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Secured Transaction, cont.

In addition to a sigsecured loanned security agreement, a security interest is not enforceable unless the secured party has given value, such as if the secured party provides the debtor with a loan, or sells or otherwise delivers goods to the debtor.

A security agreement may provide for past, current or future loans that a creditor may make to a debtor.  With the debtor’s consent, an existing creditor might obtain collateral for a past loan, and the earlier loan provides the necessary value. A security interest may also secure a loan made at the same time the security interest is taken. In addition, the security agreement may specify that the collateral will secure a loan that will be made in the future. If the creditor makes a binding commitment to make a future loan, that binding commitment provides the necessary value. However, if the creditor merely retains the option to make a future loan, value is not given and the security interest does not attach until the future loan is made.

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What is a Partnership?

A partimagesnership is an association of two or more people to carry on as co-owners of a business for profit.  A partnership can be a general partnership or a limited partnership.

Many people decide to form a partnership because it allows for a pooling of owner assets, both monetary and skill sets.  In a general partnership, owners have unlimited personal liability for all debts of the partnership.  Unless there is an agreement stating otherwise, any partner may bind the partnership to an agreement with a third party.  Even in the case of an agreement stating otherwise, a partner’s actions may still be binding up the partnership.

It is for this reason that I caution people not to refer to other people as partners.  Third parties can rely on this representation, which may result in you being bound to obligations to which you did not actually agree.

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Signed Security Agreement

A security interest is enforceable against the debtor when it has been attached to collateral.  Unless the secured party takes possession of the collateral, attachment requires an authenticated record, typically a written security agreement signed by the debtor.  The agreement must indicate that the debtor has conveyed an interest in the collateral, and include a description of the collateral that reasonably identifies the collateral by item or type.  For example, a description of “all of the debtor’s property” or a similar non-specific description is insufficient.  If the collateral is consumer goods, securities, a “commercial tort claim”, or if the loan is made for the personal, family or household purposes of the borrower, the agreement must describe the collateral in greater detail.  Otherwise, the agreement may describe the collateral by its type, such as “equipment”, “inventory” or “accounts”.

Fountain Pen and Signature

If the collateral is other than consumer goods, i.e. those items that are bought or used primarily for personal, family or household purposes, the security agreement may cover both existing collateral and “after-acquired” collateral provided that the agreement specifically states as such.

The attachment and enforceability of a security interest is governed by Ohio Revised Code Section 1309.203.

The United States Federal Trade Commission restricts the types of consumer goods which can collateralize most loans. With certain limited exceptions, the FTC prohibits a secured party from taking a security interest in most household goods, including clothing, furniture, appliances, one radio, one tv, linens, china, crockery, kitchenware, personal effects and wedding rings. There is no such prohibition on security interests in works of art, other electronic entertainment equipment, items acqured as antiques (more than 100 years old) or other jewelry. See Title 16 of the Code of Federal Regulations, parts 444.1-444.5 (2006) for additional information.

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What is a Secured Transaction?

A secured transaction is a credit or loan transaction in which the borrower agrees to give the lender a security interest in the borrower’s property, known as the collateral.  If the borrower defaults, the lender (secured party) can take possession of the property and sell it to recover the value of the loan.  The security interest is a lien on the borrower’s property.  These transactions are governed by Ohio Revised Code Chapter 1309.

To protect its security interest, a secured party must “perfect” its lien, which is usually done by filing a financing statement with the secretary of state.  The secured party may sometimes perfect its lien by being in possession of the collateral, however in most situations this is impractical.  There are other complicated exceptions to the filing requirement set forth in the Ohio Revised Code.

Screen-Shot-2012-12-18-at-10.33.47-AM1By perfecting its lien, the secured party will be able to enforce the lien in the event the borrower seeks protection from its debts by filing for bankruptcy.  And even outside of a bankruptcy situation, the secured party will want to perfect its lien to protect the collateral from the claims of other creditors.

Chapter 1309 does not apply to mortgages or other interests in land.  Real estate mortgages are governed by Ohio Revised Code Chapter 5301.

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What’s Wrong With This Transaction?

Bob Buyer and Stu Seller agree that Bob will buy Stu’s business.  Stu is 100% owner of the corporation.  They agree on an asset only purchase, for a purchase price of $425,000.  They each sign a two page document showing a purchase price of $250,000, and Bob provides Stu with $100,000 in cash and a personal check for $40,000, payable to Stu.

There are several problems with this scenario.  First, it is difficult to prepare an adequate asset purchase agreement in two pages, and certainly the purchase price in the document should match the agreed upon purchase price.  It is doubtful this document was prepared, or even reviewed, by an attorney.  No mention is made of a bill of sale, assignment of lease or any other mechanism to transfer the business from Stu to Bob.  

In addition, Bob should not personally purchase the assets, but should create a corporate entity to purchase and own the assets.

Next, paying cash provides no paper trail, which would be necessary in the event something goes wrong.  Further, Stu is not the owner of the assets, his company is, thus has no legal right to transfer them.  Any check should be payable to the company and all funds deposited in the company’s account. 

Finally, it is unclear what the purchase price is or how it will be paid.  $140,000 is neither the agreed upon price or the price reflected in the document.  How much does Bob owe, and what are the terms regarding its payment? No mention is made of a promissory note or other document describing any balance owed by Bob or the payment terms.

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Formalize Your Agreements

We recognize that many small business owners often operate with various informal agreements. However, we want to ensure you recognize that it is frequently important to formalize an agreement with a legal contract. For example, any agreement upon which you rely that can affect the future of your business is important enough that it should be formalized.

Among other things, contracts allow both parties to clearly define their obligations and expectations to and from one another, establish (and potentially limit) their liability, set forth payment terms, and allow each party to understand its responsibilities.

A legally valid contract has four basic components:

A meeting of the minds. Both parties understand and agree to the essential elements of the arrangement.
Consideration. Something of value must be exchanged by each of the parties. This can be in the form of money, goods, or even a promise to do something.
An agreement to enter into the contract. A written contract signed by both parties satisfies this requirement. (Oral agreements can also be valid in certain circumstances.)
Legal competence. Each party must have the capacity to enter into the agreement, meaning each must be of sound mind, and neither can be a minor.

While most contracts address specific items, such as payment terms, timing issues, and the exact subject of the agreement, the above four components are a critical starting point. Remember, if it’s important enough to cause you to wonder, it’s probably important enough to formalize the agreement.

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Consultants and Independent Contractors

As a small business, it is not always possible to hire all of the employees you think you may need. But this can be ok. Hiring independent contractors or consultants instead can be beneficial. You will get their special expertise, you will use them only as needed, you will save on tax contributions and benefits, and you will have flexibiity in the relationship.

It is critical, however, to carefully document your agreement with each independent contractor or consultant. Failure to do so could result in serious tax consequences. Also, if the relationship involves the development of a product, software, book, manual or intellectual property, to name a few, your agreement should set forth the rights you expect to retain in the final product.

Having employees is great, but independent contractors and consultants can often fill a specific need.

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Hiring? Tips Regarding the Process

Finding the right employees can be a daunting task.  Good employees can be the most important component to the success of your business.  While there are many sources for finding new hires, the internet, job search engines, internal postings, word of mouth, current employees, head hunters, etc., it is critical to go through the process thoroughly and properly.

For example, there are numerous employment laws that apply to many employers, such as The American With Disabilities Act, The Age Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964, to name a few.  Be familiar with what laws apply to your company, and ensure processes and procedures to comply.

Along those lines, there are questions that can be considered either appropriate or inappropriate to be asked during the interview process.  Asking an applicant his age, marital status, ethnicity and so forth will get you into trouble, while asking about responsibilities in his most recent position, special skills, education and similar questions will suit you well.  It is critical to know the dos and don’ts before interviewing any candidates to avoid pitfalls and possible liability.

Some employers choose to use offer letters in hiring a new employee, while others are satisfied making the offer verbally.  In either case, be careful not to mislead the candidate or promise something you can not deliver.  For example, avoid statements that give a false sense of security, or what the applicant may understand to be a long-term promise of employment.

For high level executives, it may be appropriate to sign a formal employment agreement covering topics such as the position, term, salary, bonus and benefits, termination rights, job responsibilities and similar items.  Employment agreements also cover provisions regarding confidentiality, non-competition and non-solicitation.  Many companies make the mistake of overusing employment agreements; it is best to keep these to a minimum, reserved for high level employees.

Your employees are critical to your success.  Be sure your hiring tools are up to date and comply with the laws and regulations applicable to your company.

 

 

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The Corporate Minute Book

corporate-minute-bookIt is important to keep your corporate minute book current.  It should include various important documents, such as the company’s articles of incorporation, bylaws, and minutes or written consents of all meetings and actions of the directors, committees and shareholders.

A current corporate minute book is a useful tool in helping you to comply with corporate formalities, which helps prevent shareholder liability.  In addition, in the event you want to raise money or sell your business, attorneys for the other side will likely want to see your minute book.

Problems to avoid include the following:

  • Minutes that the secretary has not signed
  • Written consents without all necessary signatures
  • No minutes for regularly scheduled shareholder or board meetings
  • Written consents authorizing execution of certain documents as attached, but failing to attach the documents
  • Failure to document calls or notices of meetings
  • Notices or calls of meetings that are legally inadequate
  • Shareholder minutes that do not reflect the number of shares present or how they voted
  • Resolutions showing board approval but not shareholder approval where both are necessary
  • Lack of authorization for issuing shares of stock

Keeping an up-to-date corporate minute book is not unduly burdensome, but well worth the time and effort.