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LoveEsq's Startup Resources

LoveEsq's Startup Resources

Welcome to Legal Office Hours!

Limiting Liability for Entities

William Love

These pages are subject to the

Legal Disclaimer⁠

⁠

Brought to you by William Love, and certainly not an exhaustive list (nor perhaps applicable).

Here are some things that come up when attempting to limit your liability:

Insurance:

Carrying adequate business insurance won’t erase the personal liability of a member or manager if negligent. It can help by providing another pocket for payment. Pro tip: Have your attorney actually make sure the insurance covers what you need it to do.

A personal umbrella policy may defray the costs if such a member or manager is personally liable.

Personal Guarantees and Liability

Use the correct name for the business, ask your attorney what is the correct name for the business.

While not all personal guarantees can be avoided, do not automatically consent to every guarantee.

Consenting to personal guarantees should only be done where the facts warrant it.

Understand how to sign a document, so the liability falls on the entity not an individual.

How to sign a document:

Make sure your organizational title is included in your signature line/block. Pro tip: Have a standard signature block made up by your attorney for reference.

Watch for contract language that could make you personally liable, think about consequences.

The date of your signature should be the date you actually sign and not any other day.

Check for the business consequences to your business from failure to success.

Check to see if the other sign has the authority or apparent authority to sign the document. Pro tip: the Gold Standard is Board Approval.

Have you actually read and understood the contract? Do not rely on what people are saying unless it is in the written contract.

Capitalize the business adequately.

Provide adequate capital for the entity’s intended purposes.

Document the capital going in or out, by written agreements.

Keep the entity/business finances separate from personal finances.

The business even if tiny should have its own bank account.

Do not pay personal expenses from the business account

Do not use personal money to pay business bills.

If the entity needs funds, the member should either give capital or loan capital. (see above)

Document Everything.

Understand the limitations of protection.

Outfit your business with more than just a limited liability entity “shield” and maintain your legal business “equipment”. A limited liability entity like a corporation or LLC is a shield, not a perfect shield, not a helmet, not a good pair of boots, not a tank, and definitely not the

Cheyenne Mountain Complex⁠

You will need other things like contracts, and a good field commander (aka an attorney) etc.

Pro tip: What can be considered a contract can be widespread and expansive in normal circumstances, the point of having written contracts is to both limit this exposure and make them easier to enforce.

Double Pro tip: Attorneys love it when their opponents use forms developed for one business in another business, it leads to easily exploitable gaps in protection.

The Agreement can undermine protections.

Have you gone through all the scenarios in the agreement?

Have you assessed risks and the consequences of those risks?

Have you considered the implications of agreements crossing borders?

Pro tip: A lack of deep understanding is what endangers agreements. Rushed timelines, lack of resources, and hidden references all contribute to bad deals being made.

Common Dangerous Clauses

Termination for convenience

Unilateral amendment rights

Best-efforts obligations

Assignment-consent requirements

Non-competes, no-hire, and no-solicitation provisions

Hidden Tax consequences

Indemnity obligations

Negative effects of positive outcomes

Most-favored-nation clauses

Exclusive-rights provisions

Automatic renewal and Evergreen clauses

Confidentiality obligations missing

Pro tip: A reason that you want your attorney to both understand the transaction thoroughly (by a question asking dialogue and review process) and get in on the ground floor early is that:

Any part of a contract can be weaponized (purposefully or inadvertently), and all clauses can be dangerous if not all words.

Details matter.

The earlier this is addressed the easier it is to fix because deal momentum is not built up.

Act ethically.

Misleading and omitting can make you personally liable. Misleading an an entities creditors about the financial condition of the business in order to obtain credit can turn a limited business obligation into a personal one.

Misleading yourself or your staff is just foolish and leads to many many other secondary legal issues.

Watch out for round-trip sales transactions.

Don't make hidden side letter agreements.

Don't practice in unlawful collusion.

Don't "bribe" foreign "officials" (or US officials).

Don't "export" without a license or a license exception.

It’s smarter to do it right in the first place.

You make more money in the long run by smart ethical behavior

Do not take assets.

Set aside money initially for the cost of winding down the business. Major protections can be gained by doing it correctly. That is your “zero point”.

If the business looks like it is failing you cannot reduce your loss by taking big draws or moving assets out of the entity. This allows access to your personal assets.

Pay withholding taxes & Pay your people.

The IRS can impose a 100% penalty on any responsible person who willfully fails to collect and pay trust fund taxes. Pro tip: The IRS gets their money.

Not paying or not classifying people correctly (at least state and federal minimum wage), will sink you and potentially can subject you to personal liability, and worse undermine your contractual rights. Pro tip: Pay much more than minimum wage, like a livable wage (or better) and your employees will generate opportunities for you and their work will be better.

Insurance:

Personal Guarantees and Liability

How to sign a document:

Capitalize the business adequately.

Keep the entity/business finances separate from personal finances.

Understand the limitations of protection.

The Agreement can undermine protections.

Common Dangerous Clauses

Act ethically.

Do not take assets.

Pay withholding taxes & Pay your people.

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