being blasé about its data security, try to use that failure as the basis to deny a claim.

How or where do the obligations of an organization to protect itself against cyberattacks overlap with cybersecurity insurance coverage?

Insurance companies have not had a lot of opportunities to interpret some of the conditions and exclusions in their cybersecurity policies. So, for example, some policies will take away some of the coverage policy owners believe they’re purchasing through exclusions for failure to maintain cybersecurity procedures that were disclosed as part of the application process. Insurance companies have tried to use that failure to deny coverage where human error resulted in a data breach. That’s typically a big shock to the policy- holder because the reason insurance is purchased is because sometimes protocols fail, usually because of human error.

Organizations need to scrutinize cybersecurity insurance policies for those lurking exclusions that the insurance companies will try to use to nullify the coverage. That can be difficult because there is no uniformity in the available products, so it’s a challenge for organizations to compare and contrast their options and ensure they’re covered for what they believe a cybersecurity policy should cover. In any event, though, effective coverage counsel can assist in pushing back against insurers who try to avoid their obligations based on opaque exclusions in their policies.

How can organizations determine the best cybersecurity insurance policy for their needs?

A cornerstone component organizations should look for in any cybersecurity policy is coverage for the cost to defend lawsuits that result from a data breach. The policy should also cover the cost of monitoring the credit of those affected after a data breach, as well as the costs of responding to the data breach, such as retrieving the data and plugging holes. If those elements are not a part of a policy, don’t buy it.

Organizations should consult a professional when buying cybersecurity insurance. Have them diagnose and explain how each policy available in the market differs. It’s not like buying commercial general liability policies, which are pretty uniform in their coverages. Organizations should get an independent eye to review those policies, whether it’s an in-house risk professional, a trusted broker, or outside insurance coverage legal counsel.

With cybersecurity policies, make no assumptions. Courts, when hearing a challenge to a policy provision, will expect that the company has read the policy — ignorance and assumptions will not be an acceptable defense.

Insights Legal Affairs is brought to you by Brouse McDowell, LPA

How a recent decision affects coverages and exclusions during construction

When something goes wrong during a construction project, the first thing most business owners and general contractors ask is, “Am I covered?”

Some commercial general liability (GCL) policies may not cover faulty workmanship or related defects. That’s why general contractors often purchase additional policies to provide added coverage or request special clauses, such as the products-completed operations-hazard (PCOH) clause, which covers damages “arising out of completed operations.”

A recent Ohio Supreme Court decision, however, has cast doubt on the degree of confidence that these special clauses can create and highlights the need for businesses to thoroughly review their policies with their insurers and legal counsel to ensure they are covered in any situation.

Smart Business spoke with Nicholas R. Oleski, an associate at McCarthy, Lebit, Crystal & Liffman Co., LPA, about ensuring your business is actually covered during a construction project.

What was the Ohio Supreme Court decision that impacts PCOH clauses?

In Ohio N. Univ. v. Charles Constr. Servs. Inc., Ohio Northern University filed a lawsuit against general contractor Charles Construction for water damage at its new hotel, claiming defective work by the contractor and its subcontractors. Charles Construction submitted a claim to its insurance company, believing that it was covered as a result of its PCOH clause. Charles Construction had paid an additional premium for the clause, which included terms that specifically applied to work performed by subcontractors.

The insurance company refused to pay the claim and asked the court to issue a ruling that it did not have to defend or indemnify Charles Construction under the CGL policy. The Supreme Court agreed the insurer did not have to indemnify the contractor based on a single definition contained within the policy. According to the court, the CGL policy, by its term, only was triggered by an ‘occurrence.’ The CGL policy defined an occurrence as ‘An accident, including continuous or repeated exposure to substantially the same general harmful conditions.’

Relying on one of its previous decisions, the court explained that an ‘accident’ involves a fortuity and faulty workmanship. According to the court, water damage resulting from the alleged defective work did not constitute a fortuity. The court went on to explain that ‘CGL policies are not intended to protect owners from ordinary ‘business risks’ that are normal, frequent or predictable consequences of doing business that the insured can manage.’ So, despite the fact that Charles Construction paid additional money for the PCOH clause to cover claims against its subcontractors, it still was not covered against the supposed faulty workmanship of its subcontractors.

What are the implications for businesses of the court’s decision?

The implications of this decision for the construction industry are far-reaching, as general contractors with CGL policies can expect that claims of faulty workmanship will not be covered. To ensure better protection, general contractors need to ask their insurers to explicitly include an endorsement that covers defective workmanship.

Such miniscule definitions should be carefully considered in all insurance policies, whether they are related to construction or not. Consider, for example, a typical cyber insurance policy. Many companies today purchase special riders that they believe will completely cover them in the event of a computer hack. Depending on the wording of the policy, however, the insurance company may only pay to fix the problem, but not cover the loss of income incurred while the computer system was down or the damage to the company’s relationships with its valued customers as a result of the hack.

How can businesses ensure they’re protected during construction?

When dealing with insurance, it’s never clear how a court will rule in a specific case. Definitions can be interpreted very differently, and outcomes could vary dramatically depending on the state where the case is being tried. You can help mitigate this uncertainty, however, by involving legal counsel in the review of pertinent insurance policies and analysis of other previous relevant cases.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

How to resolve conflict among business owners

Many business owners claim to be blindsided when a co-owner files a lawsuit against them detailing a list of grievances. The truth is that business owners often ignore disagreements with co-owners for years or even decades by focusing on pressing day-to-day business matters.

If your company does not address owner conflicts and succession planning issues, these matters will eventually disrupt, impact or injure the business. But with the right approach — and the right facilitator — these challenges can be identified and resolved.

“Disagreements among co-owners of a business are natural. They come up frequently. The key is how owners address those conflicts. Even a company with one owner eventually has to deal with succession issues to avoid potential tension between family members or others vying to be the next generation of owners,” says Kevin Douglass, shareholder at Babst Calland.

Smart Business spoke with Douglass about conflict resolution among business owners.

What events can trigger an escalation of a disagreement between owners?

The reasons why a disagreement may bubble to the surface are almost endless. One trigger is business financial health. If the company is doing very well, owners may feel entitled to more compensation or at least more input into how additional profits will be invested. If the business is struggling, an owner’s benefits may need to be decreased and tough decisions made about the company’s direction.

Other reasons for conflict include a change in an owner’s level of commitment or job performance, a desire to change the governance structure, conflicting business strategies, and compensation and benefit differences. Personal changes may also spark controversy, such as an owner’s marriage or divorce, owner children who are employed by the business, personal finances or advancing age.

It is surprising how often business partners, including those in the same family, do not openly voice their concerns. If co-owners are not comfortable discussing issues or sharing information, resentment festers and grows.

What are the risks of ignoring owner disagreements?

Owner disagreements, or failing to address succession issues, can spill over into business operations and finances. Employees, lenders, customers, vendors and others can easily become aware of, and even embroiled in, the drama. They may be confused about which owner is in charge. If left unchecked, the reputation and health of the business may be threatened. Just as significantly, relationships on a professional, personal and family level may be destroyed, if not addressed thoughtfully and with sensitivity.

Some owners resort to litigation to obtain the satisfaction they believe they are entitled to — and the expense, stress and distraction of co-owner litigation is never positive.

How can owners resolve their underlying issues more quickly?

An owner willing to address an issue with a co-owner head-on is often in the best position to resolve it. However, given the sensitivity of all the moving parts, including each owner’s legal rights and vested interest in the outcome, it frequently makes sense for owners to separately consult with an attorney for a comprehensive and objective assessment of the issues, risks and alternatives for resolution.

As part of that process, it is important to understand not only why the disgruntled owners are upset, but also what owners hope to achieve and whether their expectations are realistic. After fully vetting an owner’s desires and legal rights, finding a solution may include answering difficult questions. Do the owners want to continue in business together, or separate via a buyout? Do the owners share the same vision for the company’s future? Does the ownership, compensation or governance structure need to be redefined? Are new leaders and investors needed? Should the business be sold? Should a strategic or succession plan be developed, and if so, what should it look like?

Any resolution of issues involving owner conflict or succession should strive to satisfy, or at least account for, the concerns of all owners and interested parties. Unlike a winner-takes-all litigation setting, an opportunity exists to develop workable solutions for owners while preserving and protecting the business. Wise owners take advantage of that opportunity.

Insights Legal Affairs is brought to you by Babst Calland

How to comply with the Plain Language Consumer Contract Act

Pennsylvania and many other states have passed laws requiring consumer contracts to be written in “plain language” to make contracts easier for consumers to understand.

Many companies, however, may not be aware of these laws and their requirements.

“Any company that does business with consumers should have its contracts reviewed by an experienced business attorney on a regular basis to ensure compliance with these laws,” says Julia Richie Sammin, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Sammin about what businesses need to know to stay in compliance with Pennsylvania’s Plain Language Consumer Contract Act.

What is covered under the Plain Language Consumer Contract Act?

Pennsylvania’s Plain Language Consumer Contract Act applies to all written contracts between a business and a consumer. A consumer is any individual who borrows, buys, leases, or obtains credit, money, services, or property for personal, family, or household purposes. The Act’s scope is therefore fairly wide; for example, residential leases, home improvement contracts, security alarm contracts, and gym membership agreements are all covered by the Act. Consumers cannot waive the protection of the Act.

There are exceptions for, among other things, some real estate contracts, contracts involving amounts over $50,000, marital agreements, and documents used by regulated financial institutions. Also, a company will not be liable under the Act if all parties have finished what was required under the contract, the consumer wrote the part of the contract that violates the Act, or the company made a good-faith and reasonable effort to comply with the Act.

What are the guidelines by which contracts should be written to comply with the Act?

The Act requires all consumer contracts to be written, organized, and designed so that they are easy to read and understand. For instance, consumer contracts should use short words, sentences and paragraphs, and should avoid Latin and foreign words, technical legal terms, and sentences that contain more than one condition.

Consumer contracts should also have font sizes, margin width, line spacing, and other formatting and visual characteristics that make them easy to read. Therefore, contracts that use tiny fonts and cramped text can run afoul of the Act, even if the contract language itself is easy to understand.

The Act also requires specific language to waive a consumer’s rights in residential leases, and there must be a description of any property that may be repossessed if the consumer does not meet the terms of the contract.

What happens to a company that doesn’t comply with the Act?

A company that does not comply with the Act is liable to the consumer for any or all of the following: actual damages, statutory damages of $100, court costs, reasonable attorneys’ fees, and any other relief ordered by the court. In addition, a violation of the Act is deemed to be a violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law (UTPCPL), which carries more significant penalties, and pursuant to which the Pennsylvania Attorney General’s Bureau of Consumer Protection has the authority to investigate and take action against companies engaged in unfair trade practices. The attorney general has an array of enforcement powers under the UTPCPL, including injunctions, restitution and civil penalties.

How can companies ensure their contracts comply with the Act?

An attorney can rewrite a company’s contracts to comply with the readability requirements under the Act. In addition, companies may submit their consumer contracts to the Pennsylvania Office of the Attorney General (OAG) for preapproval. Preapproval means that the contract is considered to be a good-faith effort to comply with the Act, which is a defense to liability under the Act. Preapproval does not mean that the OAG has approved the contents of the contract; rather, it simply means that the contract meets the readability test under the Act.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Adding context to autonomous vehicle commercialization

At times, automated vehicles (AV) have dominated the headlines, so it can be easy to forget that the technology is still in the early stages of development and commercialization.

Justine Kasznica, shareholder at Babst Calland, is routinely asked: Why are AV companies and their automotive partners missing their stated deployment dates?

“This question raises an important point about current challenges to AV commercialization, with direct analogy to other autonomous mobility platforms, such as drones, personal delivery robots and more,” she says.

Some resources are being held back by the industry because of regulatory uncertainty, safety and security concerns, and the need for infrastructure that supports the technology, says Timothy Goodman, shareholder at Babst Calland.

“Even in view of this, progress is happening, particularly with regard to electrification and advanced driver-assistance systems (ADAS),” he says.

Smart Business spoke with Kasznica and Goodman, in the firm’s Mobility, Transport and Safety practice group, about AV development and commercialization.

Why should business executives stay aware of AV and other mobility development?

Automation has penetrated every segment of industry. In fact, warehousing, shipping, logistics and transportation are becoming more automated at a greater pace than ever before. In the future, whether it’s a drone, a legged robot or a wheeled delivery vehicle that solves the last mile problem, nearly every business will be impacted by AV. In addition, there’s plenty of opportunity to participate in this mobility evolution, even if it’s indirectly.

How is regulatory uncertainty playing a role in AV commercialization?

The federal government controls motor vehicle safety, with input from the automotive industry. Historically, National Highway Traffic Safety Administration regulations assumed vehicles would have a steering wheel, brake pedal and driver. The rules need to catch up to AV technology, which may or may not have these legacy items. However, federal rulemaking can take years, and this technology is changing rapidly.

In the absence of a strong federal framework, states are stepping in. A patchwork of laws ranges from hands-off and hesitant, to the proactive approach of Pennsylvania and California, which want to lead the way in developing sound regulations for AV testing and deployment. In addition, industry groups are creating voluntary standards for AV companies, which may influence future legislation.

The lack of a consistent regulatory frameworks had led many AV companies to start missing their projected targets for commercial deployment, in part because these regulations often dictate design features in their products.

What other challenges need to be overcome?

Autonomy is described in different levels, from zero to five. The technology is currently at level two, which is partial automation, i.e. lane assist, where the driver is still critical. Moving up to level three, four or five will require more than regulatory certainty — although that’s a big part of it. There are many transportation and infrastructure factors, like the advent of 5G, that need to catch up to the technology. This, in turn, further complicates AV development cycles.

The industry — and regulators — want AV systems to function well and not take unreasonable safety risks. AV systems in beta mode can become confused by unusual conditions, such as dust/rain/snow, pedestrians or unique road obstacles. Built-in redundancies are also required to combat software fails, while expensive and complicated technology, production cycles and implementation delays create barriers. Other concerns related to the cybersecurity and data privacy of integrated software systems need to be fleshed out before there will be full-scale commercialization. Solutions will require industry collaboration, public-private partnerships and data sharing.

While level five automation is years away, it will happen. Regulators are still trying to figure out how to promote safety without chilling innovation or picking winners and losers. In turn, resources are being held back by companies until there is more clarity with regard to regulations and the science.

Insights Legal Affairs is brought to you by Babst Calland

How companies can get the most from outside legal counsel

Smaller businesses tend not to have the budget for a full-time, in-house general counsel. Fortunately, there is another solution to help them avoid the common, and costly, legal pitfalls of being in business.

“Working pre-emptively with an outside general counsel on matters such as commercial contracting, general corporate governance, mergers and acquisitions, and vendor and supplier agreements reduces or eliminates the chance of encountering legal issues down the road,” says Elizabeth G. Yeargin, an attorney at Brouse McDowell.

Smart Business spoke with Yeargin about the many ways businesses can utilize outside general counsel.

What is corporate counseling, and why should an attorney deliver this service?

Legal counsel’s expertise is not limited to law. Through a legal lens, they can also offer practical business advice. For instance, an outside general counsel can participate in strategic and succession planning, disaster recovery and crisis management.

An outside general counsel may also have a background in the laws of a specific industry — tech or manufacturing, for instance. Generally, if it’s a highly technical industry that requires more than a general business law background, it’s better to work with someone with specialized trade knowledge.

These relationships have the added benefit of attorney-client privilege. Attorneys are bound by ethics rules and are prohibited from disclosing information received from their clients, which is different from other non-attorney advisers. Even emails between the attorney and client are privileged so long as outside parties are not included in the address line.

Which companies benefit most from working with an outside general counsel?

Smaller, closely held companies may benefit most due to the significant costs involved with staffing an attorney in-house, especially if those companies don’t have the volume of legal work to justify that expenditure. However, most inevitably have legal issues of some type that arise frequently enough that they need a trusted legal adviser who knows their specific business and can walk it safely through a legal minefield, or handle a one-off issue, such as selling a business or contracting with a difficult customer.

Who within an organization should work with an outside legal counsel?

Often an outside general counsel works directly with the CEO, CFO or president. There are, however, businesses that make outside legal counsel available to employees at other levels of the organization. For instance, sales managers or vice presidents are sometimes tasked with working directly with legal counsel when they have questions regarding supply agreements, procurement contracts or other sales-related obstacles.

It comes down to cost, need and comfort level.

Ideally, what should the general counsel-company relationship look like?

It’s best to be proactive, because it’s better to spend a little money up front to prevent much more costly issues later. That’s often the case with supply agreements and vendor contracts, which are easy to enter into but hard to get untangled from once a contract is signed.

Unless there’s a compelling reason — corporate compliance, for instance — outside counsel doesn’t likely need to be in attendance for every company meeting. But, especially when it comes to board or strategic meetings, it can be beneficial for the company’s lawyer to have a seat at the table to field legal questions and stay apprised of the general affairs of the organization. A lawyer never likes to find out through the news that a client is embroiled in a legal issue.

It’s a good idea for a company to hold regular checkups with its legal counsel so that he or she can keep track of the company’s current challenges. These checkups could be in the form of monthly meetings with the entire corporate management team or a brief phone call or lunch with the CEO. Counsel will, ideally, keep a running checklist of ongoing projects, discuss issues that are pending and those that have been resolved, and discuss upcoming strategic initiatives to keep everything at the forefront.

Insights Legal Affairs is brought to you by Brouse McDowell LPA

Critical considerations to make when forming a business

Starting a business often brings a sense of excitement coupled with owners’ desire to move quickly, but careful thought should be given to the tax and non-tax factors affecting the critical decision of how to structure the business. 

The right choice of entity protects the owners’ personal property by isolating liability associated with the business operations. Entity choice further affects access to capital, management rights and tax compliance.  

“The business form is incredibly important,” says Jonathan C. Wolnik, a tax and corporate attorney at McCarthy, Lebit, Crystal & Liffman Co., LPA. “Failing to start with the right advice from competent advisers can cause significant problems for the business and its owners.” 

Smart Business spoke with Wolnik about choice-of-entity considerations.

What are the key factors to consider when choosing a business entity? 

It starts with understanding the owners’ goals. Their vision answers questions as to how the company will be capitalized, if it needs to have closely guarded or freely transferrable ownership, and how it shall be managed. Very few owners are willing to intentionally accept personal liability for business activity, so the limitation of liability is always paramount. 

Partnerships can have very flexible management arrangements, whereas corporations typically have a more rigid management structure. However, general partnerships do not insulate personal assets, making the individual partners joint-and-severally liable for the activity of the other partners. This is often unacceptable to the owners, especially when it is easily mitigated.  

Further, the owners should understand the tax ramifications of their choice of entity, which can be easily explained by working with good advisers. But while it’s important to understand the tax ramifications among the entity options, taxes should not entirely control the business structure. 

Why would a company change entity type, and what would that process look like?

An entity formed as one type may convert to another, meaning, for example, that a corporation can become an LLC and vice versa. Typically, the entity seeking to change its form must notify certain state agencies before taking action. Further, a corporation typically must obtain a certificate of tax clearance from the Department of Taxation indicating that all prior tax liabilities have been satisfied. Other entity types do not share this requirement when converting.

A formal plan of conversion outlining why the entity wants to convert and how it will be accomplished must be adopted. The plan must be authorized at the appropriate level of governance. Note that tax-elections, such as the ‘S-election,’ do not constitute a formal change of entity type.  

The reasons for a conversion can vary and may include tax considerations or ownership changes. For example, an S-corporation is restricted as to who the permitted owners are. Therefore, admitting a new owner that does not meet the tax code’s requirements may necessitate a conversion to an LLC.  

Another factor to consider in conversion is the owners’ exit strategy. It may make sense to change entity type to obtain certain tax benefits at the time of exit, if possible. Foresight and careful planning are required when contemplating this type of action.  

What do people tend to overlook when setting up a business entity? 

Dispute resolution is often ignored by individuals starting a business. At the beginning, optimism and a desire to control costs keep owners agreeable. But those initial good feelings often fade, and if the governance documents do not adequately address dispute resolution, the problems compound. It is easier to reach agreements on dispute resolution at the start when everyone is looking forward to a peaceful and prosperous future. Processes for dispute resolution should be documented early in the business formation. 

For these reasons, professional advisers, both lawyers and accountants, should be consulted. Candid and honest conversation is critical and allows the lawyers and the accountants to ask important questions to help their clients reach the proper conclusions that shall fundamentally shape the business for years to come.

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