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Last week recall that I talked about the need for persons to have the capacity to enter into a contract. Therefore, kids and intoxicated people may have grounds to avoid the contract. Recall even further back that I discussed that some contracts are illegal. Today, I will discuss the difference between void and voidable. In addition, I will go into contracting with legal persons better known as business entities.

Void vs. Voidable

If you noticed I used the term “voidable” as opposed to void. We make a distinction in the law between the two. Void contracts are ones that the court will not recognize. They are either illegal or very improper. Recall that a contract is a promise or series of promises that a court will enforce. Therefore, a void contract is an oxymoron in a way as a court will nullify it.

A voidable contract is a type of improper contract, but the victim has the choice whether to avoid the contract or honor it. Therefore, using the kid example again, the child has till age 18 to avoid the contract, but may choose not to if they do nothing and continue to comply with the contract’s terms by age 19.

One way to remember the difference is that void, is like a black hole, a completely empty space. Therefore, a void contract is not even there, it is nothing (because a court of law will not enforce it). On the other hand for voidable, just put an “a” in front of it and you will get the concept. The contract can be avoided.

What about Legal Persons?

So far I have talked about living, breathing people, but if you follow my blog and have come to my law talks, then you know that corporations, limited liability companies, and the like are separate entities; they are legal persons that can contract. However, we understand that this is a legal fiction. The brick-and-mortar store is not going to sprout arms and grab a pen and sign a document. A person does it, and normally this is fine.

However, consider pre-formation and post-windup of the business. For start-ups, the issue is sometimes you are getting things prepared for your company, but have not filed your paperwork with the state, and thus YOU are contracting with vendors, suppliers, etc . . . On the other end, if you have entered the winding up process a fellow co-owner still has authority to the bind the company with third parties.

Therefore, you want to make sure after your articles are filed that you get contracts changed over to reflect they are with the business (as the legal person) and not you the (individual person). When winding up the business you want to make sure you send out notices to everyone who deals with the business so that your co-owner is not continuing to enter agreements with your business as it winds up (because you will owe them if that co-owner skips out).

As a side note, remember if you are contracting with someone check if you are contracting with them or their entity, sometimes it does matter and that is when limited liability comes into play.

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.
Last week I discussed the limited liability shield of certain business entities.  This is how a business owner’s personal assets are protected from the obligations of the business.  But, why is that case? Simplest answer is that they are two different persons.

Separate Entities

Say that again?!  The law treats the business owner(s), in the case of corporations and limited liability companies, as two separate persons.  Yep, that’s right a corporation or llc for legal purposes is a separate person than that of the living, breathing human person running/operating the company.

What does that mean? 

It means the corporation or llc is affected the same as a person.  It means that the following can occur:

  • sue others and be sued by others;
  • buy/sell/own property;
  • take personal actions;
  • be criminally punished for illegal actions (except imprisonment); and
  • exercise most protections and rights afforded to people.

So as you can see whatever legal actions you can take or happen to you can also be done or happen to a company because it is a person.

Thus when there is an obligation to pay the obligation is on the company and not the individual business owner.  This is why the banks need the personal guaranty to get at the owner’s assets.  If it helps with this concept think of the shield as another person.

When Two Persons are Really One: Piercing the Corporate Veil

While the personal guaranty is one way around the shield/separate person, business owners will be treated as one as the same as their company if they really act in that manner and act fraudulently.  Basically, if the people who started the business really only created it to try and perpetrate a fraud upon people who lend or deal with their business then it would be the case there is no separate person.  The business is a front.  In the law, we call it “piercing the corporate veil.”

Therefore, many attorneys urge their clients to treat their corporations and llcs as separate entities and not their own personal piggy bank.  Some of the biggest things that will cause business owner(s) to lose that shield and cause a court to “pierce the veil” are the lack of formalities, especially in a corporation.  These are those things like holding board meetings, taking down minutes, and recording major decisions.  In addition, commingling of funds, assets, and personal use of those items also could cause a court to treat the company as if it was not there.

Think about it this way, when you create a company, you start by filing paperwork with the state.  When the state grants you your charter, its like your company’s birth certificate, it expects your company to be a separate person from you that’s why you went through all that trouble to start it.  Bottom line: if you act like the company is not there, then why should the court or anyone else believe it is there?

So what did we learn?

A corporation or llc is a shield, person, veil.  Basically, the company is a separate person from the owner(s) unless they do actions that would make it seem that the company does not exist.  If that is the case the two persons, owner and business, are really one in the same and a court will disregard the limited liability.

An attorney can help draft and file your paperwork with the state and get you started.  In addition, an attorney can advise you on what is the proper route in keeping your business’s actions as its own and insuring that you two remain separate entities.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law” is a weekly short post where I try to visualize a legal concept.  It is designed to be helpful to the laymen and for a quick understanding.  For the next several posts I will be detailing organizing and operating a business.

What is Limited Liability?

Limited liability means that a business owner’s personal assets are not on the hook for financial obligations incurred by the business.  The business owner’s personal assets are “shielded” from those outstanding liabilities and in this way they are only at risk for what they invest into the business.  Therefore, an owner’s house, furniture, and personal bank account or not subject to the financial liabilities of their company if it goes under.

*In some states, the law makes shareholders liable for unpaid wages of the company’s employees.

How do I get this shield?

The limited liability shield is NOT automatic.  You will only receive this kind of protection from organizing a corporation, a limited liability company, or some time of limited liability partnership.  The formation and organization of your company is generally handled through an attorney that knows how to create and file the proper documentation with the state you are organizing in.

One Way Around the Shield: Personal Guaranty

Many sophisticated lenders, such as banks, already understand limited liability.  So when a bank lends money to small and new corporations it knows very well it cannot get its money back if the business has less assets than what the bank claims.  Its typical response to this is situation is to get the owner to sign a personal guaranty or some other form of personal obligation.  In this way, when the owner signs that document in their individual responsibility their personal assets can be gone after by the bank.

Despite this fact corporations and limited liability companies still remain viable options for a business owner seeking legitimacy and ways to raise funds for their endeavor.  If you are interested in starting a corporation or llc, and some of the ins and outs please contact an attorney.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.