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.

0

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.

0

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.

0

Client Testimonial

“I’ve been working with lawyers and governance issues for more than 20 years.  Working with Nancy brings all the bests together – she has a great mastery of non-profit law and governance issues; she is brutally efficient – resulting in great value for the investment in her work; and, she has a way of breaking down complicated issues to promote understanding and good decision making.  I’d highly recommend Nancy for your non-profit legal needs.”  Steve Millard, President and Executive Director, COSE | Council of Smaller Enterprises

0

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.

0

Donating Property

As the year-end donor season approaches, we want to remind you that the donor is required to pay for an appraisal for any property, real or personal, for which the donor wants to take a deduction of $5,000 or more.

We often see agreements between a donor and non-profit organization whereby the non-profit agrees to pay for a qualified appraisal of the property to be donated.  IRS rules does not permit this, notwithstanding the terms of any such agreement.  More specifically, the donor is required to file Form 8283 with her tax return to take a charitable deduction for donated property, which requires her to get a qualified appraisal of real and personal property.  Not all donations require an appraisal, such as cash or marketable securities.  But where an appraisal is required, it is up to the donor to obtain and pay for it.

0

Stacy Bauer is COSE’s Volunteer of the Year

trophy

We are thrilled to congratulate Stacy Bauer, winner of this year’s Volunteer of the Year Award presented by COSE.  Stacy has been very involved in COSE since joining in 2011, participating in many activities supporting Cleveland’s business community, including COSE’s Ambassador program.

Join us in congratulating Stacy on this well-deserved honor!

0

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.

0