There is nothing like a real-life story to drive home a point. What you are about to read are the real mistakes of real people. The names and details have been changed to protect innocent entrepreneurs.
Entrepreneurial people tend to have positive motivation, hope and confidence in the future. Those are essential characteristics for budding entrepreneurs. The timid need not apply. On the other hand, discretion is the better part of valor; jumping in without doing a little bit of due diligence can lead to costly mistakes, and many of us learn that lesson the hard way.
John Doe worked his whole life for other people and was tired of lining other peoples’ pockets by his own hard work. He knew a little something about widgets. He had a good source for buying bulk wholesale widgets, and he knew who was interested in buying bulk wholesale widgets.
John had saved up some money that he could use to make his first purchase of bulk wholesale widgets. With a modest profit on the first purchase, he would have more money for the next purchase, and so on. John did not think he needed a lawyer. As an entrepreneurial sort, he was intrigued by commercials about Legal Zoom that promised he could do it himself and save money he did not have.
He chose a name for his business, Enormous Enterprises. John used a do-it-yourself website builder to develop a nifty website. He was anxious to get started and contacted the wholesale widget provider he knew. John made his first purchase of wholesale widgets and was able to sell the wholesale widgets for a modest profit. His business was born.
Not long after John signed the contract with the wholesale widget producer, John went to apply for a federal identification number and state business ID number. He discovered he needed to incorporated the name first. When he tried to incorporate using the name, Enormous Enterprises, the State of Illinois rejected his articles of incorporation.. He was not sure exactly why, but he changed the name to John’s Widgets, LLC, and organized his business as an LLC.
Someone told him an LLC was better, and Legal Zoom walked him through the organization process. John was pleased that he was able to do it all himself. Everything was going great until John ran into some problems.
Unfortunately for John, the wholesale widget market was very volatile. John knew the market, but he figured that he was knowledgeable and experienced enough that he could avoid being caught in the switches. Unfortunately for John, he did get caught in those switches and was stuck with a million pounds of widgets that he bought when the price was high, and he was facing a huge loss of money he did not have when the price abruptly plummeted.
John began to panic, not knowing how he was going to unload a million pounds of widgets without taking a big loss. He contacted an attorney and showed the attorney the contract, hoping that the contract was somehow invalid and there was some way that he could avoid his obligation. To John’s chagrin, the attorney told him it was a binding document, and he was stuck with the terms he agreed to.
Then the news went from bad to worse.
The attorney noticed that John signed the contract under the name Enormous Enterprises, which was not the name of the LLC that John actually organized. John explained what happened, and the attorney told him that the contract is enforceable against against John personally!
John thought, “How could that be? He set the business up right, following the instructions in the kit!”
The problem ended up being the things John didn’t know. He did set the LLC up right, but he had already entered into the contract before he formally set up his business. He also didn’t understand the distinction between himself and his business. He did not realize that a name made that much difference, as he thought it was all his business by whatever name he chose. Unfortunately for John, he was wrong about those assumptions.
Legal Zoom did not explain these things. His nifty widget business was about to go down in flames and take him with it. John had to file for bankruptcy.
This example, which follows real life experience that I have witnessed, shows what can happen without good knowledge of the law and good advice. The most critical time to get that advice is when the foundation of the business is being set – in the beginning – before starting to do any business.
Some aspects of the law are really pretty simple. It is not rocket science, but a person does not know what a person does not know. A good attorney is a good educator and will pass on the critical knowledge a business person needs to avoid very avoidable, and sometimes very costly, mistakes.
- Kevin G. Drendel
- Drendel & Jansons Law Group
- 111 Flinn Street Batavia, IL 60510
- (630) 406-5440
- [email protected]
This article is not intended to create or imply an attorney-client relationship and is not intended as specific, legal advice. This article contains only general statements and opinions of the law and should not be relied upon for advice or application to a particular circumstance or set of facts. No attorney/client relationship is formed by the publishing of this article or responses to it. No information contained herein is a substitute for a personal consultation with an attorney. Visit www.batavialaw.com or call (630) 406-5440 for more information.