Legal Lessons Learned From Wishful Contracting (Part 1)

What We’ve Learned From Wishful Contracting (Part 1)

The legal lessons learned so far may require a bit of reading to get to the key lessons. Just to make sure we don’t miss them, let me review them quickly in a couple of lessons.

PARTNERSHIP: Never use a Partnership as a form of business.

The partners split the profits, but each of them individually carries full liability. If only one partner has high-value assets (such as Mike is the only homeowner among the four friends), that partner should insist upon an entity being formed. After all, if the partnership fails and has debt, creditors will come after his assets.

Any partner has full rights to any of the assets of the company, including the bank accounts and other property of the business. Unless there is a document that specifies who has what rights and powers, any partner can go get money, vehicles, or anything else from the company as much as any other partner. This is also an issue whenever there are multiple owners of any business.

Decide on a safer form of business. S Corps and LLCs are popular.

SEPARATE ACCOUNTS: Never have more than one person have direct access to the same cash. It’s smart to have multiple people who can see an account, but only one person should take money out of an account.

If there is more than one check-writer or more than one debit-card on a single account, it’s easy for money to be spent that should go to other expenses. At times, accounts have become overdrawn because of this.

A simple solution is to have separate accounts so you do not have two or more sources debiting the same account.

INSURANCE: First, have it. Second, know what is and is not covered.

Some businesses get the insurance they are told to get for the work they are doing, but that may not cover everything they need. Landlords routinely require liability coverage for the premises, but that may not cover transportation and on-site incidents. Liability coverage for work done might not cover a vehicle accident on the way to the site. A company policy might not cover personal vehicles.

Know what’s covered. Know how much coverage you have. One business made a massive mistake that opened them up to more than a quarter million dollars of liability, and they only had a bond of $25,000 and no insurance for such an event.

AGREEMENTS: Always make complete agreements and write them down.

Single-owner LLCs and S Corporations are notorious for not writing down agreements. It does seem silly since the same person is signing both individually and as the company representative. It’s important to remember that while the human being involved might be the same person, the entity is effective a different “person.”

Friends in business together are not often much better. They know each other. They like each other. It may seem silly that they have to create written agreements for everything. But business is different.

In our story, Mike is owed $200,000 and the friends had differing understandings of how Mike was going to be paid back. Does he get a set amount? Does he get all of the profits? How much does he get for interest? All these things should be written down.

Most of these agreements do not require a lawyer drafting a 20 page document full of legalese. A single page that outlines the key terms is usually plenty.