WRECKING YOUR SMALL BUSINESS: TRAGIC COMEDY IN FIVE ACTS

So, you have a business and you have created either a corporation or a limited liability company to be the business entity to conduct that business; and you think that you are protected.

ACT ONE: You open the doors to your new business Business Interests Group and yourr very first client or customer walks through the door [or contacts you online] to buy your product or hire your services. “How shall I make out the check?” the client asks. “Make it out to me, ‘John Q Businessman,” you reply happily.

WRONG!

You have just made one of the many common errors committed by the small business owner. You go through all of the trouble to create a business entity to protect you from liability and then you prevent it from protecting you. It is just as if you have put on shin guards to go out and play in traffic!

It is fine to be proud of your individual accomplishment in starting and running a good business, but you can not let your ego get in the way of having your business entity protect you. Your business entity is a separate legal person. That is why you created it – so that this separate legal person can absorb the liability and you do not have to.

If you have your personal name on the business checks and invoices the customer or client may reasonably have the right to believe that he is doing business with you and not your business entity. The exact name of the corporation or LLC should be on all of the businesses' contracts, checks, invoices and business cards that you give to your employees.

ACT TWO: Your business is doing well and you want to move to a larger office and obtain a higher quality web site. You find the right site and a web site provider that is compatible with your business. You prepare the company check to make the deposit and first payment and you sign the contract in your own name.

WRONG!

The business should own the lease and the web site, not you. By signing the contracts in your own name, you have just jumped out in traffic again thinking that your shin pads will protect you. When you created your business entity, you most likely gave yourself a position (such as President, Secretary, Treasurer or Chairman of the Board). When you sign contracts, YOU SHOULD SIGN ON BEHALF OF THE BUSINESS ENTITY AND IN THE CAPACITY OF YOUR POSITION. For example the contract could be signed: “Business Interests Group by: John Q. Business, President.” This way, you are not incurring any personal liability by simply signing a document, and it is clear that it is Business Interests Group that is entering into the contract.

ACT THREE: Several months after you have expanded your business, you fear that you have not chosen a business name wisely. Your regular customers call your business by its initials “BIG” which has become a catchy nickname. The word spreads about “BIG” and business grows. You go with the flow and hang a new sign over your door and change the name of the web site to “BIG” and you simply start doing business as “BIG.”

WRONG!

Unless you register your new name with the appropriate authorities, the resulting confusion could lead to liability for you. Just because you say that Business Interests Group is “BIG” that does not mean that “BIG” exists as a legal entity. And worse still, what if the name “BIG” is owned by someone else? Registering the fictitious name will ensure that is not the case, but a name check will be required before it will be approved. Another possible mistake in using a fictitious name is in registering the name with you being the owner of that name and not the business entity. If you own the fictitious name “BIG” your business entity does not own it, it can fairly be assumed that it is you who is conducting the business and not your business entity.

ACT FOUR: You have been in business for over a year and you are approached by a local business woman about entering into a joint venture. The business is owned by more individuals than your self (these could be stockholders and/or board members in a corporation or members in a LLC) but you have to act fast in order to take advantage of this fleeting opportunity. You decide to do the deal and enter into a contract with your new joint venture partner without getting the permission of the other members, board members or stockholders as required in the business entity’s By-Laws. But since you are the President (i.e. “Top Dog”) and the person who runs the business anyway, you figure that this is not a problem.

WRONG!

When the deal with the joint venture partner goes sour and both your companies are sued, your members, board members or stockholders whose approval was required for the deal my refuse to let their investment be jeopardized and require you to absorb the liability personally. And if you entering into the joint venture was unauthorized – GUESS WHAT? – You probably are personally liable. You must follow the rules of the business entity as they are set out in the formative documents and By-Laws if you expect to be protected.

ACT FIVE: The office building down the street is up for foreclosure sale and you can snatch it up at a great price. You take the Business Interests Group’s books down to the bank and apply for a loan under Business Interests Group’s name. The bank likes the deal but Business Interests Group is not credit worthy enough on its own. Your banker tells you that they will do the deal if you give them your Personal Guarantee, and in fact he assures you that the loan will go through if you give your guarantee. It feels good to be so well thought of by your banker and beaming with pride you sign the guarantee.

WRONG!

You’ve done it again! What is the use of having a separate business entity if you are still put your personal assets on the line? In all fairness it might be such a great deal that sticking your neck out may be worth it. BUT YOU MUST UNDERSTAND THAT WHEN YOU SIGN A PERSONAL GUARANTEE, IT IS JUST THAT, A GUARANTEE THAT YOU PERSONAL ASSETS WILL BACK UP THE DEAL. If you must give your guarantee for the business entity, you should look into receiving some benefit in return, and this could be discussed with the members, board members or stock holders of the business entity.

This was a short dramatization in Five Acts to illustrate how your actions can defeat the very purpose of doing business using a corporation or LLC. The Ezine Articles web site has a host of articles on various topics relative to using corporations and LLCs with which to operate your small business. Perhaps you might like to take a look at some of them.