Currently, franchises are an increasingly fast-growing segment of the retail industry, especially in the case of fast casual and quick service restaurants. But before jumping feet first into one, there are some pitfalls prospective franchisees need to navigate before taking advantage of a potential opportunity, says Ian R.D. Labitue, an associate with Kegler, Brown, Hill + Ritter.

“Franchisees are driving the growth of retail right now because the backing of a strong franchisor can provide leverage when it comes to negotiations with a landlord,” says Labitue. “But you have to ensure that the lease terms are in your best interest because ultimately the franchisor will not be operating in the leased space — you will.”

Smart Business spoke with Labitue about what franchisees need to consider regarding franchise and lease agreements.

Is negotiating a lease normally the responsibility of a franchisee?

Many franchisors will place the burden on the franchisee to find a suitable space and negotiate lease terms, however, a franchisor may want to be active in the process as well. Oftentimes, they connect a franchisee with a local broker to assist, but that may create a conflict of interest because the franchisor is paying the broker’s commission. A franchisee should always be actively engaged in the process and never on autopilot, even with the help of a franchisor or broker.

Will the franchisor dictate aspects of the lease space?

A franchise agreement will spell out the use of the leased space, but a landlord may want the franchisee’s permitted use to be as restricted as possible so that they don’t violate exclusives with other tenants. As a franchisee, you want latitude so that you are able to offer any product or service the franchisor offers. They may sell supplemental items to their primary offerings, like T-shirts or other branded paraphernalia, and you want the ability to stock those things to take advantage of the additional revenue.

Can you provide any examples of franchisees overlooking something that became a problem?

The franchise agreement not only governs the relationship between the franchisor and franchisee, but also impacts the relationship a franchisee has with its landlord. The franchisor’s leasing standards will be spelled out in the franchise agreement and are often included on a ‘lease rider,’ which can be incorporated into the franchise agreement. When a lease rider is present, the franchisee is bound by the terms of the franchise agreement to incorporate the terms in the rider in any lease it may enter into. This can be very problematic and restrictive when the time comes for the franchisee to negotiate a lease agreement. In essence, the franchisee is already starting off in a less powerful position because the terms of the lease rider must be included in the negotiation. It may make securing a space more difficult if the landlord is unwilling to agree to the predetermined franchisor lease terms.

What are some other items a franchisee should negotiate to include in its lease agreement?

Opening and/or continuing co-tenancy provision. Ask the landlord for the right to abate rent or even terminate your lease if an anchor tenant in the shopping center closes. If you’re in a development with a strong anchor, you want the ability to lower your rent or terminate the lease if they leave because their absence will almost certainly affect your sales in a negative way.

Exclusive use provision. Try to negotiate for an exclusive as well. If you’re a quick service burger franchise, restrict the landlord from signing leases with other restaurants with the primary business of selling burgers to ensure you’re the only establishment of that type in the development.

Tenant allowance provision. Ask for a tenant allowance for any improvements to the leased space; landlords are generally more willing to provide a one-time allowance than to keep a space vacant for an extended period of time.

Lease negotiations as a franchisee are a balancing act because you have to comply with the franchise agreement, but you also have to protect your interests and reach an agreement with a landlord that’s beneficial to you as a tenant.

Ian R.D. Labitue is an associate at Kegler Brown Hill + Ritter. Reach him at (614) 462-5413 or ilabitue@keglerbrown.com.

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Published in Columbus

To a business owner looking for market penetration, establishing a franchise provides a number of benefits.

“We’ve taken clients operating from a few local locations to expanding into many states through franchising because they had aggressive expansion plans and were a great candidate to franchise,” says Kacie Davis, an associate with Kegler, Brown, Hill + Ritter.

However, launching a franchise system isn’t an easy get-rich-quick scheme.

“It’s really a cost/benefit analysis for a business as to whether they’re ready to expand and can support an on-going franchise system,” says Davis.

Smart Business spoke with Davis about the process of franchising a business.

What is a franchise?

Essentially it’s a business arrangement where one party grants rights to offer goods or services under its company or brand name. The seller provides significant control or assistance over the business, and the purchaser makes a minimum payment to enter into the arrangement.

What are the benefits of franchising?

Franchising allows you to build brand recognition and increase market share with a limited risk of financial exposure. Franchisors can shift the burden of operations and obtaining necessary capital to open new locations onto individual franchisees. Additionally, the franchise model provides new revenue streams to the franchisor by way of franchise fees and royalties. Franchisees also benefit because they start with a proven business model and leverage a successful brand name to tap into an immediate customer base.

How do you determine if a business is suitable for a franchise?

While it’s somewhat intangible, there are certain hallmarks of successful franchises.

  • The franchised business has one or more established and profitable locations.

  • The business can be replicated into a turnkey operation.

  • The concept is transferable to other markets or locations.

  • The business has been lucrative and is attractive in terms of ROI.

Any type or size of business can be franchised, but a key component is its capability of supporting long-term franchisee relationships — a franchise system will only be successful if its franchisees are successful.

How is a franchise established?

In order to sell franchises, you must comply with Federal Trade Commission (FTC) regulations, which involves the preparation of a Franchise Disclosure Document (FDD). The FDD provides the franchisee with information on the business, the services the franchisor will provide and other information about the franchisor, including financial statements. Several states require registration of the FDD before franchises may be sold within that state. This means working with the state’s attorney general or securities division.

In addition to the FDD, you’ll need a franchise agreement and other contracts that detail the franchisee’s compliance requirements, such as how they use your brand name and trademarks, and how you can enforce your rights.

In order to support your franchisees, you also need a very specific operations manual for the business and a training method to teach new franchisees how to operate the business and implement the operations manual. This will ensure uniformity and protect the franchised brand, ensuring consistency and increasing brand value.

What are some common problem areas?

One problem a business owner can run into when expanding is starting to sell a franchise without realizing it. People enter into licensing agreements thinking they are not selling franchises and can avoid FTC regulations and requirements. However, what can trip an owner up, and turn the license arrangement into a franchise arrangement, is providing the right to use your brand name in connection with providing assistance or control over that licensee’s business operations.

Another risk is putting capital into franchising a business that wasn’t market-tested. Without this, you don’t know that anyone would buy into the concept and replicate the success you’ve had.

Kacie Davis is an associate at Kegler Brown Hill + Ritter. Reach her at (614) 462-5402 or kdavis@keglerbrown.com.

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Published in Columbus

Much of the discussion about oil and gas production in Ohio has focused on hydraulic fracturing used to facilitate production. But fracking, as it’s often called, is only part of the process that takes the oil and gas from the ground to consumers.

“The wells are just one part of the overall industry. You can drill a well and be prepared to produce gas and natural gas liquids, but these materials have no place to go until you have a pipeline and processing facilities,” says Scott Doran, director, Kegler, Brown, Hill & Ritter Co., L.P.A.

Smart Business spoke with Doran about the various stages in the production of oil and gas, and the permits and regulations that govern them.

What permits are required for oil and gas production operations?

In addition to the drilling permits, you generally need permits for the pipelines that will take the gas from the well pad to collection and processing points. The Ohio Department of Natural Resources (ODNR) manages drilling permits; The Ohio Environmental Protection Agency (EPA) has authority to issue air permits. The Ohio EPA, the U.S. Corps of Engineers and other agencies are involved in pipeline projects. Construction of the pipeline may necessitate impacts to streams or wetlands, and you have to consider historical preservation and endangered species issues.

You have to delineate every resource along the expected path of the pipeline, which means sending engineers or field personnel to identify streams, wetlands, historic properties and potential endangered species habitats. Of course, that also involves getting easements and permission from landowners. Those field people prepare voluminous reports, and you identify the best path for the pipeline that achieves project objectives while avoiding as many resources as possible.

If a project does impact streams or wetlands, you can apply for and obtain a permit authorizing the project, but you also have to mitigate those impacts by restoring the streams or wetlands at the site or somewhere else, or buying wetlands mitigation credits. It’s expensive, but there are a number of mitigation options to compensate for these unavoidable impacts.

Why are air permits needed?

Air emission of certain natural gas occurs during the drilling process, and the U.S. EPA and Ohio EPA have established strict permitting requirements regarding how to manage emissions during and after drilling. After drilling, there are emissions associated with the transfer and storage of materials.

It used to be that companies commonly flared off excess gas — they didn’t want to or were not able to manage the gas, so they would burn it. New permit requirements are being phased in that will require the capture of that gas.

What is required regarding wastewater collected from drilling operations?

In Ohio, a regulatory decision was made that the wastewater associated with oil and gas exploration and production is to be injected into permitted disposal wells. These disposal wells are generally off-site and operated by disposal companies that collect waste from tanks at the well pad. They’re injecting the waste 10,000 feet into the ground in porous rock, where it is designed to remain.

Drillers and wastewater treatment companies are working very hard to demonstrate effective mechanisms to treat and recycle that water, because millions of gallons are used for every well and fresh water is very valuable.

Do you expect regulations to change as the industry expands its operations here?

Regulations will undoubtedly continue to evolve, but the basic structure is in place. There is every indication that companies are continuing to make substantial infrastructure investments in Ohio, and there is a regulatory program that is overarching and impacts every step of the process.

This industry is going to have an environmental impact, but it can be done in a very responsible manner. Economically, it will be a good thing for the state. There will be some trials and tribulations along the way, but overall Ohio is doing a nice job to ensure a very substantial long-term benefit while protecting environmental resources in Ohio.

Scott Doran is a director at Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5412 or sdoran@keglerbrown.com.

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Published in Columbus

Practically no one reads software licensing agreements, but the terms they set allow software companies to access your computer network for an audit. And when they decide they want an audit, software companies may attempt to gather information without executive management knowing.

“They will send the audit request in an email because a formal letter has a greater chance of going up the chain to management. The email will say the audit right is in the contract and to run the attached script on your computer system,” says Jason H. Beehler, an associate with Kegler, Brown, Hill & Ritter.

“That script was created to find as much usage as possible. It will look for any occurrence of the software’s name, even if it has no correlation to the installation of the software. The company, usually without thinking, will go ahead and run it and it comes back with an unbelievable number. All of a sudden the software company is asking for $100,000 or $500,000 or more, depending on how extensive they allege the overuse is,” says Beehler.

Smart Business spoke with Beehler about procedures companies should follow to manage software licenses and what to do if a software company requests an audit.

How should companies respond to an audit request?

Treat it like an audit request from the IRS. Whoever receives the request should notify someone on the executive side — CEO, CFO, CIO — and the executive should contact in-house or outside counsel to review the licensing agreement and understand the company’s rights. What is the script designed to look for? Is the license agreement valid and enforceable?

You also want to make sure that, before any audit request comes in, the person who manages software purchases is proactively tracking software licenses and usage. A person may have moved on to another job or department and the copy still exists, although no one is using it. Simply removing software from computers prior to the audit can legitimately decrease your exposure by reducing the number of users.

Often employees have software programs they don’t use. From an IT perspective, it’s easier to create a master template for a desktop software suite that is loaded on computers. You may have what registers as 100 users of the software, but the number of people actually using it is 15.

What if the script has been run?

If you get a letter that says you owe $200,000, contact your counsel, and then together you can call the software company’s general counsel and see if you can negotiate. It could be that $60,000 of that total is interest and, of the remaining $140,000, maybe half corresponds to the actual number of unpurchased licenses in use. If there’s legitimate overuse, you can structure a settlement and offer to pay over a period of some months or years.

If you can’t reach a settlement, consider filing suit before the software company files, so you can choose the court. It’s much better to fight on your turf and your terms. When you file, the software company may very well countersue for copyright infringement and breach of contract. But at least you will define the case on your terms, and you may not have to litigate in the software company’s backyard.

Are more software audits being conducted?

Yes. It could be a function of a difficult economy, either because the software companies are feeling the pinch or because they suspect that users may be engaging in unauthorized copying in order to save money. The prevalence of downloaded software presents an opportunity for software companies if they suspect people aren’t tracking their licenses well.

IT experts say software companies could put controls in place to prevent unauthorized copying. That’s what makes these claims interesting, and that issue should be explored if it comes to litigation. The argument that the software company had an opportunity to prevent copying and now seeks damages for activity it could have stopped could be a significant issue at trial.

Jason H. Beehler is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5452 or jbeehler@keglerbrown.com.

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Published in Columbus

By some estimates, oil and gas wells will be pumping $30 billion into Ohio’s economy in 2015, creating 200,000 jobs. All that money and activity also promises to keep attorneys busy.

“Companies are still feeling things out. So far, there have been about 500 permits issued and there are only about 80 producing wells. But 101 permits were issued in March alone. There will be a lot more drilling this year,” says Michael Schottenstein, an associate with Kegler, Brown, Hill & Ritter.

As companies look to start drilling, property owners with leases signed when offers were lower want to renegotiate more favorable terms. And some communities continue to fight to keep hydraulic fracturing of shale rock formations, a process also known as fracking, from taking place within their borders.

Smart Business spoke with Schottenstein about current legislation and the outlook for oil and gas well production in Ohio.

What’s the status of potential fracking bans?

In a recent case in the 9th District Court of Appeals, State ex rel. Morrison v. Beck Energy, the court said Ohio Revised Code section 1509.02 gives the Ohio Department of Natural Resources, Division of Mineral Resources Management, exclusive authority over drilling permits, pre-empting local ordinances. Municipalities can regulate things like excavation and right-of-way usage and construction, but have no authority when it comes to drilling.

However, there are still municipalities discussing bans. The city of Munroe Falls has appealed to the Ohio Supreme Court and asked the court to weigh in on the issue, but the court has not said yet whether it will take the case. It’s unlikely municipalities will be able to impose outright bans.

What are some other legal developments?

The natural gas severance tax increase Gov. John Kasich proposed in his new budget is significant. Drilling companies and other industry players have been trying to stop it because they say it would discourage drilling. The industry may have won the fight for now, though. The budget plan the Ohio House Republicans recently put forward left the severance tax where it is. It’s still possible it could get passed if the Ohio Senate makes some changes, but it is unlikely.

Another development involves a line of cases dealing with lease terms and whether perpetual leases are void as being against public policy in Ohio. In Monroe County, a judge in the case of Hupp v. Beck Energy essentially said that public policy in Ohio so disfavors perpetual leases that any oil and gas lease that allows drilling companies the right to extend the lease indefinitely by paying delay rentals without an obligation to actually drill are void as against public policy.

There’s also a federal case from the Southern District of Ohio in which the decision says state law disfavors perpetual leases and will interpret them not to be perpetual when possible, but did not say they are actually void.

These are important cases because a lot of landowners are trying to find ways to get out of leases signed when companies were paying a lot less for them.

What are leases going for now?

Royalty percentages had historically been about 12.5 percent for the landowner, but we’re seeing some up to 20 percent. Reports out of eastern Ohio are that some companies are offering bonus payments of $5,000 to $10,000 an acre. Those who entered into a lease 20 years ago, got a small bonus payment and now get a royalty check for $10 a month, are trying to get a better deal.

Oil and gas leases typically provide for a period of one to five years during which companies can explore to see if there’s oil and gas on the property. Leases also usually have a clause that the lease continues as long as oil or gas is produced in paying quantities, which can be an issue if drilling was interrupted for some reason.

Are their other issues on the horizon?

One major concern is waste disposal. Fracking produces waste, called brine, and it can’t just be put it back into the water system. Because this liquid would pollute the water table, drilling and disposal has to be done right and companies must take necessary precautions. A company near Youngstown was recently indicted for dumping brine into the Mahoning River, but if companies don’t cut any corners, our water should be safe. Still, expect more litigation, legislation and regulations involving waste disposal in the future.

Michael Schottenstein is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5451 or mschottenstein@keglerbrown.com.

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Published in Columbus

It’s tempting to do whatever it takes to generate more business, but global companies are increasingly at risk of getting caught if an employee violates the Foreign Corrupt Practices Act (FCPA).

“There has been a tremendous increase in the amount of enforcement from the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in the past five years,” says Luis M. Alcalde, of counsel at Kegler, Brown, Hill & Ritter. “In addition to that greater emphasis, the Sarbanes-Oxley Act of 2002 and whistleblower legislation expanded the ability to bring illegal activities within companies to the forefront.”

The FCPA, passed in 1977, was prompted by widespread bribery of foreign officials by U.S. companies and is intended to level the playing field and let market forces dictate business contracts, Alcalde says.

“It really addresses two pillars of our capitalist system — free markets and transparency. When companies win contracts through corruption, it’s a distortion of the marketplace. The best services and best prices should win the battle,” he says.

Smart Business spoke with Alcalde about anti-corruption laws, and what companies should do to comply with laws and avoid the significant financial sanctions and legal fees that could result from violations.

How do you know what is and isn’t acceptable?

Most people can agree it constitutes bribery when a company pays $20,000 to a government official to make sure that it gets a contract. Where it gets difficult is when dealing with a culture where personal relationships are important and everyone’s wining and dining public officials. The FCPA does not have a de minimus rule, so the central issue becomes the intent behind the gift or entertainment.

What steps should companies take to stay out of trouble with the FCPA?

The most important step is to instill a genuine belief system throughout the organization, starting at the top with the board of directors, to pursue business in an ethical manner. It’s not enough to simply have a code of ethics, all employees must understand and accept that in some cultures and situations being ethical might result in some loss of business.

Secondly, develop a process of internal controls and due diligence that covers how business will be conducted and how financials will be recorded. This includes everything from purchasing supplies, advertising expenses, to hiring consultants, etc. Have a protocol that lays out the criteria and documentation that is expected — information about the vendor’s financials, time in business and ownership, as well as getting prices and at least two or three bids. Be able to monitor these transactions and conduct audits.

Finally, you have to do something to punish the wrongdoer when a violation or risk is detected. If you find out a top salesperson was paying bribes to public officials, you have to take action against the wrongdoer and possibly disclose the wrongdoing or face worse anti-bribery sanctions if caught.

Can you provide examples of the costs of FCPA-related settlements?

Siemens was one of the more famous, it had an $800 million settlement in 2008. In 2011, Alcatel-Lucent settled for $137.4 million with the DOJ and SEC. Wal-Mart is involved in a bribery investigation in Mexico and is reported to be paying an average of $600,000 a day in legal fees to deal with the issue.

After the government imposes criminal penalties, companies could also face civil penalties. It looks great when a company shows a 12 percent increase in profits in China, but not if it turns out that was based on bribes to government officials. Those officials are going to jail and the contracts are voided. Then shareholders are angry that the company lied and shares lose value, so the company will face shareholder lawsuits.

Companies must ensure legal compliance even if it means a short-term loss of business. The price of getting caught is too high. Operating ethically is always the best long-term strategy. Walking away from a deal that compromises the company is the only smart business.

Luis M. Alcalde is of counsel at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5480 or lalcalde@keglerbrown.com.

Alcalde is a global business attorney and team leader for the Cuba, Latin America and Caribbean area at Kegler Brown.

 

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Published in Columbus

Legal requirements, along with small businesses themselves, change constantly. Annual checkups with an attorney could reveal potential problems before they prove to be very costly for your business.

“There are a lot of small business owners out there who use a customer contract form they had a lawyer review 10 years ago and think they’re good to go,” said Erin Cleary, an associate with Kegler, Brown, Hill & Ritter. “We see owners who try to sell after a long, successful career of building their business, but the transaction proves costly and stressful as a result of neglecting certain legal compliance issues over the years.”

Smart Business spoke with Cleary about why it’s important to meet annually with an attorney and how it benefits your business.

What are examples of problems discovered during checkups?

Some small businesses are organized and taxed as C Corporations for no good reason. Those owners could save significant tax dollars by converting their structure to a pass-through entity. In the current environment of constantly shifting tax laws, it helps to check for such opportunities to improve tax structure or capitalize on other tax credits or incentives. These changes lead to real money in your pocket.

Another issue that can arise during a sale transaction concerns commercial contracts with customers or vendors. Contracts might include prohibitions on assignment, unusual indemnification clauses or warranty provisions that might be disadvantageous to the company. It can pose significant liability to hand out a template contract that’s outdated, for example, one that doesn’t take into account the unique risks and liabilities imposed by e-commerce and social media. Updating contracts that are regularly signed cuts down on future liabilities, especially in the context of a sale transaction where a buyer will inevitably ask the seller/owner to stay ‘on the hook’ for the contractual liabilities the business has accumulated.

One of the most serious liabilities can be the failure to properly pay, collect and report taxes, particularly sales taxes and payroll taxes. Generally, there is no statute of limitations for tax evasion, fraud or the failure to file a return, so those liabilities exist forever. In addition, it’s not possible to pass this liability on to the buyer of a business — a tax authority can always go after either the ongoing business or the original owner who failed to comply. In sale transactions with this kind of liability, the seller always ends up fully indemnifying the buyer for any future penalties, audits or investigations that might occur after closing the transaction.

Are there businesses for which legal checkups are particularly vital?

It’s probably more important among less regulated industries. Businesses that are highly regulated have closer relationships with attorneys and are more attuned to legal compliance. But legal oversight is not just about compliance. It’s also about best practices, like making sure employees sign contracts to protect the business’s intellectual property.

Checkups are worthwhile if you’re anticipating an exit from the business, whether it’s a sale, taking on a major investor, going public or transitioning the business to a family member. Even a sale to someone with whom you have a close relationship might undergo the same scrutiny as if you had a completely unrelated buyer. Many businesses, particularly professional practices, do not plan for succession. Periodic conversations with counsel might encourage you to take the time to think this through. If a professional practitioner passes away, a valuable business could quickly become worthless. Having a succession plan might mean the owner’s estate receives compensation for the business when it otherwise would not.

Some owners might like to hire different lawyers for specific needs. These owners should be careful to make sure that at least one of their lawyers is taking time to look at the overall picture to make sure nothing is falling through the cracks.

Unlike accountants, whom you’re naturally going to see annually to file taxes, there is no periodic event that requires you to update your attorney about your business. But keeping up with best practices would nevertheless make an ultimate transaction less expensive and stressful, and reduce post-closing liability.

Erin Cleary is an associate at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5420 or ecleary@keglerbrown.com.

 

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Published in Columbus

When it comes to zoning and land use regulations, things are not always as they appear. You may want to move into a building that housed a similar operation and sign a lease, only to find that the prior use had been grandfathered.

“There are all kinds of things out there that are not necessarily apparent that you need to check out before you do anything,” says Catherine A. Cunningham, a director at Kegler, Brown, Hill & Ritter. “One of the unique features of zoning is that it is not a state law, it’s a local law under the police powers of the local government. Every local government has its own rules. They have some commonality in how they do things, but the rules and regulations that you would be subject to are unique to the jurisdiction where the property is located.”

Smart Business spoke with Cunningham about the importance of reviewing local ordinances and regulations when considering a business site.

Do companies neglect to consider local ordinances and regulations when looking at potential locations?

It sometimes happens that way. Companies should consider all local ordinances and regulations to make sure that when they choose a location, they are able to do all the operations that they intend at that location.

Normally, most jurisdictions require that if you are constructing a new building, changing a use, or expanding an existing facility that you get a certificate of zoning compliance or zoning clearance from the local government to ensure that you are in compliance before you get too invested in the project.

What common mistakes do businesses make when choosing a location?

They might choose a location where the zoning doesn’t permit what they do, and sometimes they move to a location and find out they can’t expand or the building had a prior zoning violation that they’ll inherit.

Part of the due diligence, anytime you’re going to construct, lease or buy, is to check to make sure that what you want to do and the way you want to use the property are permitted under the current zoning law.

Do companies sign leases before realizing they have a zoning or regulation issue?

That happens more often than it should, in my view. Very often a business is dealing with someone it’s leasing from who is assuring its that it’s OK. Sometimes the company just makes a call to a government authority and talks to somebody, assuming that’s an adequate approval, when really what you need to do is to file an application and be sure that the governmental authority has had adequate time to review all of your information and make an approval.

Often it appears, or it is assumed, that a project or proposed use of property is in compliance with zoning, but then, when the government understands the exact nature of the project or operation, it may find it doesn’t comply with local zoning. Then companies can be prohibited from using the property or from making the expansion or adding the equipment that they think they need in their operations.

In many cases, businesses that have manufacturing facilities, hazardous materials or other special uses, such as outside storage, may trigger special permits from the local government regulator. A lot of times those businesses aren’t aware those permits are required, and sometimes they don’t qualify for the permits and can’t use that location.

Once you identify a property you want to look into, it’s critical to contact the local government or legal counsel to make a determination of how the property is zoned, whether you can use it the way you intend, and to try to get a certificate of zoning compliance or authority to use it that way so you’re cleared before leasing or buying a building.

EVENT: Managing Labor & Employee Relations Seminar will take place March 5. Click for more information.

Catherine A. Cunningham is a director at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5486 or ccunningham@keglerbrown.com.

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Published in Columbus

President Barack Obama’s re-election means health care reform is certain, and businesses need to plan to meet Patient Protection and Affordable Care Act (PPACA) mandates, most of which will be effective on Jan. 1, 2014.

There are ways companies can structure themselves to avoid any type of penalty and maintain their employees’ benefits, says Stefan Thomas, an associate with Kegler, Brown, Hill & Ritter.

“Because of the ambiguity of the law, it’s a difficult subject matter for companies to understand. Some are opting in or opting out of insurance plans, some are self-insured and some are privately insured. It’s really specific and handled on a case-by-case basis.”

Smart Business spoke with Thomas about steps that companies should take in order to meet PPACA mandates.

What steps do companies need to take in order to be prepared for the PPACA requirements?

First,companies need to determine if the law will affect them. Depending on the size of the company, it might not. They would have to be an applicable large employer, which means having 50 or more employees, including full time, full-time equivalent and seasonal workers.

There are other things to consider, such as whether the seasonal exception is applicable or whether full-time-equivalent workers (2-to-1) or seasonal employees, defined as those who work four or more months, have caused them to become large employers.

If a company is subject to PPACA mandates, what is their logical next step?

The next thing for a company to do is to figure out whether or not they’re providing any insurance and, if they are, whether it’s adequate. If it’s not adequate, it needs to be, meaning that they’re paying a certain percentage of the premium, which should be 60 percent.

If they’re large and have insurance that meets the 60 percent threshold, then they don’t have to worry about anything. But if they fail to provide the adequate amount, they have to pay a tax penalty, which is based on a ratio and can be $2,000 or $3,000 per employee. On top of that, they have to determine whether an employee has opted into an exchange. However, if the employee hasn’t gone through the exchange, the company still might not be penalized.

Some businesses are trying to limit hours employees are working or they’re changing the way they are providing health insurance in order to avoid penalties.

Is there anything smaller companies need to know about the PPACA?

Small employers could be eligible for a tax credit if they have 25 or fewer employees, with salaries averaging $50,000 or less and they provide insurance. They also have to fill out tax form 990T to determine whether they qualify for credits.

Have all the regulations of the PPACA been determined now or are provisions still subject to change?

There is still quite a lot of ambiguity regarding the new law and that is just how it is going to be for the next few years. For example, it has recently been discovered that the Medicaid expansion is mandated.

If states fail to expand coverage to people up to 138 percent of poverty level, those states will not be able to receive full funding from the federal government. That is a big issue because Medicaid is one of the largest items in state budgets.

The health care reform law is evolving every day, so companies are advised to pay close attention to the regulations as they are rolled out. Consider dedicating staff to monitoring the act’s developments, otherwise your company could be missing tax credits or penalties that could be incurred because of lack of knowledge.

Stefan Thomas is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5484 or sthomas@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter

Published in Columbus
Friday, 30 November 2012 21:02

How the election will impact your business

As leaders in Washington, D.C., head toward a fiscal cliff, their counterparts in Columbus, Ohio, also are looking at major budget changes for the state.

At both the state and federal level, taxes will be at the forefront of discussions, says Steve Tugend, chair of the Government and Legislative Affairs Practice Group at Kegler, Brown, Hill & Ritter Co., LPA.

“At the federal level, the candidate who was less likely to raise taxes was defeated, so the risk that businesses will see increased tax liability has increased significantly,” says Tugend. “At the state level, the legislature has no interest in raising taxes, and there will probably be a proposal to lower the income tax rate.”

Smart Business spoke with Tugend about the recent election results and how they will impact Ohio businesses.

How will the recent election impact the Ohio legislature?

There are going to be some changes. Leadership in the Ohio Senate will change, while William Batchelder will remain speaker of the House. Leadership in the Senate will change, with Tom Niehaus retiring because of term limits and Keith Faber becoming the new president. The transition to a Faber presidency will be a relatively orderly one and it is highly unlikely there will be a contested vote, as the Republican Caucus worked out the issue of leadership over the last couple years.

Because the governor is from the same party as the leadership in the legislature, he, by and large, sets the state’s public policy agenda on larger issues.

What major proposals do you expect from Gov. John Kasich in the upcoming term?

Two issues are particularly important because of their breadth and depth. The first is tax reform, and it is anticipated that the governor will introduce a plan to further cut the state’s personal income tax rate, from a top rate of 5.925 percent to a level that is under 4 percent.

When you are proposing to cut an income tax rate that significantly, the result is that the state will forego a significant amount of revenue. There are only two things that can be done to make up for that loss, which must be done because the state is constitutionally obligated to balance its budget. One, the state can impose taxes on goods and services that had not previously been taxed. As a result, businesses that offer services that are not currently subject to a state income tax should keep a close eye on the state budget to see what will be proposed. Alternatively, spending can be cut.

The second major issue that the governor is expected to address in the next term is school funding reform, although the specifics of that are not yet known.

Another issue is uniformity in the way municipal income taxes are calculated. Ohio has 600 entities that charge municipal income taxes, using 300 different forms, which business groups argue creates a significant administrative burden for Ohio businesses with employees who earn income in multiple jurisdictions. Many in the General Assembly view this administrative burden as an impediment to growing businesses within Ohio, and believe that the issue needs to be addressed.

What will happen at the federal level as a result of the election?

The fiscal cliff  — the looming, automated, arbitrary cuts to government spending — will create a very imprecise and negative effect on the federal budget. The consensus is that the worst alternative is to do nothing. No matter what the solution is, it needs to be a long-term solution and not another temporary one.

Businesses are most concerned about the tax code. Historically, the solution to a budgetary challenge commonly results in an exemption or deduction in the tax code that lasts four to five years, which then expires unless it is reauthorized by Congress. That does not generate a feeling of certainty or predictability. Businesses want a realistic solution grounded in good fiscal policy that will set the long-term tax and spending structure for this country.

The fiscal cliff was not designed to be a well-thought-out policy; it was designed as a hammer to inspire Congress to spring into action and put together a long-term plan that works.

What do you expect to happen regarding the fiscal cliff?

Congress may decide to pass legislation that will postpone the cliff until a later date, but it also may negotiate a settlement. The fact that the president was re-elected and that neither legislative chamber will see a change in its partisan leadership increases the possibility that a compromise can be reached this year.

There is more likely to be common ground in two general areas — reform of entitlements such as Medicare and Medicaid, and tax reform resulting in reducing or eliminating some of the deductions or exemptions in the tax code. Those are the general areas that are most likely to find agreement between the negotiating parties.

The same major players are involved, so why would there be an end to the gridlock that has occurred?

There is no longer a president of the U.S. that the Republicans are looking to defeat in four years. That changes their mindset. Equally important, there is no longer a president who can and will run for re-election. The president may be increasingly inspired by the need to compromise because of a desire to leave a positive legacy for the country.

Steve Tugend is chair of the Government and Legislative Affairs Practice Group at Kegler, Brown, Hill & Ritter Co., LPA. Reach him at (614) 462-5424 or stugend@keglerbrown.com.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus
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