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We've previously posted on the subject of the danger of personal guarantees when entering into contracts through a business entity. Normally, the officer/agent of the company needs to sign such an agreement in his or her capacity in the company, and not in their individual capacity in order to avoid personal liability. A recent case out of the Iowa Court of Appeals clarifies that signing in your corporate capacity isn't enough on its own to limit your personal liability.

In this case, which was handled by our own Lou Hockenberg, the defendant had signed an application for credit and signed the application as "Pres."  Right above that signature line, however, was a provision that provided the applicant was also personally liable for the debt. The Iowa Court of Appeals affirmed the judgment by stating that the the provisions of the binding agreement should not be negated by simply signing such an agreement in one's corporate capacity.

Moral of the story: Read what you sign.

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One of the reasons that individuals form business entities, such as corporations and limited liability companies, is to protect their own personal assets from the debts and liabilities of the business. The law does provide some protection, but in order to get that protection, the company owners need to follow certain requirements. Fail to follow those requirements opens the individual owners up to liability of the company through a process called "piercing the corporate veil".

The Iowa Court of Appeals recently affirmed a basic case permitting the piercing of the corporate veil. In this particular instance, the individual defendants claimed they were not sufficiently aware that the Plaintiff was pursuing the defendants individually (attempting to pierce the corporate veil) in the lawsuit, rather than suing just the corporation. In the court's ruling, the court found sufficient evidence to put the plaintiff's on notice before the trial that the Plaintiffs intended to pursue them individually.  The defendant's claim of "trial by ambush" was rejected.

This case serves as a reminder to all business owners that the liability protection that can be provided by an entity, such as a corporation or a limited liability company, is only valid if you follow the proper formalities. Failing to keep corporate minutes and records, separate corporate finances, routine government filings and separate books of the business entity can expose the individual owners of the company to the company's liability. Setting up the corporation is only the first step and that step alone does not necessarily provide the corporate liability protection.

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Whether you are a seasoned business owner or a relative new-comer, the issue either has or will come up sooner or later.  A customer tenders payment of a sum less then the full amount due and owing for services rendered yet the check is marked "paid in full," "acceptance of this check is payment in full," or something similar. 

The question is, what is the effect of cashing the check on the customer's account?  Under the Uniform Commercial Code (UCC)  if there is bona fide dispute between the parties and the business owner accepts and cashes the check an accord and satisfaction has occurred and the checkwriter will have a defense if the business owner would happen to take legal action for the difference. 

So, under the UCC, if there is a bona fide dispute as to the amount owed by the consumer and the check is conspicuously marked "paid in full" or something similar then the business owner can do one of two things.  He or she can either reject the payment and send the check back to the consumer or he or she can cash the check, essentially accepting the consumer's settlement offer and wiping out the rest of the debt. 

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 If you're an Iowa business that hires independent contractors - or at least calls those individuals independent contractors - beware.  A recent article in the Des Moines Register highlighted a recent report from the state indicated that companies are abusing the classification of independent contractor, as opposed to treating them as an employee, in order to save costs and taxes.  The state report recommended enhanced enforcement, including aggressive investigations and cooperation with the IRS.  For questions on whether your company should be treating your workers as employees or independent contractors, read our prior post on this very topic.

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The best time to make decisions regarding how to exit a business venture is at the beginning, especially if the business is to have more than one owner.  Why?  Because, although this my seem a little cynical, it is in all likelihood precisely the time when the soon-to-be business partners will be most closely aligned and focused on a common goal.  It is at this time, when leaving the business is the furthest thing from the partners minds, that objectivity can be achieved and a fair buy-sell agreement can be created that allows a partner out, without placing an undue burden on the remaining partner(s) and business.  At a bare minimum a carefully crafted buy-sell agreement will cover, (1) How the value of an owners interest in a business will be determined; (2) What, if any, internal or external events will trigger a buy-out; and (3) Is the sale of a departing owners interest restricted in anyway.

For information on different types of buy-sell agreements and their tax implications see Structuring Corporate Buy-Sell Agreements by David Joy, Jo Koehn  

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My husband and I are in the early process of purchasing a business. After some searching, a couple hints from a friend and a newspaper article in the Des Moines Register we stumbled on the Targeted Small Business program offered through the Iowa Department of Inspection and Appeals and the Iowa Department of Economic Development. The TSB program is for Iowa businesses that are at least 51% owned and managed by minorities and/or women or persons with disabilities. One purpose of the program is to provide financial assistance in the form of low interest loans and/or grants to new or existing businesses.

The process (as I am currently discovering) does take a little work. First, you must become a certified TSB through the Iowa Department of Inspection and Appeals. The application requires information concerning you and the current and/or future business. Because our business is not yet established my husband and I will apply to be conditionally certified. Once we are up and running we can become fully certified.

Once certified (conditionally or fully), you are eligible to apply for the TSB Financial Assistance Program. The financial assistance application is a bit more involved than the certification application. A complete business plan, including projected financials is required. Those who have little or no experience in developing a business plan or projecting profits and losses can contact the Department of Economic Development and be assigned an assistant who will guide you through the process.

If you are a minority, woman or person with disability thinking about starting your own business or expanding a current business, you should consider the Targeted Small Business Program.

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In a national study entitled "Value of Third-Party Debt Collection to the U.S. Economy in 2007:  Survey and Analysis" , which was conducted by PricewaterhouseCoopers and commissioned by ACA International, it was determined that in 2007 the collection industry was able to return $40 billion in bad debt back to large and small businesses that had previously extended consumer credit.  That $40 billion return represented a greater than twenty (20) percent reduction in private-sector bad debt.  The study suggested that this return of $40 billion translated to an average savings of $354 per American household, as the reduction in bad debt helped companies keep their margins low and in turn sell there products at a lower price.  So there you have it...through the diligence and hard work of its employees the collection industry benefits us all.

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Mechanic's Liens are a valuable tool used by contractors to help insure that they are fully compensated for the materials they supply and the improvements that they make to buildings or land.  However, if you are a contractor providing materials or making improvements to an "owner-occupied" dwelling, essentially a residential remodeling contractor, then the mechanic's lien that you file may not be worth much more than the paper that it is printed if you neglect one crucial step.

Under Iowa's Mechanic's Lien law, Chapter 572, a contractor who enters into a contract with a home owner to provide labor or  furnish materials for a owner-occupied dwelling and who has or will hire sub-contractors for the job must provide in the written contract with the home owner the following notice: 

"Persons or companies furnishing labor of materials for the improvement of real property may enforce a lien upon the improved property if they are not paid for their contributions, even if the parties have no direct contractual relationship with the owner."

In the alternative a contractor who does not enter into a written contract with the home owner must, within ten (10) days of beginning work on the property, provide the owner with written notice stating the name and address of all subcontractors that the contractor intends to use for the construction and, that the subcontractors or suppliers may have lien rights if they are not compensated for the labor or material that they provided in completion of the project.

If written notice required under Chapter 572 is not provided to the owner in a timely manner then the contractor is only entitled to a lien for the work or materials that it actually performed or the materials that it actually provided and would not be entitled to a lien as it pertained to any labor performed or materials furnished by a subcontractor.

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The Iowa Court of Appeals recently had before it a sad (sad for the child that was injured and sad for the dog) and somewhat surprising dog-bite case in which they decided that a fact question was created, necessitating further review, when a landlord had knowledge that a dog had a propensity towards violence and yet that landlord allowed the dog to remain on the property.

The abbreviated facts are as follows:  Landlord's son, who was also a tenant, had a German Shepard as a pet.  German Shepard was kept outside, possible neglect occurring (Disclosure Alert: dog owner writing this blog post). German Shepard attacks neighbor.  Landlord/father is aware that tenant/son's dog attacked neighbor.  Steps are taken to insure that dog does not get loose again.  Tenant/Son sent jail for unrelated matter.  Dog left in fenced in yard (testimony showed neglect).  Landlord/father insists that dog be removed.  Son/ex-tenant threatens suicide, father/ex-landlord relents.  Dog eventually escapes and severely injures neighbor boy.  Court of Appeals finds, among other things, that a fact issue requiring further review had been created as to whether the landlord was negligent in allowing a dangerous dog to remain in his property.

The lesson:  If you are going to allow your tenants to have pets you should have your tenants provide you with information regarding the animals demeanor and any past displays of abnormal aggression.  Also, you should put a provision in your leases that would allow you to terminate the lease should you become aware of an animals aggression and after such aggression the tenant refuses to find alternate accommodations for pet. 

Photo by flickr

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Julie Elgar of That’s What She Said uses the employees of The Office to illustrate the pervasiveness of internet use in the workplace. Elgar recognizes that unmonitored internet usage can lead to a decline of productivity and even worse harassment among employees. What should employers do? As Elgar says it’s important to develop a monitoring system and inform the employees that the system is in place.   Communicating the policy to the employees reduces their exepctation of privacy in the workplace.  Inform employees of any disciplinary policy you may have regarding violations of the intenet usage policy.

 

Photo on flickr by *diggin an old dude*

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I can't speak for all businesses, but from my perspective most businesses have a signed agreement before they provide services for either an individual or a business. However, invariably it is those transactions in which the agreement was never actually signed that cause the most problems for the business owner.  

The typical fact pattern goes something like this:   an individual wants some work done to his home, he approaches an electrical contractor for a bid,  the contractor gives the homeowner a bid, the homeowner says, "yeah, that is fine but I need the work done right away because of (insert any emergency situation here)."  

Contractor, says,  "great, it just so happens that I have some time available within your time frame, if you will just sign this agreement I will go ahead and order the material that I will need for the job."    

Homeowner, says "Yeah, I will sign it, I just can't do it today because (insert any half-baked excuse you can imagine). 

That should be definite red-flag to the contractor, or to any other business owner for that matter; however, due to a downturn in the construction industry  and perhaps being a little strapped for cash and against the contractors better judgment he reluctantly takes the homeowner at his word and begins the project. 

At the end of the day the contractor incurred the expense of the project and now the homeowner is unwilling to pay and the contractor is placed in the unenviable position of having to decide to cut his losses and move on or he can go after the homeowner for his damages, which will require a further outlay of cash and time.

The point of this post is this,  if you are going to provide a service and would like to give yourself the best opportunity to be paid for that service, then you must get the agreement in writing.  I know that this is not earth shattering information, but it is worth repeating as everyone knows that they need to put an agreement in writing, yet from time to time exceptions are made and the exception leads to a big headache. 

The bottom line is this:  If you want to increase you ability to get fully paid for every service you provide and therefore increase your bottom line then you must not perform any work before you receive a signed writing spelling out the extent of the agreement. 

If for some unknown reason you find yourself proceeding without an agreement, then my advice to you would be to begin rubbing your rabbit's foot or looking for that four leaf clover because it will likely take all of the luck in the world for you to get paid in full and on time.  If someone does not want to put it in writing then they certainly do not want to pay for it. 

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In an ideal world, when a business provides a service, the person or entity benefiting from the service promptly pays the provider for that service (assuming of course, that the service was performed as the service recipient expected).  As anyone who has been in business for longer than a week can tell you, when it comes to customers paying for the services that they receive, the world is not perfect. 

Because not all customers pay as agreed, it is imperative that before performing any work the service provider must first get a service agreement signed by the service recipient.   I know that this seems obvious and I would guess that the majority of businesses do get the bulk of their agreements in writing, yet it is always the small exceptions that end up causing business owners the biggest problems. 

Now, I know that there is portion of small business owners reading this that are likely saying to themselves:  "we do business on a handshake and a person's word is just as good as any contract," and  I would agree that that is the case 95% of the time,  but it does not take too many disputes over payment to begin to negatively effect your bottom-line.  When a service has been provided yet the recipient unjustifiably refuses to pay for that service,  then the business owner has a choice to make:  either eat the costs of the service or enlist the services of an attorney.   It has been my experience that most business owners would rather shove a stick in their eye then have to choose between those two options, but whether you like it or not, this is the decision that the business owner has to make.  

As you may have guessed, I mainly talk to the latter, business owners that chose to contact an attorney, and without exception the first question I will ask my client is whether there is a contract.  The answer to that question is determinative of the likelihood of being able to recover this debt for the business owner.   

If the answer is "yes, we have a contract signed by the service recipient and I will send it to you immediately", then I feel pretty good about the client's likelihood of recovery.  Conversely, if the client answers, "no, but...", then the client's prognosis for recovery has suffered a two-fold set back, first, it will be more difficult to prove the existence of a oral agreement to the satisfaction of a court and therefore, more attorney fees and second, and I may be generalizing here, but it has been my experience that if someone is unwilling to sign a contract for a service then they are equally unwilling to voluntarily pay for that service.

Tomorrow I will continue with part 2.

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