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A Rose by any Other Name: A Lesson in Corporate Formalities

“A rose by any other name would smell as sweet,” said William Shakespeare; but what is in the name of a business? Would a business by any other name smell as sweet?

As long as business is good it is sweet indeed; ah, but there is the rub. People who go into business sometimes do not appreciate the significance of corporate formalities. A lack of understanding of the formality of the business name and of agency principles can spell double toil and trouble.

Consider the savvy business person who incorporates a business, Sweet Roses, Inc., knowing that the corporation will protect her, personally, from the liabilities of the business. After all, that is the main benefit of adopting the corporate form of ownership: personal liability protection. The shareholders of BP Amoco stock are not personally responsible for the slings and arrows of outrageous fortune that BP Amoco suffered from the Gulf oil spill because the corporation shields the individual shareholders from the liabilities of the business.

A corporation operates as a liability shield because a corporation is considered its own “person” in the law. A corporation is considered its own legal entity capable of entering into contracts, incurring liability and making profits (so we hope) on its own, independent of the shareholders. The shareholders are only at risk for the capital they put into the corporation in exchange for their stock (in hope of profits or whatever other dreams may come!).

So what is in a name? The Business Corporation Act devotes an entire article (Article 4) to corporate names. The Business Corporation Act states with clarity that the name of a corporation must include one of the following words or abbreviations thereof: corporation, company, incorporated or limited (Corp., Co., Inc., Ltd., etc.); and the name shall be “distinguishable upon the records in the office of the Secretary of State” from all other corporations or limited liability companies.

Why, one might ask, is the name so important? For one thing, the name of a business that is incorporated must inform the world that it is a corporation – thus, the required suffix. And what if the name does not “do” that? It will be rejected by the Secretary of State.

But, where is the rub? The rub comes when a business person fails to appreciate what is in the name of a business and gets careless. Success smells sweet, but the slings and arrows of outrageous fortune can turn the sweet smell of success into the bitter taste of defeat.

Enter our once savvy business woman from stage right. The scene has now turned into a sea of troubles. Our protagonist has decided ‘tis nobler to close up shop and let the business die than to go on suffering the darts of business misfortune. The Lease, was signed, after all, on behalf of the corporation, was it not? “Twas not I, but the corporation,” says the erstwhile shareholder.

But, the corporation, alas, is an empty shell having shuffled off its mortal coil, leaving nothing for the landlord but a dream of better days when the rent was paid. Loss of fortune has left no assets in the business from which the landlord may be paid.

But wait…, what is that? The Lease bears a strange business name – Red Roses, Inc. What manner of person is that? It does not appear of record. Sweet Roses, Inc. Is known, but who is Red Roses, Inc? And lo, not only does it appear that our erstwhile heroine signed the Lease in the wrong corporate name, but she signed her own name to the lease without any indication that she was signing it as an agent. Those outrageous fortunes that would have shuffled off with the corporation’s mortal coil have found their mark in the poor shareholder instead of her corporation as the curtain draws to a close. The shield has been breached, and our shareholder finds herself obligated on all the corporate debt.

The post script is this: What is in a name is not just the stuff of fiction. Attorneys in our office took a case to a jury trial with these facts. The poor business man not only failed in his business, but he ended up personally liable on the lease. A judgment was entered against the businessman in the amount of the full remaining term of the Lease that was breached because he did not appreciate the significance of the corporate name. He confused the name on the Lease, and he did not indicate that he was signing his own name to the lease in an agency capacity.

When a contract is signed in the name of a corporation that does not legally exist or is not registered with the Secretary of State (like Red Roses, Inc.), the person who signed the contract is personally liable on that contract even if he meant to sign on behalf of a real corporation (Sweet Roses, Inc.) What’s in a name? The name is the name. Any other name does not smell as sweet and will not do when it comes to a corporation or an LLC.

A corporation or LLC that exists, but is not disclosed, is considered an “undisclosed principle”. If a person signs a document that is intended to be on behalf of a corporation or LLC, that person will become personally liable if the corporation or LLC is not named (or incorrectly named). It is of no help to indicate that one is signing in an agency capacity if the real principal (corporation or LLC) is not disclosed or is not accurately disclosed (the wrong name is used).

In addition, when a corporation or LLC exists and is named in a contract, but a person signs the contract without indicating that the contract is being signed only in an agency capacity (i.e.; as president, or secretary or even as “agent”), the unwitting agent who did not indicate the capacity in which she signed the document may be held personally liable. Not only is the name important, but designation of the capacity in which an individual signs a document is important. The corporation or LLC will not shield a person from liability who signs the contract in his own or her name. When signing a document for another “person” (like a corporation) one must clearly indicate that the signature is being given on behalf of the other “person” (by also writing in “president” or “agent” or similar agency designation).

What is in a name? It is everything for an enterprise of great pith and moment when the enterprise is undertaken as a corporation or limited liability company. The individual shareholders or members may only benefit from the personal liability protection that those forms of business provide, if those business people understand and observe the necessary formalities of the corporate or LLC form of ownership. A rose by any other name does not smell as sweet.