Every year we realize that our business clients, whether in the manufacturing, service, real estate development  or creative arts and entertainment fields, are more knowledgeable about some issues and less about others than we would have imagined.  We have learned that our clients  are very sophisticated about marketing and about the internet. What we were not prepared for were repeated instances that suggested that they did not know  as much as they should about the requirements of operating  their corporations or limited liability companies, and about their  business contracts. We have decided to share what we have learned  so that as the economy improves our clients will be able to avoid unnecessary legal and accounting costs.

With the increase in the use of the Internet generally and the creation of governmental web sites, like the Illinois Secretary of States web site, more information is available today about self incorporation, whether as a corporation or a limited liability company. Many mistakes are made as a result of self incorporation and sometimes the mistakes are quite serious. These generally include issues with regard to Sub-S elections, federal and state tax registrations, business licenses, and state statutory requirements. There are also important conceptual things which clients miss when they do not work with an attorney to incorporate their business. One is that generally the corporation and not the business owner should be the party to enter into the business’s contracts. We had one client incorporate to protect her personal assets and then sign individually and on behalf of the corporation on all contracts.  This totally negates the advantages that corporations and limited liability companies (LLCs) have over sole proprietorships and partnerships.  We worked with a great number of clients who self incorporated and then had to pay to correct costly errors or to be re-instated because they did not understand certain statutory or administrative requirements. We always advise our clients of the types of matters they can handle themselves to save costs. Incorporating is simply not one of those items.

We suggest to all clients who want to set up a new business that they first create a  business plan. A Business  plan helps to identify your business market, customers, operating capitol (cash) requirements and other issues. It is required if you are going to seek bank financing. But even if you are going to provide self or family financing for your business venture, a Business Plan helps to flesh out the facts that you need to operate. It can also serve to clarify which owner will do what and ultimately whether you are better off with joint owners or not. There are numerous tools for creating good Business Plans. Let us know if you need any resources.

Before setting up a new business, using a new trade name for a product or service or creating a domain name and/or web site, you should make sure that you are not infringing the rights of another business in that name. Remember that anytime you use a name in your business which is similar to that of another business selling a similar type of product, you could be causing confusion in the market and exposing your business to a lawsuit based on trade or service mark infringement. Just because you have obtained a domain name from a domain name service does not mean that you will not be infringing on another party by using the name. A domain name must be registered as a trade mark for protection. Whether the conduct on your part is intentional or not is not the issue. To avoid this costly mistake you should have a search conducted by a reputable intellectual property law firm   The intellectual property law firm can then tell you if the name is available and how to register the trade or service mark with the United States Patent and Trademark Office for your business.

The Secretary of State is the governmental office which controls business entities and enforces the various state statutes regarding business entities.  The Secretary of State requires companies and limited liability companies to have a registered agent. This is the contact person with the Secretary of States Office. It is common business practice that this person be your business’s attorney. This is because business people get busy and do not always understand the legal ramifications of the communications they receive from the Secretary of State. Your business attorney does and will see that all time sensitive matters are handled timely.

A Minute Book is a book which contains all of the important papers  relative to a corporation. This would include the Articles of Incorporation, which is the initial form filed to create a corporation as well as Minutes, Stock Certificates and tax registration number applications. Keeping a Minute Book updated is important in the event that an IRS audit occurs, a joint owner wants to sell  his or her interest or you want to buy a business or sell your own business.

Business owners seek a business entity that protects them as well as provides them with certain accounting and tax advantages. Once incorporated, whether as a corporation, limited liability company or otherwise, you must  comply with all of the state statutory and other requirements that exist in order to maintain the protection against personal liability that you desired in the first place. Your business attorney should explain these items to you in detail. Suffice it to say this generally means creation of a business bank account, minimum initial capital requirements and compliance with yearly statutory annual report and meeting requirements.

As a rule if you have created a corporation, limited liability corporation, partnership or other business entity you need  to understand that you are signing not individually on a contract for your business  but as the corporation, limited liability corporation, partnership or other entity. You need  to talk to your attorney on how to effectively sign contracts without personally obligating yourself, as an owner.

We had a number of clients use e-mail in communicating with clients, including communications which sought to create a contract. Unfortunately the too casual form of “e-mail speak” when using e-mail for business can prevent a clear meeting of the minds as to the terms of the contract being created. In some instances, it is not even clear that a contract has been created. One client risked recovery of $50,000 because he had used e-mail for all communications with a client, which client eventually tried to avoid total contract liability. While the term “snail mail” is used today as a popular derogative remark for regular first class mail,  formal business letters sent by mail are generally written much  clearer as to the terms of a contract being created than  e-mail communication used to confirm a business contract.

If you write formal business letters and e-mail them instead of mailing them and they contain a clear and concise statement of the terms of a business relationship then you should end up with each party understanding that a contract has been formed and what the terms of the contract are. However, e-mail by its nature and practice seems to cause even the most careful business person to be too casual. It is not adequate in most business contexts to write, “Ah, sure that’s great. Let’s move forward and sign it Bill.” Have you created a contract?  What are its terms? Who is the party entering into the contract, the business or the owner personally. While e-mail saves time and avoids delays through playing telephone tag, it is also a devise that must be used wisely in order to avoid expensive mistakes.

As a part of your general  business practices, you should make sure that you have a fully executed copy of every business contract. We suggest a separate file for each. These files can then be reviewed for budgetary purposes, notice requirement (i.e. when a renewal or termination notice needs to be given) and other contractual obligations. We had a major client that failed to contemplate its contractual obligations when making major business structural changes and ended up in litigation for breach of contract with a vendor. This was totally unnecessary and should not happen to you.

Because we hear this frequently from our clients, we can not over emphasize that any contract can be negotiated. The fact that a contract looks like a typed form is irrelevant. Short term contracts often reflect the power of the stronger party to the contract but long terms contracts should be created and viewed by each party as mutually beneficial.  Otherwise, problems should be expected.