What is an LLC, and why should you get one? LLCs are a powerful and flexible corporate form that provide incredible opportunities and protection for business owners. Even if you’re a small business, an LLC can provide a platform to grow and protect your business—and if you’re large, it’s definitely time to look at the benefits an LLC can provide.
1. LLCs Shield You from Liability
LLC stands for Limited Liability Company. When you form an LLC, you’re forming a company that limits your liability. LLCs are a “shield” that limit your legal liability for business decisions and mistakes that might otherwise harm you or your family.
For example, let’s say your business is installing hot water heaters. You sign a contract to install a hot water heater in a large office building, and you install the heater, but unfortunately, you are having a bad day, and you make a mistake, and the heater bursts and causes flooding in the basement of this office, or it causes someone to get burned, or maybe it just doesn’t work, and the business loses money because they don’t have hot water for a few days.
So what happens? You get sued—you do, personally—because you messed up. You breached a contract, your negligence caused an injury, your product that you re-sell subjects you to strict products liability, or all of the above. When this business and the injured employee and the office building’s owner or property management company sue you, they’re suing you, personally. If they win, they can collect that judgment by putting a lien on your house, by attaching your bank account, etc.
Now how would an LLC have helped you here? Simply put, if you run a company and make your contracts in the company’s name, then your breach of contract and other issues result in a suit against the company. That means your personal assets are not at risk. You aren’t personally being sued, you don’t personally have to report lawsuits against you personally if you’re seeking a mortgage, you can sleep a little better at night. It doesn’t mean your business won’t suffer from the lawsuit, it just means there’s a sealed wall between you and your company. Your company, in other words, limits your liability.
It’s important to note this doesn’t mean you can’t ever be sued personally for your actions, but if you set up your LLC properly, you will eliminate most of the situations in which you can be personally sued.
2. LLCs Allow Complex Forms of Ownership
If you’re a small business with a single owner, you can skip this one, but for family-owned businesses or startups with your college buddies that have quickly become lop-sided, an LLC allows you to setup virtually any ownership structure that you can dream of.
Does one person handle one aspect of the business? Does someone do most of the day-to-day management, while others contributions are physical assets or money? Such “lopsided” investments can be difficult to manage without an LLC as everyone’s contribution should be valued, but not everyone needs their “hands in the stew” of day-to-day management. Setting up your LLC with a board of directors or a day-to-day manager but giving financial ownership to those who’ve invested allows you to solicit investment without giving away power.
Similarly, using LLCs to shield risky investments from assets allows a business to grow in a more stable fashion. One example is setting up an LLC to protect real estate investments from one another. Using an LLC to purchase property, and setting up separate LLCs for each property allows a real estate business to protect one piece of property from the dangers that might come from another. If an injury occurs on one property, there is no liability attaching to a property owned by another LLC under the same company.
3. LLCs allow Outside Investment
Do you want to take on angel investors, or sell stock? The terminology is different (stock refers to a corporation’s ownership structure), but the function is the same. By offering investors a different class of “membership” (ownership), you can sell financial stake in your company without giving up control to the investors.
4. LLCs can be sold
Do you foresee the possibility that you might want to sell your business down the road? Your business may be satisfying now, but in thirty years, will you want to consider a second career? Would you like to be bought out for a huge amount of money in a few years by a company that thinks they can do something huge with your startup? Setting up an LLC makes it much easier to sell your business to someone who wants to take over your client list and assets one day.
Technically, you can always sell your business, even without an LLC. But many lawyers will advise a potential buyer to look elsewhere if your business is not well organized. Having an LLC that is properly setup and running encourages a potential buyer that their purchase will be easy to roll over into a new or existing business.
5. LLCs Let you Take Risks and Go Bankrupt
I realize this sounds a little crazy, but have you ever wanted to try a risky business? Have you ever wanted to take a leap? As discussed in number one, above, forming an LLC allows you to protect your personal assets. If your business goes belly-up, you aren’t putting your house at risk, or your personal credit.
Note, however, that this point is somewhat limited. Yes, the LLC will be liable for debts, but if you’re taking out enormous loans for a young LLC, you may be forced to co-sign. As always, it’s not just forming the LLC that matters—it’s how you manage and run it.
6. LLCs are the New Corporations
What about corporations? Should you consider one of those instead of an LLC? In short, LLCs are a new corporate form that has replaced corporations. Many companies will continue to run as corporations—and there’s nothing wrong with that. But new businesses starting up today should use LLCs except in very limited circumstances (where you expect to be publicly traded, or where you want to be nonprofit). Even those exceptions may soon be reduced.
So should you form an LLC?
Forming an LLC is almost never a bad idea, but the return on investment depends on the nature of your business and what your various risks are. Call the Cornerstone Law Firm, LLC today, and let’s talk about how we can help your business grow.
What To Do If Insurance Denies Your Claim
/0 Comments/in Insurance /by Cornerstone LawWhen an insurance company denies your claim, what should you do? Should you just accept the insurance claim denial, or should you fight it? Often times, when dealing with an insurance company to whom you have paid premiums for years, it can feel very frustrating when their denial leaves you feeling like you have few options. At Cornerstone Law Firm, we help clients every single day who have had an insurance claim denied to determine whether they should challenge the claim in court or otherwise.
There are two major things you should consider if your insurance claim has been denied:
1. What does your policy actually say?
When you signed up for an insurance policy, you received the full written policy (sometimes several days later in the mail). This policy can be thirty, forty, or even a hundred pages long, and will explain what the insurance company will do in a variety of circumstances and how the claim is to be administered. Does the policy cover what happened in your situation? Is there a provision that they referenced in their denial letter that governs your claim? If so, that provision is the starting point of your inquiry—but it is not the ending point.
2. What does the law of your State say?
What does the law of your state say about insurance contracts? States have laws and regulations governing insurance contracts. Here in Pennsylvania, the rules include a provision that says that insurance contracts should be construed against the insurance company if there is any question in how the contract should be properly interpreted. The law also says that if a contract for insurance violates the insured’s reasonable understanding of what they were purchasing insurance for, that provision is unenforceable. Thus, even if your insurance policy says that the denial of coverage is proper, that might not be the case.
Speak to an experienced insurance attorney.
If you have received a denial of an insurance claim, you should speak to an experienced attorney to ask them what to do in your situation. The attorneys at the Cornerstone Law Firm have substantial experience dealing with insurance company denials. We help clients to look through their policy to find the provisions at issue, look at the correspondence from the insurance company, and we can help you understand the law governing insurance contracts.
If you have been denied on an insurance claim for your car, house, or anything you may have insured, please call us at 610-926-7875 so that we can help you figure out your next steps.
What do I do if I’m an Executor? An overview of Estate Administration
/0 Comments/in Estate Administration /by Cornerstone LawWhen a loved one passes away what are the responsibilities that you have as the next of kin in regards to estate administration? In this post, I want to take the opportunity to give you an overview of the process, and to help you prepare for what you’ll expect in meeting with an Estate Administration attorney.
Marshalling the Assets
The first step in Estate Administration is marshalling the assets of the Deceased. They may have investments, stocks, bonds, IRAs, life insurance policies, 401ks and other retirement accounts, as well as bank accounts, trust funds, real property, personal property and other items of value. The Executor—that is, the individual charged with administrating the estate—will have to pull together information about each of these assets in order to assist the attorneys to make intelligent decisions about how to handle these matters. As part of marshalling the assets, there need to be appraisals done on certain items. Particularly where a business fixture or piece of equipment is difficult to value, appraisers will need to be brought in to give an opinion of the fair market value of such an item. This is true even of items that will be claimed by members of the family. Perhaps a ring or other family heirloom will be passed down to a daughter as part of her share the estate. Nonetheless, there will usually need to be an appraisal done to determine what portion of her share of the estate will be diminished by her taking that item of value instead of money.
Filing Tax Returns
They say there are two things you cannot avoid in life: death and taxes and this is particularly true at death when you have to pay more taxes. Despite the fact that an individual has had to pay income tax their whole life, they will usually have to pay an estate tax when they pass away. Even when the estate itself is not taxed, frequently the amount that is passed to the non-spouse will have to be taxed. This includes those items of value discussed earlier. Inheritance tax must be assessed, and an Inheritance Tax Return (REV-1500) must be filed within a tight time period with the Pennsylvania Department of Revenue. It is important to be diligent about preparing to file the tax return. Filing a tax return within three months brings a discount on the overall tax that has to be paid. In large estates, this discount can be a substantial amount of money. Accordingly, it is important to move quickly to prepare and file this tax return.
Distribution of Assets
After all the assets have been marshalled, valued and the taxes have been paid, it is time to distribute the assets from the estate. Distribution of the assets happens according to the Decedent’s Last Will and Testament, or, if there is no Will, according to laws governing intestate succession. This is the part you’re probably most familiar with, and of course, it’s the part where the Executor is rewarded for his hard work in administering the estate.
Conclusion: What to Do if You’ve been Named an Executor
When a loved one passes away, it is best not to delay decisions about the estate. Probating the Will, if necessary, and marshaling and distributing the assets must occur, and the sooner it occurs the more money that will be able to be passed to the heirs. If you have questions in regards to Estate Administration or if a loved one has recently passed away and you need help administrating their estate, call Cornerstone Law Firm and let us know how we can help you.
3 Reasons You Need a Will
/0 Comments/in Berks County, Wills /by Cornerstone LawEveryone needs a will. Every year, individuals die without wills, and their families deal with a great deal of unnecessary headache, stress and sorrow because of the unpreparedness of the family member who passed away. But despite the fact that everyone needs a will, many people don’t know why. So here are 3 reasons you should have a will—yes, you!
This is the obvious reason, of course. A will is the document that decides who takes your possessions and your property at the time of your death. Even if your family knows who you were closest to, the law will not necessarily pass your possessions to that person. A will is a necessary and easy way to dictate who will take your possessions upon your passing, and, perhaps more importantly and in some situations, who will not take your possessions when you pass.
This is one of the more frightening and concerning potential outcomes that a will helps to prevent. When you pass away, a court will be in charge of determining who will take custody of your minor children. A will provides clear and strong evidence of who it is you intended to have your children, and this will be upheld by the courts absent extraordinary circumstances. If you do not do this, your children could potentially be put in midst of a protracted legal custody battle. This is true even if everyone in the family is clear on who should have custody of the children or who you wish to have custody of the children. A court will still have the final say because no will was left to establish who you wished to have custody of your children.
If the other parent of your children is in the picture—married to you, or otherwise sharing custody with you—then this is not as much of a concern; the court will allow custody to the other parent. However, if both of you are to pass away suddenly, this would still be a potential problem that a will can solve. Simply put, when it comes to something as important as custody of your children there is no reason to take any chances.
These may sound like fancy legal terms to many readers, but selecting who will be the Executor (or Executrix if a female) of your Estate is a very important decision. First, in selecting your Executor it is important to consider who will carry out your wishes at your death. Second, in selecting your Executor, you are selecting someone that will make very important decisions if there are ambiguities in your will or situations that you could not have predicted. Your Executor may also be responsible for setting up Trusts for your children if they are still minors and dealing with other details. Third and finally, someone has to take the responsibility to deal with your Estate, and that individual will in all likelihood be paid from your Estate for their time and trouble. Making sure that the person who is going to receive some payment from your Estate is someone you trust, respect and appreciate is important.
Conclusion: Wills are For Everyone
Wills are important for every individual to have. You need a will to handle the affairs of your Estate after your death. But in some cases, a Trust, such as a Revocable Living Trust is a better option. Speaking with an estate planning attorney is important, and it shouldn’t be put off. Call Cornerstone Law Firm today and speak with one of our attorneys about getting started on your will.
6 Benefits to Limited Liability Companies
/0 Comments/in Business Law /by Cornerstone LawWhat is an LLC, and why should you get one? LLCs are a powerful and flexible corporate form that provide incredible opportunities and protection for business owners. Even if you’re a small business, an LLC can provide a platform to grow and protect your business—and if you’re large, it’s definitely time to look at the benefits an LLC can provide.
1. LLCs Shield You from Liability
LLC stands for Limited Liability Company. When you form an LLC, you’re forming a company that limits your liability. LLCs are a “shield” that limit your legal liability for business decisions and mistakes that might otherwise harm you or your family.
For example, let’s say your business is installing hot water heaters. You sign a contract to install a hot water heater in a large office building, and you install the heater, but unfortunately, you are having a bad day, and you make a mistake, and the heater bursts and causes flooding in the basement of this office, or it causes someone to get burned, or maybe it just doesn’t work, and the business loses money because they don’t have hot water for a few days.
So what happens? You get sued—you do, personally—because you messed up. You breached a contract, your negligence caused an injury, your product that you re-sell subjects you to strict products liability, or all of the above. When this business and the injured employee and the office building’s owner or property management company sue you, they’re suing you, personally. If they win, they can collect that judgment by putting a lien on your house, by attaching your bank account, etc.
Now how would an LLC have helped you here? Simply put, if you run a company and make your contracts in the company’s name, then your breach of contract and other issues result in a suit against the company. That means your personal assets are not at risk. You aren’t personally being sued, you don’t personally have to report lawsuits against you personally if you’re seeking a mortgage, you can sleep a little better at night. It doesn’t mean your business won’t suffer from the lawsuit, it just means there’s a sealed wall between you and your company. Your company, in other words, limits your liability.
It’s important to note this doesn’t mean you can’t ever be sued personally for your actions, but if you set up your LLC properly, you will eliminate most of the situations in which you can be personally sued.
2. LLCs Allow Complex Forms of Ownership
If you’re a small business with a single owner, you can skip this one, but for family-owned businesses or startups with your college buddies that have quickly become lop-sided, an LLC allows you to setup virtually any ownership structure that you can dream of.
Does one person handle one aspect of the business? Does someone do most of the day-to-day management, while others contributions are physical assets or money? Such “lopsided” investments can be difficult to manage without an LLC as everyone’s contribution should be valued, but not everyone needs their “hands in the stew” of day-to-day management. Setting up your LLC with a board of directors or a day-to-day manager but giving financial ownership to those who’ve invested allows you to solicit investment without giving away power.
Similarly, using LLCs to shield risky investments from assets allows a business to grow in a more stable fashion. One example is setting up an LLC to protect real estate investments from one another. Using an LLC to purchase property, and setting up separate LLCs for each property allows a real estate business to protect one piece of property from the dangers that might come from another. If an injury occurs on one property, there is no liability attaching to a property owned by another LLC under the same company.
3. LLCs allow Outside Investment
Do you want to take on angel investors, or sell stock? The terminology is different (stock refers to a corporation’s ownership structure), but the function is the same. By offering investors a different class of “membership” (ownership), you can sell financial stake in your company without giving up control to the investors.
4. LLCs can be sold
Do you foresee the possibility that you might want to sell your business down the road? Your business may be satisfying now, but in thirty years, will you want to consider a second career? Would you like to be bought out for a huge amount of money in a few years by a company that thinks they can do something huge with your startup? Setting up an LLC makes it much easier to sell your business to someone who wants to take over your client list and assets one day.
Technically, you can always sell your business, even without an LLC. But many lawyers will advise a potential buyer to look elsewhere if your business is not well organized. Having an LLC that is properly setup and running encourages a potential buyer that their purchase will be easy to roll over into a new or existing business.
5. LLCs Let you Take Risks and Go Bankrupt
I realize this sounds a little crazy, but have you ever wanted to try a risky business? Have you ever wanted to take a leap? As discussed in number one, above, forming an LLC allows you to protect your personal assets. If your business goes belly-up, you aren’t putting your house at risk, or your personal credit.
Note, however, that this point is somewhat limited. Yes, the LLC will be liable for debts, but if you’re taking out enormous loans for a young LLC, you may be forced to co-sign. As always, it’s not just forming the LLC that matters—it’s how you manage and run it.
6. LLCs are the New Corporations
What about corporations? Should you consider one of those instead of an LLC? In short, LLCs are a new corporate form that has replaced corporations. Many companies will continue to run as corporations—and there’s nothing wrong with that. But new businesses starting up today should use LLCs except in very limited circumstances (where you expect to be publicly traded, or where you want to be nonprofit). Even those exceptions may soon be reduced.
So should you form an LLC?
Forming an LLC is almost never a bad idea, but the return on investment depends on the nature of your business and what your various risks are. Call the Cornerstone Law Firm, LLC today, and let’s talk about how we can help your business grow.
National Park “First Amendment” Signs Should Come Down
/3 Comments/in First Amendment /by Cornerstone LawLast week, after observing signs in National Parks purporting to limit the exercise of the First Amendment, Attorney Joel Ready sent the following letter to Ryan Zinke, Secretary of the Department of Interior, and to Michael Reynolds, the director of the National Park Service.
Dear Sec. Zinke:
At the end of August, I honeymooned with my wife in the Smoky Mountains National Park. The Smokies are a sort of home away from home for my family. I spent many summer weeks there growing up, and of course, my wife and I now have wonderful memories of the park as well. The park has earned its place as the most visited park in America, with its lush beauty and unique wildlife. We had the opportunity to quietly observe two black bears while we were there, as well as to visit Clingman’s Dome and Cades Cove, among other sites.
However, I write to let you know of a concern I had while visiting the Smokies. During our trip, we stopped at one of the visitors’ centers,[1] where we were confronted by [the sign pictured above].
As you are probably aware, Mr. Secretary, the First Amendment cannot be confined to a small portion of government-owned ground. The First Amendment is designed to prevent the “abridgment” of speech, no matter where it occurs. Nowhere is this protection stronger than on government property. While the government is free to engage in reasonable “time, place and manner restrictions,” such restrictions must be content-neutral, narrowly-tailored to advance a significant government interest, and leave open ample alternative channels of communication.[2] Parks are “quintessential public forums [where] the government may not prohibit all communicative activity.”[3] I believe that no compelling government interest is at play here, and that these zones in front of visitors’ centers[4] (making up only a fraction of a percent of the total park) do not constitute a “narrowly-tailored” solution in any event.
The Smoky Mountains National Park, like our nation, was born in the cauldron of political dissent and protest. When the federal government used the powers of eminent domain to seize the land in the 1920s and ‘30s, a number of evicted local families protested in different ways, including protesting FDR’s speech in the park (which was, of course, full of political statements, as any Presidential speech would be).[5] Political speech in our national parks is a proud tradition, and the federal government has no place in attempting to curb speech by creating “zones” where it is acceptable or unacceptable to speak.
In our travels through the park, we encountered a number of violations of this sign, including Jehovah’s Witnesses with displays who were handing out tracts about their faith, the National Park Service’s signs throughout the park arguing for better environmental protection legislation and lauding past EPA efforts, and a small child protesting to her mother that she was done with her sack lunch (most of her sandwich was still uneaten). From the loftiest sentiments (those about religion) to the most trivial (private disputes between mother and child), all of these are speech protected by the First Amendment from government abridgment, and all of them are presumably prohibited by the sign at the visitors’ centers.[6]
I have no reason to believe any enforcement action has been taken against groups or individuals based on these signs. Nor do I harbor any suspicion that you personally authorized these signs. Rather, like so many things, our liberties are slowly eroded by the well-meant actions of individuals attempting to prevent pesky protestors from marring natural beauty or causing disruption. But protests and political speech do not mar natural beauty as quickly as oppression. I hope you will not think I overstate my case with the word “oppression”—rather, the attempts of government to snip at the fringes of free speech are always the first signs of the erosion of natural liberty. The American people are free to speak and advocate for their beliefs on government property, and these signs should come down.
With great respect and appreciation, I write to request that you remove these signs from all National Parks and any other similar government-owned properties where they may be found.
[1] The visitor’s center we visited was Sugarlands Visitors’ Centers, where we encountered very kind and helpful rangers and other workers.
[2] The caselaw on this point is voluminous, but one example should suffice: Perry Educ. Ass’n v. Perry Local Educ. Ass’n, 460 U.S. 37, 45 (1983).
[3] Id.
[4] I was unable to ascertain whether these signs are present at all visitors’ centers in the Smokies, or at all parks nationally, or whether this one visitors’ center was an anomaly. I presume that they are present nationally, but my argument is not affected if this visitors’ center is the only example.
[5] Both silent footage and text of the speech survive. The footage can be viewed on youtube: https://www.youtube.com/watch?v=RnJbJbcr3jw. The text of the speech is also available: “Address at Dedication of Great Smoky Mountains National Park.,” by Franklin D. Roosevelt, September 2, 1940. Online by Gerhard Peters and John T. Woolley, The American Presidency Project. http://www.presidency.ucsb.edu/ws/?pid=16002.
[6] Political t-shirts, personal conversations, bumper stickers on cars and license plate messages, and “pillow talk” while camping under the stars are all presumably prohibited by the sign, as well.
Film the Police
/0 Comments/in First Amendment, Law Enforcement /by Cornerstone LawFilming the police has become an act of political speech. Police actions caught on camera have played an enormous role in debates over police brutality and practices over the last twenty years, most infamously in the case of Rodney King. In the wake of such landmark events, many cities and police departments have tried to crack down on and prevent the filming of police actions. In Fields v. City of Philadelphia, released yesterday by the Third Circuit Court of Appeals (the Federal Court that governs Pennsylvania, New Jersey and Delaware), the court ruled that the First Amendment protects your right to film the police as they do their job, and that a city may not prohibit such filming or photographing of police actions, because the First Amendment to the United States Constitution protects your right to film and photograph the police.
The Camera as Eyewitness
In a beautifully-written opinion, the court ruled that you have the right to record even run-of-the-mill police encounters, because one never knows when a shot might be important. The First Amendment gives you the right to preserve an eyewitness account of what you’re seeing, even if you’re not sure that you’ll ever use that footage.
Footage Need not be “Expressive”
The court rejected the contention that the individuals caught filming the police had to prove that they were creating some sort of expressive art protected by the First Amendment. The very act of filming was the protected conduct.
This aspect of the ruling—that you don’t have to prove the artistic value or expressive nature of your footage or picture for it to be protected by the First Amendment—will have broad application in other contexts. Students who film a teacher’s interaction with them at school, footage of a DMV official rejecting an applicant on dubious grounds and even pictures taken on the street of public events are all constitutionally protected, even if it is unclear at the time how such media may be used. This right extends to the private citizen in equal force as it does to the press.
A few exceptions
The court left open the possibility that there are limits to the time, place and manner in which you can film the police. Recording a police officer’s conversation with a private informant, getting in an officer’s way or otherwise interfering with police activity might be unprotected conduct which could properly lead to an arrest.
But the court left these possible exceptions general, and the most important ruling in this case will be that you have a right to record your public servants as they go about their jobs or interact with you and others. You have a right to film the police.
Pick up Your Phone
So keep your phone out when you run into the police, or when you see others interacting with them. Allowing the public the opportunity to see how police work is done is an important part of making our justice system better, and of advocating for a better society. The First Amendment protects your right to do just that.
Police Dashboard Camera Videos Must Be Released
/0 Comments/in First Amendment, Law Enforcement /by Cornerstone LawPolice dashboard camera videos are available to the public pursuant to Right to Know requests in Pennsylvania, says the Supreme Court of Pennsylvania. The ruling in Pennsylvania State Police v. Grove, which came down Tuesday, affirms that Motor Vehicle Recordings (MVRs) are subject to disclosure unless specific content is proven to be confidential.
Unfortunately, this is not the law in all states, and even here in Pennsylvania, the state legislature is taking steps to expand police power to protect videos from disclosure. Yet, as we’ve seen in the Philando Castile case and others, footage capturing officers in crucial moments of fatal encounters can sometimes be the only witness against an officer’s word. Such footage can go viral and have a tremendous impact on the public’s perceptions of law enforcement.
Yesterday, Cornerstone Law’s Attorney Ready, who covers the Supreme Court of Pennsylvania for SCOPA Review, was asked to comment on this case for 69 News out of Allentown. You can watch the interview here.
Does the First Amendment Give You the Right to Record Police?
Another case coming from the Federal Court of Appeals for the Third Circuit will have significant implications on how we monitor police. In Fields v. City of Philadelphia, the Federal Court is called upon to decide whether the First Amendment allows the City of Philadelphia to prohibit the recording of police while they perform their jobs.
The simple fact is that while we need police as a society, police are an extension of government power–and where there is power, there will always be corruption. “Power corrupts, and absolute power corrupts absolutely.” Giving our government absolute power to determine what information can be released, or who can record the government’s actions is corruption. Monitoring our government is a right inherent to our republic, and must be preserved.
Contracts Promote Business
/0 Comments/in Contracts /by Cornerstone LawContracts are the fabric of society. Contracts promote business by clarifying parties’ expectations and facilitating better working relationships. They hold us together, allowing commerce to go forward quickly and securely, and allow the conscientious businessman a remedy when a business partner goes back on his word. But contracts are often frustrating to the business owner precisely because of their importance. When presented with a contract and all its glorious fine print, most people glaze over (seriously, when was the last time you read your iTunes’ user agreement?).
We have a gentlemen’s agreement
One mistake many people make is assuming that a “gentlemen’s agreement” will suffice for their business. “I was raised to honor my word,” I’ve heard many clients say after they were burned by someone who never put their commitment in writing.
The problem with such oral agreements is two-fold. First, as the old joke goes, oral agreements aren’t worth the paper they’re written on. Just because you were raised to honor your commitments doesn’t mean the other guy was. And second, even where both parties are honest, written contracts force both parties to think about scenarios they might not otherwise consider.
For example, let’s say that you are a famous orange-grower, and I would like to buy and re-sell your delicious, name-brand oranges. We agree that you will sell me 1,000 oranges at $1 a piece. We shake hands, and we have a deal, right? Well, yes, we do, but do we really know what our deal is? Am I picking up the oranges, or are you paying to have them delivered? Does it matter if this year’s orange crop came in smaller than last year’s? Do I have to pay on delivery or after I re-sell, and do you care if I pay with a credit card? Most of all, what if you had a bad year and sell me your neighbor’s oranges? I bargained for your name-brand oranges, not some neighbor’s knock-off citrus!
I think you get the point. Sitting down and writing out an agreement does not eliminate the possibility for misunderstanding, but it helps to bring into focus the various things that can go wrong in a business deal, and allows the parties to allocate the risk of various possibilities.
What should a good contract have in it?
Obviously, a contract should be as unique as the deal it governs. It’s always frustrating to see form contracts copied and pasted from one thing to another, as though a business deal is just a cut and paste job. Nonetheless, certain provisions should probably be in your contract.
What happens if the crop you’re buying—or the product you’re depending on the production of—is unavailable because of famine, war or strike? You can laugh, but this happens all the time. What if the other party dies tragically during the term of the contract? Is his estate responsible for completing the contract?
This might seem unnecessary in a deal between two local businesses, especially in a place like Berks County. But what if the other party to your contract moves to Montana, and the deal breaks down at some point? Can you sue him in Reading, Pennsylvania? That depends on a number of factors, believe it or not, but if you’ve written that into the contract, the answer will almost certainly be yes.
If you mess up, what happens? Does the contract dissolve? Is there a stated financial penalty? Does it depend on the damage done to the deal? This part of a contract is governed by a fairly complex thicket of Constitutional law and public policy legislated both through our General Assembly and our courts. Understanding how these remedies will be enforced (or whether a court will refuse to enforce the remedy the parties wrote into the contract) is vital to creating a strong document to govern your transaction.
Sounds obvious, right? But how are you getting paid (or making payment)? Does it matter if it’s in cash, or will you take a line of credit? Will you allow a grace period if a payment doesn’t get in on time? If so, what interest rate are you agreeing to? Who’s delivering? To where? If weather interferes, is delayed delivery excused?
Conclusion
A contract is the lifeblood of a good business deal. It is crucial to have a well-drafted document that covers the contingencies that can arise. As the old saying goes, “Measure twice; cut once.” A well-written contract can lead to a much more amiable relationship between the parties when unexpected difficulties arise, and can lead to more and better business in the future. Do you need contracts to cover your business? Contact the Cornerstone Law Firm today, and let us see how we can help you.