Podcast Episode 7—Protect Yourself by Properly Signing Business Contracts?
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Podcast Episode Timestamps
00:33 — Why use a business entity, generally, and what is its purpose?
01:08 — What I plan to talk about in this episode, and why it matters
02:39 — How a business contract should be signed
04:12 — How a business contract should be signed (really this time)
05:22 — Authority to sign for the business, and contexts in which it might be needed in writing
06:30 — Review of how the business contract should be signed
07:03 — Discussion of “risk management” – there are no guarantees
07:53 — Areas of law discussed: corporations law, agency law, and negotiable instruments statute
09:30 — Texas Business & Commerce Code 3.402 is complicated, but instructive
10:10 — Personal guarantees discussed, compared, and contrasted
11:48 — Discussion of trying to remove an individual as a defendant in a lawsuit in which a business contract was signed incorrectly
12:50 — Summarizing the episode
13:20 — Where to find more episodes of the Keith Law, PLLC Podcast
13:45 — Where to find the related blog post and how to submit questions
14:20 — Outro
TL; DR:
Once you have your entity set up, you are on the right track toward protecting your personal assets from business claims. Don’t undermine your risk management by improperly signing business contracts. The best practice is to unambiguously identify your business entity in the contract and sign the contract with the name of the entity, clearly identifying yourself as signing as agent. It’s also best not to mix up an assumed name (a/k/a “d/b/a”) with the entity’s true name.
See, below, for an example signature block.
What’s the Point of a Business Entity?
Starting a business is inherently risky. But, society benefits from entrepreneurs taking business risks. So, one way society incentivizes (or aims to decrease the disincentives) of starting a business is by helping entrepreneurs manage their risks by forming business entities (such as LLCs and corporations) that, generally, limit the downside risk to the assets of the entity. However, often, to realize the full risk-management benefits of the entity, things need to be done properly. One thing that needs to be done properly is signing contracts on behalf of the entity.
The Common Problem
New business owners understandably see themselves as the business. So, it’s common for a business owner to identify themselves individually in business contracts and sign with only their individual name. Usually, this does not cause a problem. Until there is a problem. Then, folks scrutinize the contract looking for everyone who can be held responsible legally. If the entity is not unambiguously identified as the contracting party, the individual will be included as a defendant in the lawsuit too. The problem with an individual owner being included as a co-defendant with the entity, is that it expands the world of assets in jeopardy beyond the assets of the entity to include the assets of the individual’s household.
The Solution
The solution is preventative medicine – meaning avoiding the problem before it happens by properly signing all business contracts. Although nothing is guaranteed and business risk management is about managing risks, not eliminating them, properly signing a business contract on behalf of your entity is a free and easy step to minimize the risk of losing the benefits of having an entity in the first place.
Governing Law
The first area of law to understand a bit about is corporations law. As mentioned, above, entities are permitted to limit business liability to the assets of the entity (protecting the assets of the entity’s owners). To do this, the law treats a business entity as a person. To sign a contract, a person needs to sign its name. But how does an entity sign its name. For that, we need to look at another area of law – agency law.
The law of agency deals with one person taking action on behalf of another legally. Business entities act through their agents, including officers, directors, managers, members, and workers. Legally, agents are permitted to act within the scope of their authority. Different agents may have different authority. When it comes to signing a business contract on behalf of an entity, the agent should have authority to sign the contract. Although not specifically applicable to all business contracts, I like to look to the law of negotiable instruments for guidance for agents signing business contracts on behalf of an entity.
The law of negotiable instruments is governed in Texas by statute – specifically, chapter 3 of the Business & Commerce Code. At 3.401 and 3.402, the statute addresses the necessity of signature for liability and signature by representative (agent), respectively. My preference is to look to 3.402 for best practices guidance on signing on behalf of a corporation.
What Does B&CC 3.402 Say?
Generally, if we look at 3.402 to determine best practices for signing a contract on behalf of an entity, (1) the entity should be identified in the body of the contract, and (2) the form of the agent’s signature should unambiguously show that the agent is signing on behalf of the entity.
What this means is that in a perfect world, I would like to see the entity’s formal name in the body of the contract (not just the trade name, assumed name, or d/b/a). Second, I would like to see the signature block identify the entity’s name, followed by the agent’s signature preceded with “By:” signaling that the agent is signing on behalf of the identified entity. Then, under the agent’s signature, it is good to include an indication of the agent’s authority, such as “Its: Director.”
Can You Just Show Me an Example?
Sure. I prefer business entity signature blocks that look like this example:
XYZ,LLC
BY: [signature of John Smith]
John Smith [typed name for legibility – not necessary]
ITS: Manager [or whatever agency role John Smith holds with XYZ, LLC]
What if I Signed Contracts Differently?
First, know that most contracts will not lead to a lawsuit in which the terms and parties are scrutinized for inclusion in the lawsuit. Second, the information in this blog post and related podcast are focused on what I view as best practices to minimize risk of personal exposure. In the event of a lawsuit in which you are included as a defendant individually, your attorney will likely have plenty of good arguments for why you should be dismissed from the lawsuit in your individual capacity. That said, preventative medicine is much cheaper.
What About Personal Guarantees?
Personal guarantees are used to expressly extend liability beyond the entity’s assets to those of the individual. There are often reasons for doing this and, when you do it, you should know you are doing it. The purpose of this blog post and related podcast is to help avoid INADVERTANTLY exposing personal assets on a business obligation.
Disclaimer: This audio and blog post are for informational purposes only and should not be misinterpreted as legal or other professional advice. If you have a legal question, you should consult with an attorney in your jurisdiction. Thank you for tuning in to Keith Law, PLLC.
(Photo by Sozavisimost from Pixabay)