The Mistake of a Business Owner Who Does Not Consult an Attorney

Impulsivity, urgency, or trusting without making sure you are protected can result in a mistake for a business owner. Like most things in life, some mistakes are small and have minimal consequences while other mistakes are catastrophic and have civil and/or criminal consequences.

Hypothetical #1: Gwen and Blake have been friends for decades. Blake is a blacksmith who has his own business, Blacksmith for Life. Times are difficult for blacksmiths, so he asks his friend Gwen to join the business because two owners have to be better than one, he thinks. Gwen wants to help out her friend, and readily, without consulting an attorney, signs a document before a notary that Gwen has prepared. The document states that Gwen and Blake are now 50/50 partners of Blacksmith for Life. Six months later, Gwen unexpectedly receives a letter from the credit card company for the business that she owes $50,000. Gwen is unaware of this debt, and confronts Blake. It turns out Blake has been having financial difficulty and has charged $50,000 of personal expenses on the business credit card. Gwen then contacts an attorney and wants papers drawn up. Gwen wants the papers to say that Gwen is no longer part of the business and Blake is 100% liable for the $50,000. Gwen wants to walk away without any consequences.

Analysis: Gwen will not be able to walk away without any consequences. Blacksmith for Life is a general partnership under Minnesota law. That means that Gwen is jointly and severally liable for the debts that Blake incurred in the business. In other words, if Blake does not pay the $50,000 of credit card debt, Gwen owes the $50,000 of credit card debt. Moreover, even if Gwen and Blake signed documents that said Gwen is no longer part of the business and Blake is 100% liable for the $50,000 (and any other business debts), the credit card company does not have to and most likely will not honor such an agreement. The reason why the credit card company is not going to honor such an agreement is because they were not a party to the agreement and did not agree with it, which means they are not bound to abide by Gwen and Blake’s Agreement. Moreover, Gwen is the one who has $50,000 to pay off the debt, and Blake does not have any funds to pay the debt (which is why he charged $50,000 of personal expenses to the company). So, Gwen’s failure to retain an attorney will most likely cost her at least $50,000.

Hypothetical #2: Sandbars Exclusivity LLC is a construction company that focuses on constructing homes on islands with the feature of the home a sandbar. The LLC hires construction workers as independent contractors without consulting with an attorney because they have a project that starts next week and there is not time. One of the workers falls from scaffolding while constructing the roof and gets seriously injured. OSHA investigates.

Analysis: The LLC will have civil and possibly criminal consequences for the misclassification of a worker an independent contractor when they are an employee. Without the LLC strictly complying with the 14-factor test that is now the law in Minnesota, the LLC does not have a defense regarding the misclassification.

Spangler and de Stefano, PLLP assists business owners with helping business owners plan for the unexpected so that you have peace of mind.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.