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Successor Liability

Successor Liability: How It Impacts Your Business

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Gov. John Kasich signed House Bill 259 on Dec. 22, 2015, that included a provision helping to ensure entrepreneurs will not be penalized in the form of increased workers’ compensation rates, outstanding balances, or uncovered claims costs for assuming space that was previously inhabited by a completely separate business with negative claims experience. Our partners at The Greater Cleveland Partnership and COSE have been a long-time advocate for reforms on this issue in order to avoid unpleasant surprises related to workers’ compensation matters for business owners.

To date, business owners who started a business or who moved their business to a location that was previously occupied by a completely separate company may wind up inheriting certain workers’ compensation liabilities. A transfer of experience and/or debt—an Ohio Bureau of Workers’ Compensation (BWC) policy known as successor liability—had a negative and unanticipated impact on a business’ workers’ compensation costs.

With the approval of this legislation, the Ohio BWC will be required to reduce the transfer of negative experience to a successor employer under certain circumstances. And this legislation paves the way for relief for small business owners that are often unknowingly impacted until it is too late.

“Business owners have been blindsided when they inherited these liabilities after the move occurs and it jeopardized a small business owner’s ability to participate in certain workers’ compensation savings plans,” says COSE Executive Director Steve Millard.

Due to the passage of House Bill 259, Ohio law now instructs the BWC to establish conditions and criteria that might reduce or waive negative experience to be transferred to an employer who is a successor in interest.

“My company has opened four restaurants in Northeast Ohio the last few years,” says Operations Manager of Driftwood Restaurants Toby Heintzelman. “In three cases—and despite the fact that our company did not buy these businesses from the previous owners—we were surprised to learn that we were expected to pick up the previous companies’ workers’ compensation history. It made no sense. Moving forward, we’re encouraged that business owners will be responsible for the real risk they bring, not the history or disputes of former occupants.”

BWC also now provides a limited release of relevant workers’ compensation information before an acquisition or merger occurs. To help facilitate these requests, the Request for Business Transfer Information (AC-4) Form has been created. This form, which both parties must sign, allows the buyer to view any outstanding liabilities as well as the risk experience of the predecessor.

“The Governor, Ohio BWC, and legislative leaders like former State Representative Barbara Sears are to be commended for listening to the business community and acting on this issue,” says Millard. “The old approach served to prevent, or even worse, penalize new business creation in previously occupied or abandoned facilities. We’re confident these common sense changes will provide small business owners with greater clarity when they move to a new place or open up a new business which will help revitalize Ohio neighborhoods and lead to economic growth.”

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What is an Employer Identification Number?

imagesAn employer identification number (EIN), also known as a federal tax identification number (TIN), is used to identify a business entity.  Generally businesses need an EIN.  If you answer yes to any of the following questions, your business must get an EIN:  Do you have any employees?  Do you operate your business as a corporation or partnership?  Do you file an employment, excise or alcohol, tobacco and firearms tax return?  Do you withhold taxes on income, other than wages, paid to a non-resident alien?  Do you have a Keogh plan?  Are you involved with any of the following:  Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns; estates; real estate mortgage investment conduits; non-profit organizations; farmers’ cooperatives; or plan administrators?

It’s important to remember that a business entity is separate and distinct from its owner(s), and as such needs its own identification.  You can apply for an EIN online, for free, and receive your EIN immediately.  The application is fairly straightforward and takes only minutes to complete.

 

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Registering Your Trademark or Service Mark in Ohio, Part 1

Although many people think of federal trademark or service mark protection, if your mark will not be used in interstate commerce you may want to consider an Ohio filing.  Registration of a mark provides two things.  First, it provides actual public notice.  By registering the mark with a central filing agency, the mark is available for public scrutiny.  This benefits both the owner, who seeks exlusive use of the mark, and a potential filer who seeks to ensure that her mark does not conflict with a mark already in use.  Second, registration of a mark might be used as evidence in the event an infringement claim is pursued by the registrant.

A trademark is “any word, name, symbol, device, or combination of any word, name, symbol, or device, that is adopRegisteredTM.svgted and used by a person to identify and distinguish the goods of that person, including a unique product, from the goods of other persons, and to indicate the source of the goods, even if that source is unknown.”

A service mark is “any word, name, symbol, device, or combination of any word, name, symbol, or device, that is adopted and used by a person to identify and distinguish the services of that person, including a unique service, from the services of other persons and to indicate the source of the services, even if the source is unknown.”

While a mark may meet either of these definitions, there are several restrictions to consider first.  Any mark that consists of or comprises any of the following will not be accepted for filing:

  1. Immoral, deceptive or scandalous matter;
  2. Matter that may disparage or falsely suggest a connection with persons living or dead, institutions, beliefs or national symbols, or bring them into contempt or disrepute;
  3. The flag or coat of arms or other insignia of the United States, or of any state or municipality, or of any foreign nation, or any simulation thereof;
  4. The name, signature or portrait of any living individual, except with her written consent;
  5. A mark which, when applied to the goods or services, is “merely descriptive,” “deceptively misdescriptive,” or is primarily geographically descriptive;
  6. A mark that is primarily merely a surname;
  7. A mark that resembles a trademark or service mark previously used in Ohio by another entity and is not abandoned, and is likely to cause confusion, mistake or is deceptive; or
  8. A mark that resembles a mark registered in the U.S. Patent and Trademark Office by another entity and is not abandoned, and which is likely to cause confusion, mistake or is deceptive.

 

 

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Secured Transaction, cont.

In addition to a sigsecured loanned security agreement, a security interest is not enforceable unless the secured party has given value, such as if the secured party provides the debtor with a loan, or sells or otherwise delivers goods to the debtor.

A security agreement may provide for past, current or future loans that a creditor may make to a debtor.  With the debtor’s consent, an existing creditor might obtain collateral for a past loan, and the earlier loan provides the necessary value. A security interest may also secure a loan made at the same time the security interest is taken. In addition, the security agreement may specify that the collateral will secure a loan that will be made in the future. If the creditor makes a binding commitment to make a future loan, that binding commitment provides the necessary value. However, if the creditor merely retains the option to make a future loan, value is not given and the security interest does not attach until the future loan is made.

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What is a Partnership?

A partimagesnership is an association of two or more people to carry on as co-owners of a business for profit.  A partnership can be a general partnership or a limited partnership.

Many people decide to form a partnership because it allows for a pooling of owner assets, both monetary and skill sets.  In a general partnership, owners have unlimited personal liability for all debts of the partnership.  Unless there is an agreement stating otherwise, any partner may bind the partnership to an agreement with a third party.  Even in the case of an agreement stating otherwise, a partner’s actions may still be binding up the partnership.

It is for this reason that I caution people not to refer to other people as partners.  Third parties can rely on this representation, which may result in you being bound to obligations to which you did not actually agree.

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Signed Security Agreement

A security interest is enforceable against the debtor when it has been attached to collateral.  Unless the secured party takes possession of the collateral, attachment requires an authenticated record, typically a written security agreement signed by the debtor.  The agreement must indicate that the debtor has conveyed an interest in the collateral, and include a description of the collateral that reasonably identifies the collateral by item or type.  For example, a description of “all of the debtor’s property” or a similar non-specific description is insufficient.  If the collateral is consumer goods, securities, a “commercial tort claim”, or if the loan is made for the personal, family or household purposes of the borrower, the agreement must describe the collateral in greater detail.  Otherwise, the agreement may describe the collateral by its type, such as “equipment”, “inventory” or “accounts”.

Fountain Pen and Signature

If the collateral is other than consumer goods, i.e. those items that are bought or used primarily for personal, family or household purposes, the security agreement may cover both existing collateral and “after-acquired” collateral provided that the agreement specifically states as such.

The attachment and enforceability of a security interest is governed by Ohio Revised Code Section 1309.203.

The United States Federal Trade Commission restricts the types of consumer goods which can collateralize most loans. With certain limited exceptions, the FTC prohibits a secured party from taking a security interest in most household goods, including clothing, furniture, appliances, one radio, one tv, linens, china, crockery, kitchenware, personal effects and wedding rings. There is no such prohibition on security interests in works of art, other electronic entertainment equipment, items acqured as antiques (more than 100 years old) or other jewelry. See Title 16 of the Code of Federal Regulations, parts 444.1-444.5 (2006) for additional information.

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What is a Secured Transaction?

A secured transaction is a credit or loan transaction in which the borrower agrees to give the lender a security interest in the borrower’s property, known as the collateral.  If the borrower defaults, the lender (secured party) can take possession of the property and sell it to recover the value of the loan.  The security interest is a lien on the borrower’s property.  These transactions are governed by Ohio Revised Code Chapter 1309.

To protect its security interest, a secured party must “perfect” its lien, which is usually done by filing a financing statement with the secretary of state.  The secured party may sometimes perfect its lien by being in possession of the collateral, however in most situations this is impractical.  There are other complicated exceptions to the filing requirement set forth in the Ohio Revised Code.

Screen-Shot-2012-12-18-at-10.33.47-AM1By perfecting its lien, the secured party will be able to enforce the lien in the event the borrower seeks protection from its debts by filing for bankruptcy.  And even outside of a bankruptcy situation, the secured party will want to perfect its lien to protect the collateral from the claims of other creditors.

Chapter 1309 does not apply to mortgages or other interests in land.  Real estate mortgages are governed by Ohio Revised Code Chapter 5301.

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Client Testimonial

“I’ve been working with lawyers and governance issues for more than 20 years.  Working with Nancy brings all the bests together – she has a great mastery of non-profit law and governance issues; she is brutally efficient – resulting in great value for the investment in her work; and, she has a way of breaking down complicated issues to promote understanding and good decision making.  I’d highly recommend Nancy for your non-profit legal needs.”  Steve Millard, President and Executive Director, COSE | Council of Smaller Enterprises