Northern California Bankruptcy Lawyer

On The Bankruptcy Soapbox

The Soap Box

Does This Struggling Business Have A Future?

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virus damaged business

Long after the human patients recover from the coronavirus, small businesses will still be struggling.

And long nights will be spent deciding whether to try to stay in business.

Here are some things to weigh as you consider the future of a struggling small business.

The desire to continue

The most important part of most small businesses is the owner. The owner supplies the vision and the drive that makes the business run.

If you are drained of vision and drive, then allow yourself to exit. Soldiering on just so you don’t have to admit you’re done is unlikely to have a good result.

If you’re game to continue, there are more questions.

Is the business viable

When the lock-down is over, and we creep back to the new “normal”, the next gating question is whether there’s a post pandemic market for the business’s product .

And if there is continuing demand for the product, how long is the ramp up?  What financial resources does it take to survive the ramp up? And what’s the likely volume of business to be expected over the short run? The longer run?

Reorganize for survival

The pandemic has forced change and re evaluation on all of us.  When things are already disrupted, considering change seems less overwhelming. And more essential.

Could the business continue with

  • fewer owners
  • fewer employees
  • no brick and mortar premises
  • narrower market
  • broader market
  • partnered with others

Embrace the disruption and move the pieces around the board, at least in your mind.

New debt and lingering death

Business loans seem to be at the center of the government’s recovery strategy. Distressingly, the rules about when/if those loans need to be repaid are unclear, incomplete, and subject to change.

It’s worth some thought as to whether the business can handle more debt. What is the current debt structure, and were you paying that debt down before the pandemic?

Another way to think about more borrowing is that it may be essential as a short term strategy to keep food on the table until you have more options outside of the current business.

Wind down and move on

Writing the existing  business off as a lost cause isn’t necessarily an all or nothing choice.

Perhaps you fold the existing business but remain in the same industry, as a proprietor rather than an entity, or as an entity after a personal bankruptcy.

Dangers inherent in corporate Chapter 7

Maybe, this is the time to change industries, take a salaried job, return to school, or ????

Challenges for all

The issues are complex and intertwined. And with the virus still shadowing our lives, uncertainty abounds. Allow yourself some time to consider how you move forward.

More

Collected posts on coronavirus impact on personal finances

Separating yourself from your business

The Risks Of Filing Bankruptcy For Your Corporation

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risk of business bankruptcy

When your incorporated business fails,  the instinctive reaction is to file bankruptcy for the corporation.

But a corporate bankruptcy comes with risk to the shareholders.

I know you incorporated to separate yourself as the owner from the risks of the business.  As a separate legal “person”, the corporation is 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 need to know, up front,  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.

Bankruptcy trustees are further empowered to recover money paid by the debtor corporation where the transfer is a preference or a fraudulent transfer.  That’s the beginning of the complications in a business Chapter 7.

Before choose bankruptcy as the method for winding down, consider these five potential complications.

1.   Owe payroll taxes?

Corporate officers may have personal liability to the IRS and any state taxing authority for amounts withheld from the paychecks of employees.  Liability may extend to anyone with signature authority on the corporate bank account

This liability exists whether the corporation files bankruptcy or winds down outside of bankruptcy.

More about “borrowing” from Uncle Sam

Filing corporate bankruptcy may preserve assets from other aggressive creditors from which those taxes can be paid.  That benefits the individual officers, since every dollar the trustee pays on payroll taxes reduces what they’ll have to pay.

But bankruptcy empowers the trustee to hire professionals, investigate the debtor’s books, and pursue recovery of money owed to the corporation, either under state law, or under bankruptcy law.

The expenses of that pursuit are paid ahead of the priority taxes.

Thus a bankruptcy filing could work to shrink the pool of money for payment of payroll taxes, and drag out the time before payment is made.

2.  Made guarantees?

Landlords often require the personal guarantee of the individual shareholders before they commit to a real property lease for the corporation.  Or the lease may have been in the shareholder’s name from the start.

Sign correctly for your corporation so you’re not liable

Any individual guarantor on a lease gets no protection from his obligations to the landlord when the tenant corporation files bankruptcy.

When a corporation files Chapter 7, a trustee is appointed. He calls the shots and he’s got the keys to the leased premises.  All the while, the rent clock is ticking, increasing the guarantor’s exposure.

Trustees are usually quick to either vacate the premises or surrender it back to the landlord, freeing the landlord to look for new tenants.

But  pre bankruptcy lease arrears have no priority for payment in the bankruptcy case.  If there is a dividend payable to the landlord, it may be small and far in the future.  The individual is on the hook in the mean time.

3.  Used corporate credit cards ?

Almost without exception, some living, breathing human being is personally liable for every credit card.  Even if the card has the business name embossed on it, the application for that card undoubtedly contains a promise of the owner to pay the card issuer.

So, any liability of the individuals on the credit card won’t be eliminated by the business’s bankruptcy.

The myth of the corporate credit card

It can get worse:  the corporation may not, in fact, be liable at all on the card.  Not all “business credit cards” are really issued to the business. They’re issued to the people who run the business.

Filing bankruptcy doesn’t make the situation worse:  if the corporation is liable and if there are assets to pay creditor claims, the credit card folks get something toward the balance.  Only it’s a long time down the road.

Just don’t expect the corporation’s bankruptcy to absolve you for business credit cards.

4.  Benefited from paying the bills?

File bankruptcy for the business, and you may get yourself sued by the trustee for an avoidable preference.

When you and the business are jointly liable for a debt, every payment the business makes on that debt reduces your personal exposure to the creditor.  And that, in the eyes of the law, is a preference.

Payments the business made on the joint debt benefit you.  If other bills weren’t getting paid, we have an unfair discrimination between creditors of the business.  The trustee is authorized to sue you to make it more fair to other creditors.

The problem of preferences is the only item on this list of complications that is unique to bankruptcy.  Depending on the facts of the business’s operation, filing a Chapter 7 may just invite a lawsuit against you as the shareholder.

5.  Enjoyed  business help with personal expenses?

The more corporate money that flowed to insiders, the greater the threat that a bankruptcy trustee will challenge the payments,.

“Challenge” here is shorthand for “sue you”, or at least look hard at expenditures that made life easier for shareholders at a time when other creditors weren’t getting paid.

Often, the facts are just the opposite:  the shareholders were putting more money into the corporation, or going without to keep the business afloat.

But the idea of a fraudulent transfer, a payment for which the payor did not get a fair return for its money, has a long lookback period.  A bankruptcy trustee could be looking back years to see if the shareholders got more than was fair under fraudulent transfer law.

And if the books and records are sketchy, the shareholders may end up spending lots of time producing documents or explaining what happened.

Even if the end result is OK, the experience can be unnerving.

The bankruptcy takeaway

How to close-out a failed corporate business can be complex.  While I’ve listed the ways a corporate bankruptcy might end up biting the shareholders, the benefits can be equally significant.

File bankruptcy and much of the wind down work passes to the trustee.  The business creditors understand there is nothing available to pay their claims against the corporation.  Assets are distributed in an orderly and predictable manner.

Before you file bankruptcy for a corporation, make sure you’ve asked yourself the five questions I’ve laid out.  Take your answers to experienced bankruptcy counsel for a review.

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Winding up a failed business

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 39 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.

The 23% business loan

What is insidious about business credit cards is their impact on the likelihood of a small business using them becoming profitable.

Just like the consumer credit card, business folks are conditioned to think they’re doing OK in business if they make regular payments on the 23% loan they have from Big Bank on the card.

But it takes a hell of a business to pay 23% for seed capital and make a profit.

Yet few business plans look at the cost of funds when assessing how they’re doing.

Business cards when business craters

There’s a perverse “benefit” to the fact the business isn’t liable for the credit card if the corporate business gets in financial trouble.  The card isn’t a debt of the corporation.

More times than I can count, the corporate business can continue on, assuming that there is a path forward, and the shareholder can file bankruptcy and ditch the credit card balance.

The corporation is a separate legal person and the bankruptcy of its shareholder doesn’t directly impact the corporation.  And it’s far easier and cheaper to reorganize the financial affairs of the shareholder in Chapter 13 than it is to reorganize a corporation in Chapter 11, the only form of bankruptcy that gets a corporation a discharge.

Now, the business has to have a plan for funding operations without the shareholder’s credit cards.  But, if we face the fact that the business doesn’t have to service that debt either going forward, the numbers may look different.

Seems there are two sides to every coin, and every card.

More

“B” is for business in my Bankruptcy Alphabet

How to sign the corporation’s name

Your business needs a prenup

Draft an enforceable contract without a lawyer

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.  Hearing me say that, my client was dumbfounded.

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.

How to properly sign for your corporation

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 corporation’s payroll taxes.

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

While exemptions protect some assets, up to a specified dollar value,  the non exempt equity in the family home is at risk .

Understand the California homestead

When business vs. personal distinction matters

The only time that it matters whether an individual’s 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”.

So, 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.

The myth of the corporate credit card

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

SBA Loans Collectible Long Past Business Failure

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The SBA has eagle eyes and sharp talons when it comes to collecting from guarantors of business loans.

SBA collection tools are ruthless, efficient and ageless.

So I learned when a client consulted me about a business that had failed 12 years ago.

Yet the SBA had never sued him, nor had it filed a lien on his home.

He reported that every time he changed jobs, however, the SBA just appeared and garnished his wages.

At this rate, his exposure on his SBA loan guarantee will live long beyond the next decade.

Statute of limitations

The United States Code 28 USC 2415 prescribes a six year statute of limitations on lawsuits to collect non tax debts owed to the US.

That six year period is reset with each payment the feds receive on the debt.

Understand the liability of a guarantor

So, the SBA has six years from the last payment made to file a lawsuit against a guarantor for a money judgment.  With a judgment comes a slew of collection tools under the law, including liens  and levies.

But, it turns out, the feds don’t need a judgment to exercise powerful collection actions that usually require a judgment.

Administrative garnishment

Like the IRS, the SBA has a right to garnish wages without ever going to court.

13 C.F.R. 140.11  lays out both the limits on how much of each paycheck can be garnished and the procedure for challenging a garnishment.

Chillingly, the regulation provides that the feds have the right to garnish until the debt is satisfied, or until there is a settlement.  So that’s how the SBA kept surfacing for my client at each new job.

Offset into retirement years

Retirement isn’t a reprieve from SBA debt, either.

The government retains the right to offset any money it may owe you, as in tax refunds or Social Security benefits, to pay the debt. 31 USC 3716.

So, the passage of time will bar the initiation of a law suit that could result in a lien or a right to levy your assets, but the right to garnish wages or offset
mutual debts appears to have no time limit.  A guarantor of the debt of a long dead business may be paying on that debt until the guarantor’s death.

SBA debts dischargeable in bankruptcy

If an SBA borrower isn’t able to reach a settlement of the debt with the SBA, any unsecured debt to the SBA  is fully dischargeable in bankruptcy.

Secured debt owed to the SBA is only secured in a bankruptcy case to the extent that there is equity in the asset after liens senior to the SBA are paid. Thus in a Chapter 13, an SBA lien can be crammed down to the value of the collateral.

In the usual circumstances, the SBA is not protected by the provisions of Chapter 13 that bar modification or bifurcation of debts secured only by the debtor’s home:  SBA debts are almost always secured by the assets of the business for whom the loan was taken out.

More

No tax consequences when SBA guarantees compromised

Is a corporate bankruptcy safe for shareholders?

Thoughts on winding down failing business

Closing Up Shop

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What can you do when it becomes obvious that your  business should wind down?

The hardest part of being in business is recognizing when the business has no future and needs to close.  Yet the overwhelming majority of new businesses fail within 5 years.

So you’re not alone.  In fact, in the face of the pandemic, you’re in great company.

Shutting down an insolvent business presents a tough challenge: honoring the legal rights of creditors while minimizing the damage to the founders and employees.

Not to mention the emotional hit.

Separating the owner from the business

Unless you are a sole proprietor, you and your business are two separate legal entities.

Whether your business operates as a corporation or an LLC, it has its own rights and obligations.  Those rights and obligations  may be different from yours as the shareholder.

For the purposes of this discussion, we’re going to assume the business is a corporation. If you operated as an LLC, the issues are essentially the same as those of a corporation.

  • The board of directors of an insolvent corporation owes its duty of loyalty to the creditors, not the owners.
  • Creditor claims get paid before the shareholder’s ownership claims.
  • Shareholders can be creditors as well as owners.
  • Management can legally pay some creditors and not others.

Keep these precepts in mind once you see the business needs to close.

Bankruptcy or not

There is no clear or universal answer to whether a failed business should file a Chapter 7.

A corporation does not get a discharge in a Chapter 7 case; only a Chapter 11 reorganization erases the debts of a corporation.  And a Chapter 11 is worth the significant time and expense only if the business has a future, or some valuable asset salable only if the business continues until the sale.

So the only purpose a business bankruptcy serves is to liquidate the business assets and satisfy creditors as far as possible.  The unpaid debts will remain enforceable against the corporation for as long as the law allows.

Companies can go out of business without filing bankruptcy: they liquidate their assets and cease operations. Creditors have a right to recover their claims from the assets of the corporation.

If there are no assets, the corporation cannot be further harmed by lawsuits that try to collect from the corporation: a judgment against a company without assets is worthless.

Closing without bankruptcy

It’s perfectly legal and rational to simply close the doors and cease business without involving the courts.

The danger to management in this approach is the tendency of some creditors to assume that the business’s failure to pay means that there is some sort of skullduggery afoot.  Those creditors don’t recognize the legal distinction between the corporation that runs the business and the people who work for and own the corporation.

It becomes easy and reflexive for such creditors to sue the officers as well as the corporation to collect the debt.  The corporation may have no remaining assets but the officers have both assets and future earnings at stake.

While the claim against the individuals may be invalid, the individual has to appear and defend in the lawsuit, or a judgment will be entered against him.

And sometimes, the individuals are liable because the individual guaranteed the debt or even the individual opened the account before the corporation was formed.

Why doing it yourself can work

Personally managing the wind up has advantages, if you are willing to devote the time and energy to the process.

Management can usually get a better price for assets since they know the market, know the asset, and are motivated to get highest recovery.

Outside of bankruptcy, you control who gets paid with the available funds.
You can act swiftly to limit exposure of management or investors by paying first debts guaranteed by insiders, subletting leased space, returning leased equipment, etc.

Creditors are protected from having to give back preferential payments to the bankruptcy trustee.

Assets can be sold to insiders so long as the price is fair.

All desireable outcomes, if it’s possible.

DIY isn’t all roses

But…
Handling the shut down yourself has some down side. DIY may

  • Prevent management from accepting new employment
  • Require cooperation from creditors and lessors
  • Increase likelihood that disgruntled creditor will sue individuals too

Bankruptcy is simple

In Chapter 7, the bankruptcy trustee becomes responsible for liquidating assets, returning equipment, and dealing with creditors, freeing management to turn to other endeavors

The trustee has powers under Bankruptcy Code to sell leases despite anti assignment provisions and to avoid levies and writs of attachment, recovering value for creditors that isn’t possible outside of bankruptcy.

Filing bankruptcy seems to reduce the instance of creditors suing individual managers for corporate debt.

The automatic stay prevents aggressive creditors from diverting cash that could be used to pay taxes, employees, and guaranteed debts or recovering property needed for wind up.

But….
If the bankruptcy trustee winds up the business:

  • Trustee unlikely to get top dollar for saleable assets.
  • Insiders may be prohibited from buying technology, intellectual property or projects in development
  • Trustee’s fees and expenses are paid off the top
  • Trustee can recover preferences to trade creditors and to insiders and challenge pre petition transfers of assets if legally fraudulent
  • Bankruptcy process frequently slow and inexact
  • Claims are paid according to priorities in the Bankruptcy Code

Try some of each

The choice of how to wind up doesn’t have to be an either/or decision.

Management can liquidate assets as far as feasible, and file bankruptcy thereafter to let the trustee mop up.

Step back and look at the issues of timing, asset value, and creditor claims.

If the answers seem complex, consult a bankruptcy lawyer for help weighing the alternatives.

More

Payroll tax trouble

Separating the business from the business owner

Myth of the corporate business card

Incorporating Your Business Has Surprise Benefit

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fence-145622_1280_optIncorporate to protect yourself from the debts of your  business, shriek the ads.

That’s the theory of incorporation:  create a separate legal entity in the form of the corporation.

Let that entity incur debt and expose itself to other risks.  If it fails, the personal holdings of the owners of the corporation are safe.

But, in the real world, most big ticket debts that a corporation might incur require the guarantee of the owner.

So if both corporation and owner are liable for the business debts, what has incorporation gained you?

You’ll be surprised.

Incorporate to protect the business

Consider the same move, incorporation,  for the opposite reason.

Incorporate to protect the business from the owner’s debts.

A sole proprietor and his business are one and the same in the law.

When the proprietor has a tax problem or there’s a judgment outstanding against him, all of the business cash and assets are exposed to that debt.

The business bank account can be levied for the owner’s back child support or a judgment against the owner for unpaid magazine subscriptions.

Most exemption laws found in state statutes protect some part of a wage earners salary.  The working man needs some part of his paycheck to put food on the table and gas in the car.

But a proprietor isn’t an employee of his business:  he and the business are one.

The debts of the businessman can put his business out of business.

Corporation immune to shareholder debts

It’s a different story if the business is owned and run by a corporation.

The corporation is a legal entity separate from the shareholder.  The shareholder’s creditors can’t take the corporation’s money to satisfy the owner’s debts.

As a shareholder, you don’t have to worry that your personal creditors will garnish the business’s account debtors to collect a personal debt.

The corporation can retain a reserve for its operation without regard to the claims of the shareholder’s creditors.

Get a job

Incorporating the business also allows the business owner to create a distinction between the money necessary to run the business and the money necessary to feed his family.   He can pay himself a salary, and leave the balance of the business assets in the corporation.

His salary is exposed to his debts, but not his livelihood.

State law provides exemptions that protect a portion of the wage earner’s salary from creditors, a protection that a sole proprietor doesn’t get.

So a creditor of the shareholder-employee can garnish the shareholder’s wages, but they only get a fraction of the total paycheck.  Exemption laws protect the balance of the earnings.

Knowledge workers and service businesses incorporate too

It’s not just brick and mortar businesses that can use protection from its owners.

Realtor and consultants who are not incorporated expose their business cash flow to their creditors.

Nothing is quite so devastating as having your clients served with legal process requiring them to pay the sheriff on your debts rather than paying you.  Or close a big transaction as a realtor and have the tax authorities levy your entire commission.

Incorporation is a powerful tool.  Its principal benefit is, however,  just the opposite of the conventional thinking.

Image courtesy of Wikimedia.

Who Owns Your Business When You File Bankruptcy?

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business bankruptcy

The bankruptcy trustee’s question was straightforward (if inartful) yet the business owner nearly blew the answer.

The trustee asked:  are you the sole owner of your business?

When my client hesitated, she followed up:  are you a sole proprietor?

Focusing on the fact that he was the only person with an interest in the business, he said yes.

Wait a minute, was my response. That’s not so.

It took several minutes of sworn testimony at the first meeting of creditors to sort the matter out.

Who owns the corporate business

We were once again experiencing the phenomenon of the shape-shifting business owner.  The businessman had, in his mind, morphed into a sole proprietor rather than a stockholder.

The debtor was the sole owner of the corporation that owned and operated the failed business.

He was correct that no one else had an interest.  He skipped over the part that it was another legal entity, his corporation, that actually owned the assets and owed the debts of the business.

He owned the corporation that owned the business.

Why it matters

A sole proprietor owns a business as a personal asset.  In law, he owns the assets of the business and is liable for its debts.

A sole proprietorship has no legal existence separate from the owner.  The proprietorship may adopt a fictitious business name, but behind that dba is the individual who owns and operates the business.

So, if my client were a sole proprietor, the inventory of the business would have been an asset of the bankruptcy estate created when he filed bankruptcy.  The business bank accounts would fall to the control of the trustee.

When a corporation is created, it becomes a legal entity distinct from the individuals who own the shares in the corporation.  The corporation can have its own debts and its own funds that don’t belong directly to the shareholders.

That’s why business people incorporate:  to create a legal “person” that can take risks without exposing the shareholder’s other assets to that risk.

When my client filed his Chapter 7 case, his stock in the corporation was an asset of the bankruptcy estate, but not the business itself.  The business was owned and operated by the corporation.

Since the corporation had tons of debts, the stock that the bankruptcy trustee could administer had no net value.  That’s because, equity holders get money when a corporation liquidates only after creditors of the corporation have been paid off.

The takeaway

The first meeting of creditors in a bankruptcy case is the trustee’s opportunity to gather more information about what the debtor owns and owes.

Once you focus on what the trustee needs to get from the meeting, it’s easier to answer correctly and avoid the confusion that happened in my case.

When confusion ensues, it’s important to sort it out on the spot.

And that’s how I earned my keep in this case.

More

Rules for testifying at a bankruptcy hearing

How corporate officers can avoid personal liability

When a business needs to wind down

What Small Business Needs From Government

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business challenges

 

This post was first published 10 years ago, in the midst of the Great Recession.  I continue to think about the real challenges of running a small business and the balance needed between simplicity for the business owner and protections for the public.  More below.

Senator McCain this morning on Meet the Press reprised the Republican view of the approach to stimulus:  tax cuts for small businesses.

I thought about the small businesses I had seen in the past couple of weeks.  Not one of them was paying income taxes, and their expenditure on payroll taxes was small, because they’d cut back on  employees.

For the very small business, I don’t see taxes as the culprit.

Everywhere you look you see the impact of credit cards on the economy.  Often it’s suit by American Express that brings a small business owner to my office.

Or the businessman makes a list of their credit card debt and the interest rates after the recent round of increases and realize that they can never pay off the debt at 28% interest.

Credit card merchant fees are a much bigger piece of the small business expense picture than are taxes for most of my clients.  Each merchant pays a percentage of each credit transaction to the card issuer.   7-Eleven store owners are petitioning  Congress for regulation of the fees charged merchants  by the card issuers .

I’m certainly not an economist and don’t have a Moran Plan for reinvigorating the economy, but the people I see in trouble aren’t there because of their tax burden.

Small business wish list

Ten years later, my wish list for entrepreneurs is greater simplicity on the administrative side of the business.

Perhaps fewer jurisdictions to deal with and regulations that the average Joe can understand and follow.  Less need for hired professionals to keep the business out of trouble.

Looking around in 2019, the regulatory changes we’re seeing don’t seem to be helping Mom and Pop businesses.

More

Pitfalls to avoid for small business

Your money needs a prenup

Myth of the business credit card

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.

Contract1.  Write out the entire deal

The biggest failing of DIY contracts is incompleteness.  They don’t describe fully the performance that is promised.  They miss one of the essential terms:

  • who
  • what
  • where
  • when

If you hope that a judge will enforce a contract, it has to be written such that an absolute stranger to the deal, the judge, can read the contract and know what was agreed.

Too many self-drafted contracts don’t contain enough for a stranger to understand the deal.

Now, contracts with missing terms or ambiguities can be enforced.  The contract is still “legal”.  It’s just that there is a great risk that the missing terms as the judge fills them in don’t match the intent of the parties.

Enforcement of a fragmentary contract is far more expensive than had the contract been complete.

Enforcement of the unwritten terms becomes victim to what each party remembers but didn’t write down.

2. Flush out & write down assumptions

Often, the contracting parties each come to the table with a collection of assumptions about the arrangement.  And each party assumes that the other party shares their assumptions.

Only, until you articulate your assumptions, you can’t test whether you are both, really, on the same track.

The unwritten assumptions form part of the deal.  A good contract lays the assumption out on paper.  If they aren’t shared when you sit down to write the contract,  discussion or negotiation ensues.

The exercise of writing it out becomes as important as the writing itself.

3.  Explore the “what ifs”

Well crafted contracts provide for the rights of the parties if things don’t go just as hoped when the contract was formed.

What if

  • one party gets sick and performance is delayed
  • the materials aren’t available on schedule
  • the product doesn’t perform as anticipated

My rule of thumb is that the more money that is involved, or the more critical the contract is to your business, the more what ifs the contract should address.

If the consideration is $1000, it’s not worth extended negotiating or drafting to deal with remote possibilities.  If it’s a $100,000, it’s worth more to lay out the details.

4.  Provide for attorney’s fees

If you expect to enforce the contract in court if it’s breached, then your contract should provide that the injured party can collect its attorneys fees from the other in addition to any other damages.

Why?

Because the American Rule about attorneys fees says that each party pays their own attorney, win or lose.  That is, unless the contract, or a statute, says differently.

Without a provision that grants the prevailing party the attorneys fees necessary to enforce the contract, it may simply be too expensive to go to court.  Or, the cost of representation may consume the damage award.

Write on

With these principles in mind, you can draft a contract that is certain and enforceable.  Strive for clarity and completeness.

And if this seem too daunting, take your draft to an attorney and pay only for review and repair of your document.

Because, at the end of the day, a contract only works if you can enforce it.

More

How you sign your name to your corporation’s contract

Benefits of incorporating not what you think

Does your business partnership have a prenup?

Image courtesy of Pixabay and Nemo.

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