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Small Business Owners: Avoid these Pitfalls

Happy Friday, and a conclusion to “Small Business Week”.

President Barack Obama has proclaimed May 1-7, 2016 “National Small Business Week.

I follow the Small Business & Entrepreneurship Council, if you are a small business owner you should check the organization out.

In regards to National Small Business Week, SBE Council president & CEO Karen Kerrigan was quoted this week as saying: “in order to boost opportunity and business growth Washington must focus on advancing policies that are more friendly and supportive”

I agree. I am all for policies that are friendly to small business.

But, I’m not here to talk policy. I’m here to talk about “what not to do” if you are a small business owner.

And what better way to help me illustrate this than a recent court of appeals decision from April 12th.

The case:

Herman v. Jeffrey W. Pickell & Kaleidoscope Books, 2016 Mich. App. LEXIS 700, *1-2 (Mich. Ct. App. Apr. 12, 2016)

Facts:

  • Defendant – Pickell was the sole proprietor of a business: Kaleidoscope Books and Collectibles, located in Ann Arbor, Michigan.
  • Plaintiff – Herman met defendant at some point in the late 1990’s while plaintiff’s daughter was a student at the University of Michigan.
  • Plaintiff frequented defendant’s store due to his interest in collectibles  and other products that defendant sold.
  • The parties each claimed that the other was the first to initiate the suggestion of going into business together. Id. ps 1-2. (I’m picturing this –“You wanted to go in business first, no, YOU wanted to!“)

The Business Terms:

According to the Court, “both parties seemed to agree that at some point they came to an understanding whereby plaintiff would provide defendant with $50,000 in return for a 10% interest in defendant’s business.” Id. pg 2.

Apparently, that’s about all they could agree on.

The Writing that contained the Business Terms: Two Letters:

According to the Court, “[n]o writing existed between the parties before a February 1, 1998 letter from defendant to plaintiff that stated that plaintiff was “a ten percent (10%) silent partner in the business.” Id. pg 3.

“Defendant sent a letter to plaintiff dated June 25, 1998 that stated that plaintiff would “retain 10% ownership . . . until the $50,000 loan is completely repaid.” Id.

(Question: Is Plaintiff a “silent partner”, or an investor with a “loan to be repaid?”)

Addressing these types of ambiguities are the reasons you retain a lawyer beforehand…

Long story short, 10 years went by without communicating, and Plaintiff sued Defendant for breach of a business contract.

I’m not going to tell you how the story ends, you can read that here.

But, these facts give me the opportunity to illustrate a few points for small business owners to consider:

1. Your business agreements should be in writing.

Any business transaction where money is changing hands. should be in writing. Taking on a partner?

Taking on an investor?

Taking on an investor that could convert into an equity partner?

Entering a business contract for services, supplies?

Put it in writing.

2. In writing, prepared by a lawyer, not a letter you drafted yourself.

I’ve written many times in the past on the problems that arise when people decide to be their own lawyers.

Nowhere is this more prevalent than small business. Putting together the documents you need likely is not as expensive as you think, and is worth it considering the cost of litigation.

3. Your business should be incorporated.

The defendant in this case was a “sole proprietor”. He had no liability protection.  He was completely liable for any debts or liabilities of his company. I’ve written on this topic before: Business owners  need to consider forming a limited liability company or a corporation to shield yourself from personal liability of your business debt.

e-mail: Jeshua@dwlawpc.com

twitter: @JeshuaTLauka

www.dwlawpc.com

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