Category: Business Law Blog

Contracts: An Underused Contractor’s Tool

Before you begin work for a customer, it’s crucial to have a contract in place. A contract protects you and your customer by setting out, ahead of time, the expectations you both have. While some parts of your contracts will change depending on the type of work, the size of the project, or your business preferences, there are some basic parts that should always be in your home improvement contracts.

First, you should always have a written contract with your customers. Many states actually require home improvement contracts to be in writing if certain criteria are met. For example, Wisconsin’s Home Improvement Practices Act (Wis. Adm. Code ATCP 110) requires contractors who accept payment before the job is completed to have a written contract that contains certain key parts. Regardless of whether it is required, a written contract can reduce the chance of a dispute (for example, over what work was included) later on and also serve as evidence to support your claim if a dispute does crop up.

 

So, what should be in your written contract? Many states have specific legal requirements and limitations for home improvement contracts. You should consult a local attorney to make sure you comply with your state’s laws. Generally, however, there are seven things all home improvement contracts should have:

1. Price: The contract should include the total price, plus any finance charges (particularly if you allow payment plans). If the project is for time and materials, specify the cost of materials, the hourly rates involved, and any conditions that might affect those prices.

2. Work description: A good work description lists not only what you will do, but what materials you will use. More detail is better. For example, if you install windows, identify how many windows you’ll be installing, who manufactures them, their make/model, their color and size, and so on. The work description is also a good place to note if something isn’t included. Using the same window example, you might want to note that you do not install shutters on the new windows.

3. Time period: Identify the start date and completion date. If you don’t know specific dates, include the time period during which the work will take place. It’s also a good idea to note if there are factors (i.e., weather) that could alter the schedule and how that will be handled.

4. Contact information: Your written contract should include your name, address and phone number. If you want customers to contact you by email, include that as well. You should also include the name and business address of the salesperson or agent who worked with the customer.

5. Security interests/construction lien rights: If you plan to take out a lien, mortgage or other security interest (usually as part of financing), then you should make sure it’s clearly stated in the contract. Additionally, some states require certain notices be given to homeowners about contractors’ and subcontractors’ construction lien rights. A local attorney specializing in construction law can set you on the right path.

6. Guarantees and warranties: If you make any guarantees or warranties about your products and/or services, they should go in the contract, along with any conditions or, just as importantly, limitations on them. In some cases, you may also want to note or include any guarantees or warranties made by manufacturers of the products used.

7. Signatures: Ideally, you want a contract signed by both you and the customer. Ultimately, the most important part is to have the homeowner sign, as that is the party against whom you could potentially end up enforcing the contract in court.

We highly recommend that you work with a local attorney to customize your basic terms and conditions in the contract for your business.

Even with all of the advantages of having a written contract, many contractors resist them because they know that a project often changes as it goes along. The good news is that there’s a simple way to address this issue: change work orders are additional written and signed documents that can be incorporated into your contract if changes need to be made. Together, they can help you stay on the same page with your customers and protect you from disputes down the road.

A Creditor’s Guide to Bankruptcy

Bankruptcy is difficult for a debtor, but did you know it can also be complicated for creditors? While big creditors have sophisticated processes for dealing with bankrupt customers, small businesses are often the ones left out.

As soon as a customer files bankruptcy, there are several key steps you should take to protect your interests:

  1. 1.Contact your attorney. Bankruptcy laws are complicated and if you don’t follow the bankruptcy court’s rules, you can end up with nothing or even having to pay back what you’ve collected.
  2. 2.Collect and preserve your business records for that customer. Those records are important to prove your claim.
  3. 3.If you’ve sold goods to the customer on credit, you might be able to reclaim those goods if you quickly send a reclamation demand to the customer. You should also stop goods that are in transit or hold goods not yet shipped to the customer.
  4. 4.File a proof of claim. This proof of claim is necessary in order for you to have any right to potential distributions.
  5. 5.Stop the collections process. Filing for bankruptcy automatically stops creditors for pursuing other collections options, like filing a lawsuit.

Unfortunately, you can’t accept payment from the customer once they’ve declared bankruptcy or even in the period immediately before declaring bankruptcy (with some exceptions). It seems unfair, but the goal is to prevent customers from paying favored creditors while others are shut out. You may end up being sued to repay the amount. If a customer suddenly offers to pay an old bill, check with your attorney first before accepting.

Understanding your rights and limits when a customer declares bankruptcy can give you the best chance to come out of the process on top. And remember: a good process for handling bankruptcies is no substitute for having a solid, consistent collections process up front.

Location, Location, Location…and Zoning

Location is critical to the success of your business. You probably already know to consider visibility, convenience, and traffic patterns when deciding where to locate. But you may not know there’s another element to consider: zoning. Zoning laws limit the ways you can use property located in that area.

Zoning laws have gotten much more complicated that just separating housing from businesses. Many cities now restrict the types of businesses that can go in a particular area and those restrictions aren’t always obvious (for example, some cities treat churches as “residential” uses). Zoning laws also now include additional requirements: signage, parking, visual appearance, and even limiting the number of businesses.

Fortunately, there are three things you can do to protect yourself from running afoul of the zoning laws:

1. Do your homework! Always check the zoning for a property before you buy or lease it. Some cities will agree to change zoning, but in those cases its best to make the sale or lease contingent on the zoning change going through.

2. Be nice to your neighbors—cities usually wait until a neighbor complains before pursuing violations. Building good relationships with your neighbors gives them less reason to complain.

3. Never rely on how the previous owner used the property—just because the previous owner used the property for a particular business doesn’t mean you can. The previous owner might have been grandfathered in (the business existed before the zoning law) or no one challenged its existence.

Remember, fighting zoning laws can be difficult and expensive. On top of that, cities usually have quite a bit of leeway to make and enforce zoning laws. Instead of fighting them, plan ahead to find the perfect location for your business that has the right zoning.

What to Know before you Join an LLC

Joining an LLC as a new member can be a great professional opportunity. But with all the excitement, many people forget to take a serious look at what they’re signing up for. Part of the reason is that each LLC is different – LLCs are controlled mainly by the Operating Agreement written by existing members. Here are the four things everyone must know before they join an LLC.

1. You can’t just “quit” an LLC like you can a job.

Some LLCs might offer you a membership interest instead of hiring you as an employee. There are certainly advantages to this, but one disadvantage is that it’s much harder to dissociate from the LLC as a member than it is to quit as an employee.

2. Not all members play the same role.

If you want to play an active role in running the business, make sure you’re joining as a managing member and the Operating Agreement spells out your decision-making ability. Passive members simply provide funds and sit back.

3. Membership interests are not created equal.

Some members may (and often do) have a larger percentage than the others. They might have more say in running the company or be entitled to a bigger percentage of profits. Make sure the percentage you’re being offered is sufficient for what you want to get out of the opportunity.

4. Contributions.

Joining an LLC requires you to make an initial capital contribution (usually), but many people don’t realize they can be on the hook for additional contributions down the road. Failing to make these “capital calls” could lead to dilution of your ownership, losing your interest entirely, or lawsuits.

Fortunately, all of these concerns should be addressed in an LLC’s Operating Agreement. Taking a little time to review the Operating Agreement with an experienced business attorney can help you figure out if becoming a member is a good opportunity for you.

Expanding Your Business With Business Certifications

Both government and private organizations offer businesses multiple ways to “certify” their business as a particular type. Common certifications include small business, woman-owned, minority-owned, and disabled veteran-owned. But what do those certifications mean and is it worth looking into certifying your business?

There are two main reasons businesses choose to get certified. The first is that government agencies and even some private companies offer business opportunities to particular types of businesses. A good example is that many state agencies set aside a certain number of contracts for small businesses certified with the U.S. Small Business Administration.

Another reason to get certified is marketing. A business targeting women might attract more customers if they can advertise as a certified woman-owned business. Similarly, many customers will appreciate knowing that they’re supporting small or veteran-owned businesses.

Before deciding to certify your business, it’s a good idea to do your homework. First, make sure you qualify. Second, specific business opportunities may require you to be certified by a particular organization (like a national organization rather than a state government). Finally, research the certification process. Some certifications may be fairly simple and ask for limited information. Others require you to follow a lot of steps, including an on-site visit, and can take a while to complete.

Certifying your business can be a great way to market your business or access new opportunities. Our attorneys can help you decide if it’s the right choice for your business and walk you through the process.

Piercing the Corporate Veil: How to Avoid Losing Your Corporate Protection

Ask any business owner why they incorporated their business and one of the reasons they’ll give is “to protect myself from business liabilities.” But incorporating doesn’t mean you can never be held personally liable. Although it’s rare, courts sometimes ignore the legal protection of a corporation to hold an owner personally liable (a process called “piercing the corporate veil”).

The good news is there are steps you can take to avoid having a court pierce the corporate veil. Piercing happens when the court decides that you, as a business owner, haven’t really treated the corporation as a separate entity. In Wisconsin, the same theory applies to LLCs and their members as well. Essentially, the courts are saying that if you want the protection of incorporating, you have to follow corporation rules.

To avoid piercing:

  • Always follow corporate formalities, like holding annual meetings, keeping minutes and filing with the state on time
  • Never mix corporate assets with your personal ones (or those of another corporation or LLC)
  • When setting up your business, make sure it’s adequately funded. Courts are more willing to pierce an “undercapitalized” business
  • Always identify your business as a corporation or LLC so customers and creditors are on notice that your business has limited liability. Also identify your title so they know you’re acting on the business’ behalf
  • Never use your business to engage in illegal, fraudulent or reckless activities (and get the advice of an experienced business attorney if you aren’t sure)

Having a court pierce your business’s veil can be devastating for you as an owner. But by following the rules, you won’t give the courts a reason to pierce. That way you and your business can take advantage of the protections offered by corporations and LLCs.

Cross Your T’s: Conducting Due Diligence

Buying or selling a business can be an exciting opportunity. With that excitement, many buyers and sellers skip due diligence entirely or cut corners. Failing to do due diligence can have serious consequences. When the excitement wears off, many buyers and sellers are left wondering what went wrong.

Most people buying a business look at the financial information. But many fail to conduct full due diligence and look at all parts of the business. Failing to look at the circumstances of the sale can be disastrous for both buyers and sellers. Buyers may discover they can’t operate the business at a profit or at all. Two particular areas of concern are: 1) Licenses and permits and 2) Liabilities.

Many businesses require licenses or permits in order to operate. Due diligence involves making sure the business you buy has those and that they can be transferred to you (for example, an Appleton permit won’t work if you plan to set up shop in Green Bay). The last thing you want is to go through the purchase process only to find that you can’t operate the business because you don’t have the necessary permit.

Another area to investigate is liabilities that might not show up in financial statements. For example, a business might be in violation of employment laws or facing environmental lawsuits. Depending on the liability and how the sale is structured, a buyer may be on the hook for those, leading to extra costs and cutting into profitability.

Sellers also face problems if due diligence isn’t completed. Depending on what warranties you make, omitting information might make them untrue. And untrue warranties lead to liability.

Buying or selling a business should be an opportunity for growth, not a hassle years down the road. Taking the time to do it right now can save you time later.

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.