Category: Business Law Blog

Assuming Personal Responsibility

A huge advantage to incorporating or forming an LLC is that it protects your personal assets from business debts. But creating the corporation or LLC isn’t enough—you have to make sure you don’t waive that protection.

One way to waive that protection is to take actions that suggest you’re willing to be personally responsible for the corporation’s debts. Below are four of the most common ways business owners can, intentionally or otherwise, assume responsibility for their business’ debts:

  • Signing a personal guaranty. By signing, you’re taking responsibility for paying the loan if the business can’t. Many banks require one, especially for new businesses. As you develop a good history with the banks, you might be able to get them to waive this requirement. Make sure to keep track of any personal guaranty.
  • Offering personal property as collateral. A creditor can go after collateral, even if it’s your personal property. Just like with personal guaranties, a bank is more likely to require this for new businesses. Again, make sure to keep track of what you offer as collateral.
  • Using personal credit cards for business expenses. You are always responsible for paying your personal credit card balances. The card company doesn’t care if you used the card for “business purposes.”
  • Signing a contract personally. Always make sure you indicate you’re signing as a representative of the company (ex. President, CEO, etc.). If you just put your name on the dotted line, people will assume you’re signing as an individual and plan to be held individually responsible for the contract.

Corporations and LLCs offer great protection for business owners, but that protection isn’t absolute. Being aware of how you can become personally liable for your company’s debts can help you minimize your risk and realize all the advantages incorporating has to offer.

Putting Wage Garnishments in Perspective

Garnishing a debtor’s wages is called an “earnings garnishment” in Wisconsin. It’s one way a creditor has to collect what they’re owed on a judgment. But like many ways to collect, there are limits to what and how you can garnish.

The biggest limitation is on what you can garnish: at best, only 20% of an employee’s earnings can be garnished. If garnishment would bring the earnings below the poverty level, you’ll get even less. And if an employee is already earning below the poverty level, you can’t garnish at all.

Another limitation is time: Wisconsin limits garnishing to 13 week periods. Usually, only one creditor can garnish at a time. When the 13 weeks are up, you have to re-file (and pay the appropriate fees).

A final issue with earnings garnishments is that they involve a debtor’s employer (called the “garnishee”), which can complicate things. For example, you must send certain forms to both the debtor and the garnishee. Both of them can object to the garnishment, meaning you may end up back in court to decide who’s right.

It might seem like, with all of those limits, an earnings garnishment is never a good idea. Not true! The key to a successful earnings garnishment is to keep your expectations reasonable. Working with someone who understands the collections process, the likely costs you’ll incur and the likely amount you’ll receive from the garnishment.

Also, consider alternatives ways to collect: a garnishment may be your best option, especially if you’re having difficulty finding other property that the debtor owns. And if the debtor makes enough money, you may be able to get the judgment paid relatively quickly.

The collections process can be daunting. Understanding the pros and cons of your options can help you make the best decision on approaching it.

Paid in Full

A customer who owes you money sends you a check for part of the amount due with the words like “paid in full” written on the check. The big question: what should you do with it? Do you have to accept? Can you accept the partial payment and try to collect the rest?

Technically, if the amount owed is undisputed, then the words “paid in full” won’t prevent you from cashing that check and pursuing the remaining balance. But if the amount is disputed, then accepting a check marked “paid in full” completely discharges the entire debt. The distinction sounds simple, but it’s difficult to apply in reality.

If you’re willing to accept the amount on the check as full payment, you can cash the check either way. That might be best if the debt is old or unlikely to be paid entirely. But if you aren’t willing to accept a lesser amount, it’s a good idea to return any “paid in full” checks with a letter explaining why you’ve returned it and inviting the debtor to send another check without the “paid in full” language. You don’t have to accept a check marked “paid in full” if it’s for an amount less than what you’re owed.

Perhaps the best thing to do is develop a policy regarding “paid in full” checks. Work with a collections attorney to decide how to track the checks, when you’ll accept them (for example, if the debt is over 5 years old or under $1,000), and how you’ll handle rejected ones. You can also address how you’ll negotiate settlements or payment plans.

Some debtors use “paid in full” checks to trick you. Others may honestly think they’ve paid the full amount. Knowing your options and being prepared can help you maximize your payment.

Hostile Work Environments: Uncomfortable for You and Your Employees

As an employer, you probably already know you can’t discriminate in hiring or firing people based on protected characteristics (race, gender, religion, disability, etc.). But you also can’t harass an employee based on those characteristics. If harassment creates a “hostile work environment” you could be legally responsible.

What is a hostile work environment?
A hostile work environment is when the harassment becomes so severe as to interfere with an employee’s ability to do their job. Isolated incidents usually aren’t enough to create a hostile environment. Having a “crappy job” isn’t enough, either, so it can be difficult to make a hostile environment claim.

I would never harass an employee, so I’m clear, right?
Unfortunately no. The Wisconsin Department of Workforce Development (DWD) notes that an employer might be liable for actions of their employees or even customers if the employer knows or should have known of the harassment and didn’t take appropriate action.

If it’s hard to make a successful claim, do I really need to worry?
Yes! Even if you don’t end up being sued, harassment can lead to low employee morale and productivity. It can even affect your reputation in the community (and we know people in the Fox Valley care about a business’ reputation).

So what can I do to protect my business?
Talk with an experienced employment attorney to create fair and workable policies. Then, make sure your employees know the policies and enforce them! Take all claims seriously and address them before they create a hostile work environment. You’ll avoid many problems and have something to fall back on if you do get sued.

You started your business because you enjoy what you do and hopefully your employees feel the same. Setting down some ground rules can protect you and help all employees feel comfortable at work.

Property Exemptions

If you have a judgment against a debtor, there are several options you have to try and collect it. One of those options is execution, or seeking to collect assets of the debtor to satisfy the debt. Unfortunately, Wisconsin has a long list of exemptions—certain assets that you can’t reach as a creditor.

Some of the more common exemptions are:
•The value of the debtor’s home up to $75,000;
•Child support or alimony payments;
•Social security or disability benefits;
•Some business and farm property, some household goods and some savings accounts;
•Retirement benefits; and
•75%, 80% or even 100% of the debtors’ wages (depending on the circumstances).

For some debtors, all of these exemptions might make them “judgment proof”—in other words, there’s nothing left to go after. But for others, it might just take some investigation. For example, the home exemption might mean a debtor’s Appleton house is off-limits but their cottage up near Green Bay is still fair game.

Because execution is complicated and full of these exemptions, it’s never a good idea to tackle it on your own. Always consult an attorney who can help you identify if execution is the best approach for you. This is especially true if the debtor is married—their spouse can claim all of those exemptions as well, making execution even trickier. Your attorney can help you identify what property you can actually reach and how to navigate the process.

Putting a Judgment to Work: Why Docketing Should Be Your Next Step

Winning a judgment against a debtor doesn’t mean you automatically get paid. In rare cases, a debtor may pay the judgment voluntarily (usually just to make it go away). But in most cases, you’ll need to docket your judgment to help you collect.

What is “docketing” a judgment and why should I do it?

Docketing means you formally record your judgment with the court. It creates a lien on any property the debtor owns in that county. In Wisconsin, the lien is good for 10 years.

Where do I docket a judgment?

Because a docketed judgment only creates a lien on property in the county where it was docketed, you should docket the judgment everywhere the debtor has property. For example, if you get a judgment in Outagamie County, the debtor might own a house in Brown County and a cottage in Winnebago County.  Docket the judgment in Outagamie, Brown and Winnebago County.  A business debtor might own a store in Calumet and Outagamie County.  In some cases, you may even need to docket your judgment in another state.

How do I docket a judgment?

Generally, to docket a judgment in the court where you obtained it, you’ll need to file the judgment form and pay a docketing fee. If you’re docketing a judgment in another county, there are additional steps (especially if you’re filing in another state). Unfortunately, even within Outagamie, Brown, Winnebago and Calumet Counties, the process isn’t identical.  Always work with your attorney to make sure you follow the right process.

What happens once I docket a judgment?

You could wait to see if the lien on the debtor’s property is enough—the debtor may pay up to improve their credit rating or in order to sell the property. But in the meantime, you can pursue other options, like garnishment or execution against property.

A court may grant you a judgment, but the court won’t collect it for you. It’s up to you to seek payment, so docket any judgment you have and talk to your attorney about additional enforcement options.

Employment Contracts 101: The Top 5 Things You Need to Know

A written employment contract can be a great way to protect your business. It can lay out your expectations and give you certain rights. But, like any contract, an employment contract is a two-way street that imposes some obligations on you as well. Before you sign up for something you didn’t want, it’s important to understand what employment contracts can do. Here are the top 5 things you need to know about employment contracts:

  1. An employment contract can and should be tailored to your individual business and the employee’s position. Include what’s important to you, like a confidentiality clause or how commissions are calculated.
  2. You can set a specific period of employment (like 3 years) or require an employee to give extra notice (like 90 days) before they quit. But remember: you’re bound to those terms
  3. Along those same lines, some employment contracts limit your right to fire employees withoutThis is especially true if you set a specific period of time for employment, so make sure you know what you’ve agreed to.
  4. 4.Not every employee needs an employment contract. You might need one if you’re offering perks to work for you over a competitor or if the employee would be difficult to.

    And most importantly:

  5. ALWAYS consult an attorney before signing an employment contract. Employment law is complicated and you need someone who fully understands what you need and what you’re potentially agreeing to—they aren’t always the same

Good employment contracts reinforce your rights as an employer and protect your business. But in return they impose some obligations on you. Understanding the basics of employment contracts will help you get the contract you need.

Avoiding Bad Debt: Tips to Help You Get Paid

The easiest, and cheapest, way to collect on a bad debt is to avoid it in the first place. There’s no foolproof way to avoid bad debts, but you can limit them.

  1. Talk to an attorney before you do sales on credit. An experienced attorney can tell you what rights you have if a customer fails to pay and help you draft a sales contract that states your business’s policy on payment (including incentives for early payment), interest calculation, personal guarantees, and recovery of attorneys’ fees for collection. They can also tell you what you can’t do to collect what you’re owed.
  2. Most clients show red flags before they default, like repeated late payments or asking for extensions. Make sure you have a system to spot those flags and address them early.
  3. Contact the customer immediately if their payment is late and stay in contact until you get paid. Be clear with the customer what will happen if they continue to not pay and document any conversations you have, especially the reasons for being late and any payment plan you work out.
  4. Send out invoices promptly and regularly. The longer you give the customer to pay, the more likely it is that they won’t.
  5. Follow through and be consistent. Follow your policies in every case. Stick to the deadlines you set for payment, especially if you negotiate a payment plan with a customer. Even if one client absolutely refuses to pay, future clients will see that you take collections seriously and think twice before failing to pay their bill.

Some customers, unfortunately, can’t or won’t pay their bills. But preventing most of your accounts from becoming problems in the first place will keep you and your business in the black.

Good Employees Gone Bad: What Your Disciplinary Policy Should Do

In an ideal world, you’d never have to discipline an employee. In the real world, though, it’s important to have a disciplinary policy that’s both clear and consistently enforced. A good disciplinary policy can help protect you and your business, especially if discipline results in terminating an employee. When creating a policy, there are several things to keep in mind:

  1. Put it in writing! Your policy should always be written down so that you can refer to it when needed, but also so that employees can read it and have a clear understanding of how it works. Equally important is to show the policy to your employees so they have a chance to read and understand it. That way you can avoid problems that happen just because an employee didn’t know your expectations.
  2. Write your policy with a view towards the process, such as how many warnings you’ll give, who should give them, and how to give them. Don’t try to address specific violations, because you can’t anticipate all of them.
  3. Be consistent with enforcement. Enforcing the policy with only some of your employees is unfair to all of them. Also, if you only enforce the policy sometimes, employees may not know when they’ve actually done something wrong.
  4. Document every step in the employee’s personnel file. Write up a summary of any verbal warnings and include a copy of any written ones. This helps you identify if problems continue to occur. It can also serve as evidence to support you if you have to terminate an employee.

A disciplinary policy should give you a road map to addressing employee problems, up to and including termination. But most importantly, a well-written policy will tell your employees what you expect of them and help you avoid problems before they start.

Being Reasonable: The Key to an Enforceable Non-Compete Agreement

Many employers now ask employees to sign non-compete agreements as a way to protect business interests. But having a non-compete you can actually enforce is easier said than done.

Wisconsin law requires non-compete restrictions to be “reasonably necessary for the protection of the employer.” It sounds simple, but in practice, courts interpret non-competes in favor of employees.  That means a lot of agreements aren’t enforced because they’re too restrictive.

There’s no guarantee your non-compete agreement will be enforced, but there are things you can do to increase your chances:

  1. Decide ahead of time what the business reasons are for having a non-compete (protecting a customer base or confidential information, for example). You’ll need those reasons if the agreement is challenged, but thinking about them first can also help you tailor the agreement to protect them better.
  2. Limit restrictions to a definite time period. What’s “reasonable” will depend on your situation, but usually it’s no more than 2 years.
  3. Limit restrictions to a definite geographical area. Again, this depends on the situation, but the area should be related to your business presence, like the area you advertise in and draw most of your customers from.
  4. Use non-competes as part of a policy, not based on individual employees. If you ask one person in a position to sign one, ask everyone in that position to sign one.

And most importantly:

5. Talk to a lawyer at the beginning. The law on non-competes is constantly changing. A lawyer will tell you where the law stands and how to write the agreement so it’s most likely to be upheld.

A non-compete agreement is useful only if it’s enforceable.  Take the time to plan your agreement so that you have the best chance of success.