There is nothing like a real-life story to drive home a point. What you are about to read are the real mistakes of real people. The names and details have been changed to protect the erstwhile entrepreneurs.
Entrepreneurial people tend to have a lot of confidence in their own abilities and positive motivation. Those are essential characteristics for budding entrepreneurs. The timid need not apply. On the other hand, discretion is the better part of valor; jumping in without doing a little bit of due diligence can lead to costly mistakes.
John Doe worked his whole life for other people and was tired of making other people wealthy by his own hard work. He knew a little something about widgets. He had a good source for buying bulk wholesale widgets, and he knew who was interested in buying bulk wholesale widgets. It made sense to work hard for his own benefit, rather than the benefit of someone else.
John had saved up some money that he could use to make his first purchase of bulk wholesale widgets. With a modest profit on the first purchase, he would have more money for the next purchase, and so on. John did not think he needed a lawyer. He was enamored with the idea from commercials about Legal Zoom that he could do it himself and save a lot of money that he did not have. He chose a name for his business, Enormous Enterprises. John used a do-it-yourself website builder to develop a nifty website, and John entered into a contract with the wholesale widget provider that he knew. John made his first purchase of wholesale widgets and was able to sell the wholesale widgets for a modest profit. His business was born.
Not long after John signed the contract with the wholesale widget producer, John went to apply for a federal identification number and state business ID number. He discovered that he could not use the name, Enormous Enterprises. He was not sure exactly why, but he was able to change the name to John’s Widgets, LLC. Legal Zoom walked him through the organization process, and John was pleased that he was able to do it all himself.
Unfortunately for John, the wholesale widget market was a very volatile market. John knew this well, but he figured that he was knowledgeable about the market and the price adjustments and could avoid being caught in the switches. Unfortunately for John, he did get caught in those switches and was stuck with a million pounds of widgets that he bought when the price was high, and he was facing a huge loss of money he did not have when the price abruptly plummeted.
John began to panic, not knowing how he was going to unload a million pounds of widgets without taking a big loss. He contacted an attorney and showed the attorney the contract, hoping that the contract was somehow invalid and there was some way that he could avoid his obligation. To John’s chagrin, the attorney indicated that, although the contract was not well drafted, it was nevertheless a binding document, pretty clear in its terms. Further, the attorney noted that John signed the contract under the name Enormous Enterprises, which was not the name of the LLC that John actually organized. The attorney informed John that the contract is not only valid, but the contract is binding upon John personally, because it was not signed in the name of his LLC.
John had never made the distinction between himself and his business. He did not realize that a name made that much difference, as it was all his business by whatever name he hung out on the shingle. Unfortunately for John, he was wrong about those assumptions. Legal Zoom did not explain these things. His nifty widget business was about to go down in flames and take him with it.
Henry Smith was an engineer in college. He got good grades. He worked his way through school for a tool and die maker and learned a thing or two about plastic mold injection and business along the way. Jobs were hard to come by in his field, but it seemed that money was ready to be made selling plastic molded gidgets that were much in demand. When he had the opportunity to buy an old, used plastic mold injection machine, he jumped on it, though it required him to go into significant debt.
Henry used an attorney to incorporate his business, but it seemed like a big expense for something that seemed so simple when it was completed. He figured he would not make the mistake again to pay for services that he could probably figure out on his own, especially when he had to make the payments on the machine and find a place to rent to run his business.
He chose his corporate named because it sounded so global and impressive: Worldwide Plastic Enterprises Company Incorporated. He quickly discovered the entire name was difficult to fit on checks and downright bothersome to write out. When he signed the lease for his business, he wrote the name in as Worldwide Plastics Inc., and he signed his name “Henry Smith”.
Business was a struggle. The demand for plastic gidgets was not as high as he thought it would be. Henry was a good salesman, but he did not have enough contacts to keep up the sales. He could not find reliable and good help to run the machine, and his old machine was constantly having problems that were expensive to fix. He was still paying for the old machine, when it broke down, and he had to purchase a new machine that was even more expensive.
Henry limped along for several years just barely making ends meet. He had signed a ten year lease. He was only five years into it when he figured it would be better just to stop paying it. He hoped he could get by for months until he had to be out of the space, and he could find cheaper space in the meantime. He figured the lease was in the name of the corporation, and the worst that could happen was that he would shut the doors and walk away. After all, the reason people incorporate is to shield themselves personally from business liability.
Henry did not figure on the fact that the landlord would sue him for payment of the remainder of the Lease – 5 years of rent payments! Henry also did not realize how important the name of the business is: “Worldwide Plastics Inc.” is not the same as “Worldwide Plastic Enterprises Incorporated”. Worldwide Plastics Inc., the name Henry used on the Lease, could not be found anywhere on the Secretary of State's records. Therefore, the landlord sued him personally. The judge ruled that the principal (the corporation) was undisclosed, and therefore Henry was personally liable for the Lease. Henry also signed the Lease without designating that he was signing in an agency capacity. Even though Henry intended to sign the Lease on behalf of his corporation, and not on his own behalf, his carelessness and lack of understanding resulted in his personal liability. He had not choice but to file for bankruptcy.
These real life examples show what can happen without knowledge of the law and good advice. The most critical time to get that advice is when the foundation of the business is being set – in the beginning. Some aspects of the law are really pretty simple. It is not rocket science, but a person does not know what a person does not know. A good attorney is a good educator and will pass on the critical knowledge a business person needs to avoid very avoidable, and sometimes very costly, mistakes.
Kevin G. Drendel firstname.lastname@example.org
Drendel & Jansons Law Group 111 Flinn Street Batavia, IL 60510
(630) 406-5440 www.batavialaw.com
This article is not intended to create or imply an attorney-client relationship and is not intended as specific, legal advice. This article contains only general statements and opinions of the law and should not be relied upon for advice or application to a particular circumstance or set of facts. No attorney/client relationship is formed by the publishing of this article or responses to it. No information contained herein is a substitute for a personal consultation with an attorney. Visit www.batavialaw.com or call (630) 406-5440 for more information.