As a business attorney who specializes in working with small and medium-size businesses, one of the hardest things to see is a great business idea fail due to simple mistakes that can be easily avoided. This column is dedicated to helping entrepreneurs avoid some of the most common pitfalls of starting and running a business so that they can focus on nurturing their business from idea to successful reality.
Three simple letters …
They seem innocuous enough – “LLC” or “INC” – but in a legal context they carry a lot of weight. Unfortunately, many business owners lose sight of these three letters the minute they file their entity formation paperwork away.
So, what’s the big deal? You might want to ask Clair D. Bosen, the unsuspecting southern Idaho farmer who lost sight of those three letters in the rush of day-to-day business and was left on the hook to the tune of $70,945.53 for chemical and fertilizer applications to an acreage he and his spouse owned in partnership with another couple.
With $33,091.08 in interest and $11,672.12 in attorney fees and costs owed as the losing party in a lawsuit that went all the way to the Idaho Supreme Court, Mr. Bosen’s oversight ended up costing him a whopping $115,708.73.
This tale of woe began in early 2000 when Mr. Bosen and his business partner formed Hogs ‘n Kisses, LLC to operate a hog farm on the acreage they had purchased together with their spouses.
Later that same year, Mr. Bosen completed and executed a form entitled “Commercial Sales Agreement” provided by Soilbuilder Financial Services, Inc. in order to obtain soil-building products and services for the acreage on which the Hogs ‘n Kisses, LLC enterprise was operated. Mr. Bosen listed the LLC as the “Customer” on the form and also indicated in another blank space on the form that the “Type of Ownership” was “LLC” and that he and his business partner were the “Principals” of the LLC.
Unfortunately, at the bottom of the form, in a section titled “Agricultural Business Agreement”, the form used the word “Applicant” rather than “Customer” and stated that the Applicant agrees to pay the total amount due on each invoice. Mr. Bosen signed the line provided for the “Applicant’s Signature” as Clair D. Bosen … and nothing more. Mr. Bosen also signed a separate security agreement and a financing statement to obtain an extension of credit to have the products and services provided prior to payment. He signed both of those documents as “Clair D. Bosen” and likewise did not indicate that he was signing them in a representative capacity for the LLC.
Ultimately, the LLC was unable to pay for the soil-building services and a lawsuit was brought against Mr. and Mrs. Bosen for payment of the debt. Despite Mr. Bosen’s assertion that he never intended to be personally liable for the soil-building products and services, that argument did not carry the day. Rather, the trial court and the Idaho Supreme Court looked to Mr. Bosen’s signature on the three related documents and, because he did not indicate on any of them that he was signing as a member or manager or other officer of the LLC, they concluded that his signature indicated that he had agreed to accept personal liability for the debt.
A court will often construe an ambiguous term in a contract against the party that prepared the document, especially when that party has superior bargaining power, as was the case here. Nevertheless, the court in this case viewed Mr. Bosen’s signature as the ambiguous term, even though he simply filled out the form documents the way they were presented to him. As a result, the court construed the documents against Mr. Bosen rather than against the company that created the forms.
So, what’s the moral of this story? Don’t make a similar mistake in your business. The letters “INC” and “LLC” in association with your business name are intended to serve as notice to the parties with whom you do business that they are doing business with a legal entity and not you in your individual capacity.
So, whether you’re signing a pre-printed contract, or debuting your sexy new website, or getting that first run of business cards and letterhead printed, remember that in order to claim the full benefit of doing business as a legal entity for which the owners have limited liability, you need to constantly remind your company’s creditors who they’re really doing business with.
Molly O’Leary represents business and telecommunications clients throughout Idaho, and is a managing member of Richardson & O’Leary, PLLC, located in Boise, Idaho. Ms. O’Leary also serves as a commissioner on the Idaho State Bar Board of Commissioners, and serves on the statewide advisory council for the Idaho Small Business Development Center.