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How To Write A Contract Without A Lawyer & Make It Stick

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meeting-handshake-pixabay_optEven in a world where people attempt almost any skilled task with the help of Google, YouTube, or Legal Zoom,  people continue to ask: is this contract legal?

They aren’t asking (usually) whether the subject matter of the contract is permitted by law.

They really want to know: will what I’ve written be enforceable.

What makes it a contract

There are no magic words or phrases that make a contract enforceable by a court.

Enforceability is not acquired by adding “whereas” or “notwithstanding“.

A contract need only establish that one party made a promise to the other for consideration. Consideration is legalese for money.  Or something else of value.

If I promise to join you for dinner next Friday, we have not created an enforceable contract, because there was no valuable consideration exchanged.  My promise was gratuitious.  You didn’t offer me anything but your good company over a meal.

If , on the other hand, I promise to speak at the event you’re planning, for which you’ll pay my  fee, then we have an enforceable contract.  I will appear and speak, and you will pay.

If either of us fails to do what we’ve promised, a court will attempt to give the injured party the benefit of the bargain.

So here are four tips on drafting a contract that does the job. [Read more…]

Your Business Partnership Needs A Prenup

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Wedding_2Financial partnerships are at least as challenging as marriages.  And business deals don’t have love to smooth the rough spots in the relationship.

The traditional marriage service ends with the charge that what God has joined together,  let no man put asunder.

That’s great with love, but not so great with money.

Something will likely asunder the business venture.

Yet people pool their money in business, real estate, and investments without a thought to how the partnership will end.

Chances are, it will end, and that end can be very messy and miserably expensive.

My charge to those pairing up for an investment is this:

At the start of any venture involving pooling money, lay out some rules for how you part in the end.

Think of your business wind-up rules as a prenuptial agreement for your business. [Read more…]

5 Small Business Mistakes To Avoid If You Want Success

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small businessEveryone tells you what to do to succeed in business;  you also need to know what not to do if you don’t want to fail.

Running your own business is the classic American dream.  It’s romantic and heroic.

The romance of self determination, market recognition, and profit obscures the fact that the overwhelming percentage of small businesses fail within 5 years.

I love entrepreneurs.  They are creative, determined, skillful, and incredibly  hard working.  And still they fail.

Those failures represent not only dashed dreams, but financial pain.  That financial pain is personal pain as well.

No isolating business debt from personal assets

In thirty seven years as a bankruptcy lawyer, I’ve found themes in why they failed.  Here is my list of five behaviors tied to business failures. [Read more…]

Myth Of The Corporate Credit Card

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business credit cardAs far as myths go, the myth of the business credit card ranks right up there with  unicorns, Big Foot, and leprechauns .

Every struggling small business owner who crosses the threshold of my office believes that his corporate credit card is not a personal debt.

Wrong.

In 38 years of bankruptcy practice, I have never seen a credit card for which a living, breathing human being was not liable.  Not one.

The card may have the corporate business name on it.  Mine says  Cathleen Moran, Moran Law Group.  

But in fact, my corporation is not even jointly liable with me on that card.  It’s just me on the hook.

Which is scary given that these “business” cards are marketed as another form of business financing.  Their debt limits are easily five figures and many businesses have a drawer full of them. [Read more…]

How Your Property Gets Sold In Your Partner’s Bankruptcy

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co owned property

It isn’t just marriage that can get you roped in to a bankruptcy case that isn’t your own.

Own community property and a bankruptcy filing by your spouse or your soon-to-be ex can drag you into a bankruptcy court.

But the issue is broader:  joint ownership of any kind of asset in any state, community property or not,  exposes you to a loss of control of your property if your co owner files bankruptcy.

The bankruptcy court has the power to force the sale your property or require you to buy out your co owner.  On a timeline not of your choosing.

Co owners at risk

If your partner in a business or a piece of real property files bankruptcy, the partner’s interest may be sold for the benefit of your partner’s creditors.

Oops!

And since the sale price of just your partner’s interest in the property would probably be less than the fraction of the partner’s ownership, the Bankruptcy Code gives the bankruptcy trustee the power to sell your interest too. [Read more…]

Personal Assets Can Be At Risk For Your Business Debts

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Business debt can bleed over into an entrepreneur’s personal assets, to the apparent amazement of a recent client.

He was aghast that the generous equity in the home he and his wife owned was at risk when his corporate business folded.

That was not because the shareholder is liable for the corporation’s debts.  A properly operated corporation confines the business debts to the corporate entity.

No,  it’s because he signed the business lease in his individual name.  And because he was a corporate officer who didn’t pay all the payroll taxes for the corporation’s employees.

As a person liable for a debt, his assets (and the whole of the community property in California) are exposed to creditors.

Exemptions protect some assets, up to a specificed dollar value, but the equity in the family home is at risk when debts incurred for business go unpaid.

Understand the California homestead

When business vs. personal distinction matters

The only time that it matters whether a debt is personal rather than business is when figuring the infamous means test.  The means test applies only to those whose debts are “primarily consumer”.

Debts incurred in business, taxes, and debts imposed by law are not “consumer” debts.  If those kinds of debts exceed the total of consumer debts, the means test doesn’t apply.  There is no need to “qualify” for bankruptcy relief by reason of income.

Sole proprietors are fully at risk

As a matter of debtor-creditor law, if your business is a proprietorship, there is no legal distinction between you and your business.  The debts you incur to run the business have the same legal rights to payment from your assets, personal and business,  as the debts incurred for personal living.

When the business is one with the business owner, failure to pay any debt imperils both business and business owner.

Isolating business debt

Corporations and LLC’s are legal “persons” invented to create a distinction between the business and the business owner.  The corporation can incur debt in its name alone, and only it is liable.

The practical catch is that vendors and landlords may not want to extend credit where the only “person” liable is a thinly capitalized corporation. They may insist on a guarantor.  Execute that guarantee of the corporation’s debt, and the individual has staked his personal assets to pay the debt.

The other way owners of corporate businesses become liable for the business debts is inattention.  They never change the vendor accounts to the corporate name when they incorporate.

They are sloppy about how they sign business agreements.

How to sign for your corporation

They take a business credit card and don’t realize that they are personally liable.

Who needs bankruptcy

In the case of the entrepreneur I met with, it turns out that the corporation is liable for very little and it can survive as an entity if there is a business future;  the shareholder however is a likely candidate for a Chapter 13, to keep the house and pay the debts over time.

More

Is it safe to file a corporate bankruptcy?

Asset protection for everyday folks

How exemptions work

Is It Safe To File Corporate Bankruptcy? 5 Questions To Ask

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risk of business bankruptcy

When your incorporated business fails,  you may be more at risk than you think.

I know you incorporated to separate yourself as the owner from the risks of the business.  The corporation is a separate legal person, distinct from the individuals who own the stock in the corporation.

But when the business has to shut down, the actual degree of separation is tested.

You’ve got to know if the business can safely file bankruptcy.

Or, will using bankruptcy to shut down the business drag the owners down as well?

Can this corporation safely file bankruptcy?

Businesses looking to go out of business typically file Chapter 7.  The business closes, a trustee is appointed, and any valuable assets are sold for the benefit of creditors.

The trustee then controls the corporate checkbook and the timeline on which creditors get paid through the courts. [Read more…]

Sign Your Corporation’s Name So You Aren’t On The Hook

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John_Hancock_Signature-wikimedia-public-domain

John Hancock knew how to sign his name- so large that King George could read it without his glasses.

But most small business folks who do business as a corporation are clueless when it comes to signing contracts on behalf of their corporation.

When they sign their name, without more, on the line that says “Owner”, they may have made themselves personally liable for the obligations in the contract.

Signing just your name likely defeats the very reason that you incorporated your business.  You’ve just put yourself personally on the hook. [Read more…]

Four Essential Habits For Successful Entreprenuership

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entrepreneur-593362_1280Starting out in business for yourself?  Congratulations.

Small business, and businesses that were once small, form the tapestry of our economy.

I’ve run my own small business for coming 40 years and my favorite clients in my business are other small business people.

But, in the euphoria and exhaustion of starting up, don’t put off doing the dull basics of bigger businesses. Those basics are basic for a reason.

Form habits and routines from the very beginning that will serve your business well as it grows.

Four utterly non-sexy imperatives form the foundation of a small business. [Read more…]

What Asset of Failed Business Is Most Valuable?

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run off with business assetsUsually I rant about mistakes clients made when they incorporated their ongoing business.

Come hard times for the business, those mistakes eat into our options for the owners survival when the corporation goes down.

Invariably,

  • the vendor accounts remain in the name of the proprietor,
  • the stock may not have been issued, and
  • it’s unclear whether there was an explicit transfer of the assets to the corporation.

If the business is beyond saving, I want the incorporated business to go out of business. The business can shut down either through a bankruptcy filing or just by closing the door.

The goal is to let the corporation die without killing the owner in the process.

That requires  as much distinction between the assets and debts of the business and the assets and debts of the business owner as possible.

Yet when the incorporation was sloppily done, that line between owner and business may be murky.

Owner still needs to eat

The challenge when a small business fails is making sure that the owner has a way to make a living after the doors close. [Read more…]

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Suite 140
Mountain View, CA 94043
Phone: (650) 694-4700

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