Posts

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.

If you enjoyed this post be sure to “Subscribe” today!

*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.
In the prior post in this series we talked about how in a corporation or limited liability company (LLC) a business owner’s identity is separate from the organization.  Today we will focus on the other type of ways one could organize a business, namely a sole proprietorship or partnership.

Flying Solo: Sole Proprietorship

Quick, easy, and simple that is a sole proprietorship.  One day did you decide to make things and sell them online?   You are a sole proprietor.  You are the business and the business is you.  Unlike, the LLC and corporation there is no separate legal entity status, and why?  Consider the fact that you did not take steps to formalize such an entity and because of it you need not do any of the formalities associated with corporations and LLCs.  One of the basic formalities that you may have to do is register a “Doing Business As Certificate” if you are utilizing a name other than your own to conduct the business.

The Ugly Side of Sole Proprietorship

Without the limited liability shield your business assets and obligations are not separate from your personal ones.  Your stuff will be used to satisfy debts and other liabilities of your sole proprietorship.  Your home, personal savings, car and everything else you own could be used to pay for a court judgment or creditor claims.

To highlight how personal assets become entangled with a sole proprietorship consider the situation if you are married.  You and your spouse’s stuff that are owned together are all personal assets and therefore, they would be used satisfy debts and claims.  It would be hard to say, which things are exclusively yours when you jointly own many things together.

It Takes Two to Tango: Partnerships

In the case of a general partnership it takes two or more persons, who have not incorporated, and are carrying on a business for profit as co-owners.  If all these conditions are met you are in a partnership even if you did not intend or know it.   No formal documentation is needed, all you need to is work together with another person, and try to make some money, and you will be considered in a partnership.

Similar to the sole proprietor of a proprietorship, each partner in the general partnership has unlimited liability for the debts and obligation of the partnership.  However, in the case of the sole proprietor it is just the one person on the hook.  In a partnership each general partner’s assets can be used to satisfy a debt or obligation even if that partner disagreed with transaction that led to the debt or obligation.

Limited Partners, Limit their Risk and Work

However, there are ways to limit liability.  In a limited partnership, there must always be one general partner and one limited partner.   The limited partner gets all the benefits of limited liability, but loses out on the ability to manage the business.  They cannot actively manage the business.  As you might have guessed, this kind of relationship needs to be filed with the state through a certificate of limited partnership.  In addition, the partners should have a documented partnership agreement detailing their arrangement, which an attorney can help you with.

 

Now you know all the types of business organizations that exist.  They are as follows: sole proprietorship, partnership, corporation, and limited liability company.   Next time I will do a quick recap of the four different types, highlight some interesting features, and the time after that we will get into the laws that may affect the operations of a small business.

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.