In addition to these issues of agency and entity formation/governance there are a few other basic areas that seem appropriate to discuss here. This review is intended merely to point out some other commonly troublesome areas.
While the law of contracts is quite complicated, and rightly deserves a more thorough treatment elsewhere (link to Contracts article) there is one common issue that crops up far too frequently with contracts. When you sign a contract you are legally binding someone to do something. Just who that “someone” is depends on how you sign the contract. If you sign you own name, without specifying anything else, then you are legally bound by that contract. It doesn’t matter if you are an LLC or a corporation and you only formed the entity to avoid being personally responsible; if you sign on your own behalf you have just circumvented those liability protections.
If, on the other hand, you sign your name on behalf of the business, in your capacity as an agent, partner, officer, director, member or manager then your business is the “someone” who is bound by the contract. You may still be liable for the business’ debts in some cases, but signing on behalf of the business as an authorized agent means that the business, not you personally, is one of the parties to the agreement.
In some instances, like a commercial lease with a landlord, you may have to sign on behalf of the business, and to personally sign as well. This has the effect of making both you and the business bound by the terms of the contract.
So, make sure that you not only know what you are signing, but please be mindful of HOW you are signing.
It is also worth mentioning, without getting into a full discussion of trademarks and branding, that it is important to keep a few considerations in mind when naming your business. LLCs and corporations receive a name when they are formed, but partnerships and sole proprietorships do not. If you form a partnership, or do business as a sole proprietor, and wish to use a name for your business you must register what is known as a fictitious name. This is also true for LLCs and corporations that use any name other than the name under which they were formed (even dropping the suffix “LLC,” “Corp,” or “Inc.” is enough to require a fictitious name registration) to transact business.
You can use almost any name you like as a fictitious name for your business (also referred to as a DBA, for “doing business as”) as long as it is not the name of another business. Be aware, however, that the state corporation commission does not look at the names from a trademark perspective (where confusingly similar names can land you in hot water) but only to see if the exact name you want to use is already taken.
All registered business entities are required to have a registered agent. This agent is not like the agents we discussed at the beginning of this article, who act on behalf of the business, but rather is someone who serves to accept certain communications (including lawsuits) on behalf of the business. This enables individuals who need to contact the business to do so even when they do not know exactly where the business is located.
A topic in its own right, due diligence is a process, although some may consider it an ordeal in the traditional sense of the word, that any company seeking outsider investors is going to have to go through. It is the process by which an investor looks under the hood, examines the company, and looks for flaws. They aren’t hoping to find flaws, but they want to find them BEFORE they put their money into your business. Just how detailed and invasive this process is depends on the investor, but also on the amount of the investment and the stage of your company’s development. Some things that may be requested during this process are your formation documents, partnership agreements, employee contracts, NDAs and non-compete agreements, intellectual property assignment contracts, accounting and financial statements, and copies of any of your supplier/vendor contracts. The investors will want to assure themselves that what they are putting money into is what they think it is, so expect a thorough examination of these, and many other, documents.
If you have not been keeping the proper records, or if you are missing certain contracts, authorizations, or agreements, you may be able to fix the problem, but fixing the problem takes time and money. Even worse, it may signal to potential investors that you aren’t very well organized, and cause them to doubt your ability to successfully run a business. Otherwise perfectly viable companies can die during the due diligence process as opportunities are missed and critical deadlines go unmet. If you have any intention of raising capital down the line you really need to familiarize yourself with the due diligence process, keep the likely requirements in mind, and make sure that you are taking the right steps at every stage of your company’s development.
© 2016 John V. Robinson, P.C.