What's an LLC?

Curious about LLCs? Here’s a guide that explains what this structure is, how you can form one and what the benefits and disadvantages are.

A limited liability company (LLC) is a hybrid legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The owners of an LLC are referred to as members. Depending on the state, the members can consist of a single individual (one owner), or two or more individuals, corporations or other LLCs.

Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership.

Forming an LLC

While each state has slight variations in its requirements for forming an LLC, they all adhere to the same general principles:

Choose a Business Name. There are three general rules for your LLC’s name: 1. It must be different from an existing LLC in your state, 2. It must indicate that it is an LLC (such as LLC or Limited Liability Company), and 3. It must not include words restricted by your state (such as bank or insurance).

File Articles of Organization. This is a simple document that includes information such as your business name, address, registered agent and sometimes the names of the members. In Ohio you file with the Secretary of State, though in other states it may be the State Corporation Commission, Department of Commerce and Consumer Affairs, Department of Consumer and Regulatory Affairs, or the Division of Corporations & Commercial Code. There is typically a filing fee that must accompany the articles of organization.

Create an Operating Agreement. Most states do not require operating agreements. However, an operating agreement is highly recommended for multi-member LLCs because it structures your LLC’s finances and organization, and provides rules and regulations for smooth operation. The operating agreement usually includes percentage of interests, allocation of profits and losses, members’ rights and responsibilities, buy-out provisions and covers other important items.

Obtain Licenses and Permits. Once your business is registered, you must obtain other necessary business licenses and permits. Regulations vary by industry, state and locality.

LLC Taxes

In the eyes of the federal government, an LLC is not a separate tax entity so the business itself is not taxed. Instead, all federal income taxes are passed through to the LLC’s members and are paid as part of their personal income tax. Note that though the federal government does not tax income on an LLC, some states do.

LLCs must file a corporation, partnership or sole proprietorship tax return. Talk with your accounting professional to determine whether your LLC is automatically classified and taxed as a corporation by federal tax law, or which tax classification to choose that best meets your needs, as well as which tax forms to file. For additional guidance visit IRS.gov.

There is an additional option of requesting S-Corp status for your LLC.  You’ll have to make a special election with the IRS to have the LLC taxed as an S-Corp, and must file prior to the first two months and 15 days of the beginning of the tax year in which the election is to take effect.  The LLC remains a limited liability company from a legal standpoint, but for tax purposes it can be treated as an S-Corp. Be sure to contact the state’s income tax agency to determine how it handles an S-Corp election as well. Your accountant can best guide you in making these decisions and filing the proper paperwork.

Advantages of an LLC

Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members’ personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means “limited” liability—members are not necessarily shielded from wrongful acts, including those of their employees.

Less Recordkeeping. An LLC’s operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are lower start-up costs.

Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might also contribute different proportions of capital and sweat equity. Consequently, it’s up to the members themselves to decide who has earned what percentage of the profits or losses.

Disadvantages of an LLC

Limited Life. In many states, when a member leaves an LLC the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.

Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions toward Medicare and Social Security. The entire net income of the LLC is subject to this tax.

New Tax Considerations

Effective January 1, 2018, the tax audit rules affecting LLCs have changed. If you have an existing LLC, it is important to update your operating agreement to accommodate these critical changes.

Stacy is a founding member of BauerGriffith, a business law firm providing high quality legal and business counsel to a wide array of clients, with an emphasis on non-profit organizations, small business and individual planning clients. She serves as outsourced corporate counsel for diverse clients, partnering with executive management to design, plan and implement stated and defined business objectives within legal parameters.

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  • Next up: What the NFL Draft Can Teach You About Finding the Best Talent
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  • What the NFL Draft Can Teach You About Finding the Best Talent

    In the first of this two-part series we are exploring three of seven objectives to keep in mind while securing the best employees for your business. Join us next month as we wrap up with the last four objectives to an effective recruiting, hiring and induction system.

    Every year at this time the NFL talent search is in full swing as scouts, coaches and owners strive to upgrade their team’s performance. Starting at season’s end they dissect results at every level to identify the gaps and needs for the coming season and how best to fill those gaps. Each of the 32 teams only has 53 slots to field a team that can win the division and make the playoffs.

    Of all the priorities you face building a successful business, one priority has to be establishing a successful sales team. The primary purpose of any successful business is to attract and retain customers, so it is logical that a talented team has to be high on an owner’s and leader’s priority list.

    As with professional sports, your goal is to get the right people in the right seats and select a candidate who has the best chance of being successful for you.

    • RELATED: Do the sports analogies really hit it out of the park for you? Here are some lessons from the Cleveland Cavaliers and the Cleveland Indians that you can apply to your small business.

    A proven recruiting, hiring and induction system should be based on seven specific effective objectives. Here we discuss the first three, and we will take a deep dive into the other four objectives next month.

    Objective No. 1: Win the talent war

    Start with your growth goals. Depending on the number of openings, the right hire can have dramatic impact on your results.

    Growing a business provides a continuous opportunity to energize and engage your whole team and help you attract the proven performers you need on your sales team. Your story as a growing company is attractive in a market where employee engagement is a major cause for top performers to look for new opportunities. Your recruiting process needs to intercept with those who are actively looking.

    Start your recruiting process with the goal of hiring the talent you will need to deliver your revenue growth trajectory over the next 12 to 36 months. Think like an investor and put your money in the best spot for revenue growth.

    You have X number of openings now or in the coming months—what kind of talent do you need? Are you dependent on “top performers” for a majority of your sales? Do you have real growth opportunities over the next 12 months? Do you have a specific sales talent gap and do you have the talent you need to capture these opportunities?

    What do you need to do differently to attract and hire the best talent who can do the job and win? The process of recruiting is a major challenge for business owners and leaders. Like any process in your business, improving the performance of your sales recruiting process is an ongoing exercise.

    Start with where you are today.

    Objective No. 2: Develop a sales candidate “profile”

    As we are learning from our marketing experts, the development and use of a customer profile helps a company understand what the perfect buyer needs and wants. The same process can work for attracting the perfect sales candidate. Your profile must take you beyond the experience listed on a resume and LinkedIn or found in a background check.

    What is the profile of a top performing B2B sales person? The best performers consistently get the sales job done so it is essential that your candidate profile identifies the things your top talent does consistently to win.

    Identify the behaviors and attitudes that proven performers display. Are the candidates comfortable with winning, goal achievement, money, success and a desire to win, or are they insecure and have limiting beliefs that undermine performance and make them complacent at a certain level of success? Do their personal beliefs, values, attitudes, biases and behaviors that impact success align with your company culture and values?

    Do they need to remain calm and confident to make sound decisions when under stress or in chaotic situations? Do they need to be adaptable, accept feedback, be coachable and willing to learn and change?

    Define the proven skills you need now and in the future. Past success may not always guarantee future success in a new environment so the interviews have to uncover areas of concern. The profile and your interview process help reveal the hidden sales weaknesses of a salesperson. Your process needs to identify the strengths and the weaknesses in order to determine their potential for getting the sales job done. Create a candidate scoring and ranking system that allows your interview team to keep score at every stage.

    Objective No. 3: Attract and recruit the talent that fits your profile

    Now that you have a candidate profile, you need to develop an attraction plan similar to the ones used for customers. As with attracting customers, talent recruiting is a two-way interview process. The question for the candidate is, “Why should I want to work for you?”

    As you are assessing and evaluating candidates, candidates are evaluating you against their current employer as well as others looking to upgrade their teams. The purpose, reputation and “brand” of your company—the job, the career, and earning potential, as well as the environment and culture of your company—are part of the candidate’s evaluation.

    The goal of the job advertising process is to attract resumes that best fit your criteria and help you find “fully formed" adults who have the competencies you need; they fit your culture and they demonstrate the positive attitudes, behaviors and passion to get the job done consistently.

    The goal of your advertising strategy is to grab their attention, get them interested and attract qualified prospects who are currently working but are actively looking for something better. Why you? Is your opportunity better?

    The best hiring decisions come down to your needs against a profile that details the proven skills, attitude and behaviors and the fit with the unique culture of your company. Stay tuned for objectives four through seven next month!

    Wayne Bergman is a business and executive coach and founder of Consistent Business Growth. Questions or comments about this piece? Email him directly at wayne@cbgrowth-gfm.com.

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  • Next up: When, Where and How to Conduct Employee Workplace Searches
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  • When, Where and How to Conduct Employee Workplace Searches

    Here are a few things to keep in mind if a search of employee space or property is ever needed.

    Company searches of employee space and property are sometimes necessary to preserve safety, workplace confidentiality, and other important company policies. Employers often wonder what is fair game for a search if they suspect something is amiss, or if they want to be proactive about policy enforcement. The answer is, inevitably, “it depends.” Employers can better protect themselves from claims of violations of privacy with knowledge of a few factors for determining the proper scope of a search, as well as the correct procedures for carrying one out.

    The Reasonableness Standard

    Federal and Ohio laws give us some guiding principles on whether an investigation is legal in the first place: it is generally so if (1) there is a reasonable basis for suspicion that the particular employee has committed a breach of policy, or (2) no reasonable expectation of privacy in the item or location exists. In the employment context, there is no need for a warrant or probable cause to conduct a search.

    Expectations of Privacy

    A company typically has an unfettered interest in its property, so there is no expectation of privacy by the employee. Company items with no expectation of privacy might include lockers, desks, and company phones or vehicles. Unless your company space is clearly provided for the private use of the employee, such as a bathroom or changing room, an employee generally has few rights to privacy while on company premises.

    However, an employee has an unqualified expectation of privacy in his or her own body. Cavity searches, undergarment searches, and, in most cases, pat-downs are off limits. If a situation is so delicate and the suspicion so heightened that you feel you need to perform a physical search of an employee do not do it. Your management staff should instead contact law enforcement.

    Somewhere in the middle, an employee has a high but qualified expectation of privacy in his or her own personal belongings. This expectation may be weakened by the company’s workplace search policy if the policy identifies with specificity personal property that is subject to search. Remember, however, that a company workplace search policy must be tailored to the interests that the company seeks to protect (and at this point, we’re really talking about “reasonable suspicion,” which we delve into below).

    Reasonableness of Investigation

    If an investigation is legal, the determinative question for whether the search of any particular space is proper is whether reasonable suspicion exists that evidence of a policy violation or crime may be found there. Reasonableness is fact-sensitive and varies by the case, but the most important point is that the search itself should be tailored to its purpose and the nature of the suspected misconduct. In short: no fishing expeditions.

    There are many factors that support the reasonableness of a search. Before conducting a search, try to make sure your search hits as many of the following factors as possible:

    • whether the search was on, or of, company or personal property;
    • whether the search was of a space or item in which the employee had a diminished expectation of privacy;
    • whether there is credible evidence of misconduct;
    • whether the search is for a limited purpose and the search scope is limited to that purpose;
    • whether the employee is public or private (public employees have greater protection under the 4th Amendment; these constitutional protections have been extended to private employees in nine states, not including Ohio);
    • whether the search was conducted by authorized personnel;
    • whether the employee was notified of the search beforehand, and whether he or she acquiesced to it; and
    • whether there was a clear written policy informing workers about workplace searches.

    The search policies …

    In most cases, a well-written workplace search policy can set employee expectations for the course of employment. Your policy should be drafted by your human resources department or an attorney with experience in HR and employment law.  As to all policies, they are only as useful as your employees’ understanding of them. Before acting on a policy, you should make sure that your employee has knowledge of the policy, and ideally has signed a statement attesting that they have read and understood the policy.

    A private company sets the rules, for the most part. Employees are employed subject to your search policies – so long as the policies are legal and the employees are apprised of them upon hiring and as changes are made. Remember though, the policies should be in service of your legitimate company interests – safety, confidentiality, etc. – and should be reasonable in all respects. If the policy is unreasonable, it won’t help you much down the road if and when a company receives a claim against it.

    … And procedures

    Once you have your policies in place, assemble a team to administer the policies. Designated Human Resources personnel should be put in charge of investigating claims and carrying out searches. It’s best practice to have multiple people perform searches, with at least one recording what the search uncovered. Recordkeeping helps avoid liability if something is later reported missing.

    It’s also a good idea to be mindful of gender considerations for sensitive searches; a search should be conducted by at least one person of the same gender in case private or sensitive items must be searched.

    Reports of searches should include the reason for the search, the personnel conducting the search, the date and time of the search, the subject matter of the search, what was found, which items were seized, whether the employee was present, and what instructions were given to the employee following the search. All of this should be delivered to the Human Resources or risk management director for evaluation.

    Before developing a search plan, you should first verify available evidence of misconduct wherever possible. In developing the search protocol for any particular offense, consider the worker’s privacy expectations and map out your strategy accordingly. Always ask for written consent immediately before beginning; you should communicate the investigation process to the employee so that he or she is fully informed.

    Finally, if your policies are well-drafted, feel confident acting accordingly, but never physically detain an employee or use physical or verbal threats or coercion to enable a search. If an employee refuses to cooperate, you can assert additional disciplinary action, but be careful not to cross a line that could lead to civil liability or criminal culpability.

    Nick Weiss is an attorney at The Gertsburg Law Firm. An audit of your policies can help you avoid the pain of lawsuits. The Gertsburg Law Firm introduces CoverMySix, a one-stop legal audit for your business, led by award-winning litigators and in-house counsel. CM6 minimizes your exposure to lawsuits, investigations, disgruntled employees and customers, and all the damage that comes with them. Learn more about how to protect your business from lawsuits at covermysix.com.

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  • Next up: Emergency or Not? Where to Turn for Medical Care
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  • Emergency or Not? Where to Turn for Medical Care


    When you or a loved one is ill or injured, quick treatment is your top priority. But unless you think your problem is immediately life threatening, it’s best to call your primary care provider (PCP) before heading to the emergency room (ER). Your PCP can discuss your symptoms and tell you where to get the proper care and avoid any unnecessary medical costs.

    Below, we’ll discuss when is the right time to visit the ER, an urgent care clinic or convenience clinic.

    When to Use the Emergency Room
    The ER is best for treating life-threating conditions and injuries in need of immediate care. Since ER staffs are trained to treat these high priority patients first, anyone sitting in the waiting room with a non-emergency symptom like a sore throat or low-grade fever could be left waiting for long periods of time. ER visits can also result in expensive out-of-pocket costs because many insurance plans include higher ER copays or don’t cover ER visits at all if the situation is not determined to be a true emergency. 

    You should turn to an ER in instances of:
    Compound fractures
    Major head injuries
    Severe pains
    Poison ingestion
    Animal bites
    Severe burns
    Chest pains or symptoms of heart attack
    Any symptom or injury that is threatening the patient’s life 

    Be sure to understand how your ER coverage works with your insurance plan to avoid unexpected bills and only go to the ER in the case of a true emergency. 

    Non-emergency Options to Receive Care
    Medical Mutual wants you to get treated at the right place and with the efficiency, quality and attention you deserve. If you have a minor illness or injury you think requires prompt attention, but can’t reach your PCP, urgent care clinics and convenience clinics are good, and usually less costly, alternatives to the ER.

    Urgent Care Clinic
    Not only will you save time, but you’ll save money. Urgent care clinics offer shorter waiting times, and sometimes you can be seen immediately. Some clinics are open 24/7 and most others have extended hours (early morning, late evening and weekend hours). Clinic staff members are specially trained in treating minor injuries and illness, and they will recognize if a higher level of care is needed and refer you appropriately. 

    An urgent care clinic can help you with: 
    o Asthma and wheezing
    o Back pain
    o Colds and flu
    o Ear or eye infections
    o Minor allergic reactions
    o Minor lacerations or burns
    o Rashes
    o Respiratory infections
    o Sore throats
    o Sprains or strains
    o Urinary and kidney tract infections

    Convenience Clinics
    Convenience clinics are another good option for treating minor illnesses and injuries. These clinics are often located in drug stores and grocery stores and are staffed by nurse practitioners or physician assistants who can diagnose and treat many illnesses and write prescriptions.

    A convenience clinic can help you with:
    o Sore throat or bronchitis
    o Pink eye
    o Ear infections
    o Various vaccinations

    Finally, if you receive treatment from an urgent care or convenience clinic, don’t forget to schedule a follow-up appointment with your PCP to discuss the course of treatment prescribed and see if further instructions are needed.

    Finding a Facility
    When looking for an ER, urgent care or convenience clinic, it’s important to always check that the facility is in your health insurance network to avoid expensive out-of-pocket costs. If you are already a COSE MEWA member through Medical Mutual, finding a facility is easy with our Find a Provider tool

    The material provided is for your information only. It does not take the place of your doctor’s advice, diagnosis or treatment. You should make decisions about your care with your doctor. What is covered by your health insurance will be based on your specific benefit plan.

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  • Next up: Who Are Millennials? What You Need to Know to Attract the Young Top Talent to Your Company
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  • Who Are Millennials? What You Need to Know to Attract the Young Top Talent to Your Company

    If they’re not already, millennials are going to be a big part of your company’s growth. Here’s how to recruit this dynamic group.

    There are 80 million millennials in the United States. There are 2.5 billion millennials worldwide. In 2016, the number of young professionals in Cleveland numbered more than 175,000 and this population growth outpaced total population growth, post-recession. Just by their scale alone, the millennial generation is a force that businesses need to be aware of.

    But it extends beyond just sheer numbers. This group also shares a unique mindset as it relates to how they approach their career. The Generation Ys, The Millennials and the Gen Nexters. When recruiting and engaging these employees where do you begin? The best way to answer that question is to get a better idea of what is motivating the millennial generation as it is a generation with its own mindset. Research suggests that millennials have different aspirations with their work:

    • They want to make a difference.
    • They are achievement-oriented.
    • They stay in positions for only 1.8 years on average.

    Now that we know a little more about this group, let’s go back to the original question above: How can employers recruit and engage this group? Let’s break it down bullet-by-bullet.

    They want to make a difference

    If you want to make a young professional happy, help her/him discover and connect to their purpose. One good way to do this is to use organizations such as Engage! Cleveland as an extension of your HR department. These organizations can introduce your millennial employee to difference-making opportunities that will help keep their batteries charged and make for a more satisfied employee. Research shows that employees who are engaged in their community are 2-3 times more likely to stay.

    They are achievement-oriented

    Related to the point above, establish creative ways to build professional skills such as getting involved in the nonprofit world. Show them how they can gain skills outside of the work place and how it will help their career. A Millennial might want to be a manager, but doesn’t currently manage other employees. As an example, managing volunteers can be more challenging than managing employees, so, if they can learn to manage volunteers at a nonprofit, they will be in a better position to someday manage employees. This is a check in the right column.

    They stay in positions for only 1.8 years on average

    If you recruit a millennial employee, you likely want that person to stick around as turnover is a big, scary word in HR. Older generations cared about one thing…drum roll please…MONEY! Salary increases aren’t the only way to increase a millennial’s job satisfaction. Offer a title change and other ways to impact their work and workplace. You might also consider other perks, such as additional vacation time or a flexible schedule. These “perks” that often don’t cost the company money are no brainers and lead to more satisfied employees.

    Also, millennials value those companies that honor work-life balance and societal issues. Think about how your organization can best offer a good work-life balance mix and perhaps hold back a bit of salary in exchange. It could very well be a win win for both you and your Millennial employees.

    A long-term force

    Millennials are going to be a force on the employment scene for some time. Estimates show that 75% of the 2025 workface will be Millennials. So it is imperative, that you think through some of the items above and how they might intersect with your company’s philosophy and you will put your company in a good position to align yourself with millennial recruits.

    And just in case you were getting tired of all of the Millennial data, don’t worry, Gen Z, those born between the mid 1990’s and mid 2000’s, will be entering the workforce soon with an entirely different set of priorities.

    Ashley Basile Oeken is president of Engage! Cleveland, a nonprofit whose mission is to attract, engage and retain young, diverse talent to the Greater Cleveland area. Learn more about her organization’s work by clicking here.

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  • Next up: Building the Matrix: Who’s Responsible for Your Company’s Decisions?
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  • Building the Matrix: Who’s Responsible for Your Company’s Decisions?

    Sometimes simply following the law isn't enough to ensure decisions impacting your company go smoothly and that your reputation is protected. Learn how a matrix of authority can help.

    It is difficult to keep a company on the path of legal compliance and to maintain its reputation especially since following the law does not necessarily protect an organization’s reputation. 

    Recently, AT&T and Novartis experienced the pain a bad decision can have on reputation and financial value. The CEO’s for both Novartis and AT&T gave mea culpas for hiring Michael Cohen, Donald J. Trump’s former lawyer.   

    Novartis’ chief executive explained that it was a bad decision for his company to pay Michael Cohen $1.2 million dollars to consult on how the Trump administration would approach policy decisions related to the Affordable Care Act.   

    Likewise, AT&T’s CEO said that “Hiring Michael Cohen as a political consultant was a big mistake." Cohen was going to advise AT&T on the key players in the Trump administration; on those key players’ priorities; and on “how they think,” including the administration’s approach on AT&T’s proposed merger with Time-Warner.

    To be clear, according to both companies, their decisions to hire Cohen were legal since hiring someone to provide a corporation with insight into an administration in itself is not a crime.

    In fact, Cohen is not the first person to sell his knowledge or experience with a particular administration. Many who have held government positions or who have unique access and knowledge about the government are hired as “consultants” or “lobbyists.” And, this is not just a U.S. thing. Most businesses that work internationally know that retaining a former government official, in almost any country, to consult on how the government operates and to make introductions facilitates developing business.

    But, with this benefit comes risk. Consultant and lobbyists—whether in the U.S. or outside of the U.S—who have access to government officials or former government officials, or who otherwise have “inside” government information, although capable of providing valuable political strategy to a company, may also, intentionally or unintentionally, expose a company and its employees to reputational damage and to criminal behavior such as bribery, conflicts of interest, and a whole host of other crimes. 

    As a result, when an organization decides to hire a consultant is connected, like Cohen is, the organization should proceed with caution. First, conducting due diligence on the consult is a must so you can know who their family members and business partners are, where they are invested, what they did in the past, what they will do with the money you pay them, etc. 

    Second, an organization needs to make sure that leadership, including its lawyers, know a consultant with ties to the government is going to be hired, this includes the fees to be paid to the consultant, and the scope of the work. 

    The CEO’s for both AT&T and Novartis admit their mistake in hiring Cohen was a result of “moving too fast” and a lack of due diligence. More precisely, Novartis’ CEO said he really did not even know who Cohen was and, very soon after signing the agreement with Cohen to provide policy advice, it became clear to Novartis that Cohen had oversold his ability to advise on health policy. 

    As for AT&T, apparently AT&T’s government affairs group hired Cohen; and according to AT&T’s CEO, Cohen was not adequately vetted. In the wake of this matter, the leader of AT&T’s government affairs group will retire; and, going forward, AT&T’s government affairs team will report to AT&T’s lawyers.

    AT&T’s decision to place the responsibility and authority to hire political consultants in the hands of its lawyers is one way of mitigating the risk of the reputational damage it and Novartis suffered. But not the only way, because at Novartis, the lawyers were involved, yet Cohen was still hired. Novartis’ general counsel resigned over the matter.

    The facts that are known about how AT&T and Novartis decided to hire Cohen demonstrate why it is vital to define who within an organization has responsibility and authority to make decisions that have the legal and reputational implications that hiring Cohen had. 

    An effective way to clearly define responsibility and authority, essentially who owns a decision, in an organization is through a well-configured “matrix of authority.”

    A matrix of authority broadly identifies the decisions a company regularly makes, for example retaining political consultants, leasing factory or office space, merging or acquiring another company. Once the decisions are listed, each decision should then map to the role/function/title within the organization that has authority and responsibility to make the decision. The role/function/title listed as the “decider” should have the necessary clout, experience and knowledge depending on the type of decision. For example, a decision to re-brand the company would sit with the CEO but also an organization’s marketing leader. Or, a decision to re-finance debt, depending on how much debt, may rest with the CFO or the CFO’s designee.

    The AT&T and Novartis situations further demonstrate how a matrix of authority should be designed and how it may blunt legal and reputational damage.

    As a result of the Cohen hire, going forward AT&T lawyers now own the decision on whether to retain political consultants. Theoretically, the lawyers should know the legal requirements that apply to working with political consultants who have government ties – for example lobbying, ethics and corruption laws. With this knowledge, the lawyers should be able to assess the legal and reputational risks of the decision; advise leaders on these risks; and advise on steps to manage these risks.

    However, for political consultants with Cohen’s connections and profile, the lawyers should not have the final say. Rather, the matrix of authority should assign final authority and responsibility to the AT&T CEO and possibly its board, informed by the lawyers. 

    If, for example, the Novartis CEO had been clearly identified as the individual with the final authority and responsibility to retain political consultants like Cohen, then the CEO would know it was his obligation to make sure he is satisfied that the hiring decision complies with the law and is in the best interest of the company. Rather, than having to explain his company’s decision after the “writ” has already hit the fan.

    The matrix of authority also relieves leaders of having to review every decision. For example, if a company wants to hire a political consultant to advise on a state’s approach on public-private partnerships and the consultant is a professor focusing on public-private partnerships with no government relationships, the final authority and responsibility may rest with more junior lawyers and managers. Thus, leaders are not burdened with these less risky decisions. For, I can assure you, many an organization develops procedures and policies to blunt some risk, only to find it has gridlocked itself with some onerous review and approval process which ties up leadership with decisions they don't need to make.  This ends up making everyone in the decision chain frustrated; and, slows business decisions without necessarily mitigating risk.

    Without defining who has responsibility for decisions, organizations risk exposing themselves to decisions being made without adequate facts; without adequate subject matter advice; and without the judgment and knowledge of leadership. A matrix of authority provides clear definition to both employees and leaders on who owns decisions; and, as a result fosters more thoughtful decisions. Because, for most of us, when we know we have the responsibility, we act with more diligence and thought.  So, had the AT&T and Novartis CEOs knew of their organizations’ decisions to hire Cohen, they may have thought through the implications and may not have found themselves having to explain their mistakes.

    "It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong." Thomas Sowell

    Margaret Cassidy is principal at Cassidy Law. Learn more about the firm’s capabilities by clicking here.

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