The prospect of finally getting down to business excited Lee. But it also scared him. Lee had taken months of planning before he was ready to start his business. He had talked about his idea for an LLC with everyone who would listen. He had his LLC formed, his business plan, and his financing. His spouse had even asked him when he was going to get started. Yet something was keeping Lee from taking the plunge. And Lee knew what it was. He was scared to commit to anything on which he’d have to follow through. He was scared to sign a contract because he knew it meant that the excitement was over and the work had begun.
Commitment
You’ve seen that forming an LLC is relatively easy. Surprising as it may seem, forming an LLC also doesn’t come with any commitment. Search your state’s corporations bureau database, and you’ll see hundreds or even thousands of businesses. Not all of them are operating. Many of them are just placeholders, ideas for businesses that for one reason or another never got off the ground. Just because you’ve formed an LLC doesn’t mean that you must take the plunge into starting its operation. Indeed, if going through the planning process has shown you that you don’t have the stomach for it, then stop. Trust your gut. You may not have the right plan. You may not have the time, motivation, personality, discipline, or character. But on the other hand, expect to feel trepidation and hesitation. You’d be foolish not to do so. Take it a step at a time until you are confident that you are wise and ready to commit.
Contracts
Your formal commitment to operating your LLC comes with your execution of the LLC’s first contracts. Contracts are agreements or promises to perform. The promise on one side is typically to pay money and on the other side to supply a good or perform a service. Contracts can also involve exchanges of goods for goods, services for services, or goods for services, in what we sometimes call bartering. An executory contract is one in which neither side has performed yet but both sides have agreed to do so in an enforceable form. A promise to keep negotiating toward a contract is not a contract. The parties must agree on the contract’s essential terms, which typically include item or service, quantity or duration, price, and performance date or time. Color, material, quality, and other specifics may or may not be essential terms, depending on the product or service. Course of dealing or industry trade may fill gaps in non-essential contract terms, like manner of shipment, if the parties do not specify those non-essentials.
Performance
When you sign a contract on your LLC’s behalf, you and your LLC have two main interests to consider. The first interest is whether your LLC can live up to what it has promised in the contract. Don’t commit your LLC to any contract about which you’re unsure of your LLC’s ability to perform. Your judgment whether your LLC can live up to its promises may be your single most valuable skill when managing your LLC. Your most-valuable skill is not product design, financial administration, or customer relations. It is instead can your LLC do what it promised to do. The other consideration you must make when committing your LLC to a contract is whether the other side can do what it promised to do, whether that performance involves paying your LLC for goods or services, or supplying your LLC with a critical resource. Your LLC’s success depends on contracting with dependable parties. Don’t do business with jerks or fools.
Enforcement
A contract isn’t just a promise. A contract is instead an enforceable promise. If one side fails to perform as promised in the contract, the other side can either make the other side do so, called specific performance, or get money damages for the loss. Civil courts enforce contract promises. People think that tort claims for things like motor-vehicle accidents and slip-and-fall injuries clog the courts. They don’t. Business litigation clogs the courts. Check your local civil court’s docket. You’ll probably find hundreds of lawsuits filed by your local hospital against patients who haven’t paid for services, landlords suing tenants for nonpayment of rent, and credit card companies suing cardholders for back amounts owed. Don’t get your LLC into a position of having to respond to civil court breach-of-contract lawsuits. And don’t get your LLC into a position of having to pursue those lawsuits against customers, clients, or suppliers. Do the best you can to sign good contracts with good companies and folks.
Writings
Contracts are often in written form. But not always. States have statutes of frauds requiring certain contracts to be in writing, signed by the charged party, to be enforceable. Those contracts typically include contracts for an interest in real property, contracts to act as a surety for another’s debt, contracts for the sale of goods over $500, and contracts that the parties cannot perform within one year. Check your state’s law. The statute of frauds leaves many other contracts enforceable without a signed writing. So, beware making oral promises to perform. You may find yourself answering to an enforcement action against you or your LLC for the oral promise. Likewise, beware relying on oral promises by your customers, clients, and suppliers. You may have an enforceable contract, but it may be hard to prove. Get it in writing if it’s something on which you intend to rely and about which you have any doubt of the other party’s performance.
Capacity
Your LLC has the legal capacity to enter into enforceable contracts. That’s a large part of why you formed your LLC, so that your LLC could take on the contract obligation rather than obligating you personally to the contract. Your LLC is a legal entity, in effect having the rights and responsibilities of a person, with a legal life of its own. Your LLC has the legal capacity to sue another party who breaches a contract. If you need to enforce your LLC’s contract rights, your LLC may do so in its own name. Your LLC also has the legal capacity to have to answer to a breach-of-contract lawsuit brought by the other party. You may not want to see your LLC sue or be sued. But seeing your LLC as a party to civil litigation is better than you personally being the party. Keep the civil liability to your LLC, not on you.
Execution
How you execute your LLC’s contracts matters. To keep contract liability to the LLC and not on you personally, you must execute the contract on the LLC’s behalf. What that means is that the contract should state that it is between your LLC and the other party, not between the other party and you. Make sure the contract names your LLC, and not you. The LLC’s manager must still sign the contract on the LLC’s behalf. When the manager does so, the contract signature line should clearly indicate above or below it that the party signing the contract is the LLC, not the individual manager. The contract may identify the manager’s name, for instance below the signature line where the manager signs the manager’s name. But when doing so, the contract should indicate that the individual is signing as manager, not in an individual capacity. A proper execution block would look like the following example:
Roofing Supplies LLC
X ___________________________
By Martin Ramirez, Its Manager
Types
Operating your LLC may require you to execute different types of contract. As your LLC’s manager, you may need to sign contracts, on the expense side of the LLC’s ledger, for cell-phone service, website maintenance, copier/scanner lease, internet service, subscriptions, an office or facility lease, postage meter, furniture purchases, and equipment or vehicle purchases or leases. You may also need to open and sign the terms of a bank account, utilities service accounts, and supplier account, and sign contracts to retain employees and contractors. On the income side of the LLC’s ledger, you may, as the LLC’s manager, sign contracts to sell the LLC’s goods or services, or agreements to qualify the LLC for insurance reimbursements. Read and understand the terms of each contract before committing the LLC to performing the contract. If your LLC gets to draft the contract, take great care in doing so, using reliable industry, trade, or profession forms, and getting a skilled attorney’s advice where no approved form is available or does not provide the protection you need.
Stages
You may not have to commit your LLC to multiple contracts for expenses right at the outset. You may instead be able to test your business model and make initial sales before committing to substantial expenses. You may be able to start in stages, without committing your LLC to long-term or expensive contracts. If possible, do so. No plan has guarantees. Market tests are an ordinary course for new businesses. Especially, don’t commit your LLC to expensive items or services, or facilities leased or services delivered over a long period, until you’re sure that your new LLC’s business will need them. If you can, start without questionable items, borrow the items, or lease or buy the items on a trial basis until you learn whether they are necessary. If you can, start out of your current location before committing to an expensive new location. Consider leasing short term before you buy.
Purchases
When contracting for your LLC to purchase items, be sure that the contract sufficiently describes the make, model, size, number, quality, and other attributes of the item you believe that your LLC is purchasing. Obtain and inspect the item or an exemplar before signing the contract, if you are able. Ensure that the contract includes the total sales price and that you are aware of any sales taxes, preparation fees, delivery fees, or other charges beyond the sales price. If the seller is extending credit, ensure that you understand the payment terms, amortization schedule, prepayment right, interest rate, and total cost after interest. Watch out for having to pay late fees and expenses of collection. Strike those terms if possible. Have budgets for purchasing items, and stick to those budgets.
Leases
Your LLC may lease some items instead of buying them outright. Leasing an office, retail outlet, or manufacturing or service facility instead of buying the premises may be necessary and appropriate. Same for leasing a vehicle instead of buying the vehicle, and leasing computer systems, telephone systems, office equipment, and manufacturing or other service equipment. Leases can relieve the LLC from attracting substantial capital and immediately spending it on purchases. But leases can also substantially increase operating costs. The cost of leasing over the full lease term may be substantially more than the cost of buying the same item. And when the lease ends, you own nothing and may owe termination charges for excessive use or depreciation of the item. Look closely at leases. Speak with others who have entered into similar leases to see how well they worked. And keep the lease liability to the LLC without personal guarantees.
Contractors
Your LLC may also enter into contracts with various contractors who agree to perform various services. Those services may include renovating an office or facility for your LLC, designing a website, specifying and installing a computer system, or handling your LLC’s accounting and payroll. A popular business strategy is to contract for services rather than hire employees to perform them. Doing so can reduce overall costs while increasing the quality of the services. For example, rather than hire a part-time bookkeeper to keep accounts, do payroll, make payments, and do billing, your LLC might instead retain a professional service to do those financial functions, if you do not learn to do them yourself. You might also farm out to independent contractors your LLC’s marketing and design work, office or facility custodial work, manufacturing work, fulfillment of orders, and other work. The strategy is to retain only core functions to which your LLC adds unique value. Investigate contracting out your LLC’s functions. But also investigate any potential contractors, following up on references. Read and understand the contract terms, and commit only the LLC, not yourself.
Sales
Your LLC’s sales contract, whether for goods or services, may be your LLC’s most-important contract. Give considerable thought and attention to your LLC’s goods or services contract. Your LLC’s customers or clients should read the contract closely. The contract represents the image, services, and reputation of your LLC. The contract is as much a marketing tool as it is a contract. Give considerable attention not only to its contents but also to its format, design, appearance, and packaging, whether in paper format and delivered in person, or online. Be sure that your LLC’s contract information is accurate. Avoid any misrepresentation that could constitute fraud. Your LLC’s contract should describe the goods or services your LLC will provide, the price, and any terms or conditions affecting payment, credit, billing, and delivery.
Pricing
Your website or other public advertising need not include the price for your LLC’s products or services. When and how you disclose the price of your LLC’s goods or services is important to your LLC’s marketing, reputation, and sales. Some goods and services require up-front price disclosure, while other goods and services do not. Consider carefully the timing of your LLC’s price disclosure and the information you disclose with it. Examine how other businesses in the same field disclose their pricing. Price communicates value. Just because a price is lower does not mean more sales. The opposite can be true for certain goods or services sold in certain markets.
Collection
Your LLC may sell its goods or services with payment expected at the time of sale. Or it may instead bill customers or clients for goods and services. Billing and the collection of bills is another important subject for your LLC’s success. Make payment terms clear when negotiating sales. And then follow through as promised. If your LLC communicates that it will bill monthly and expect payment within thirty days, then don’t miss sending monthly bills, and follow up promptly with customers or clients who do not pay within thirty days. Collecting on unpaid bills is both an art and science. Clear, cordial, and consistent communications are generally the key. But plan in advance for collections issues. Request retainers against which to bill if you can and if typical in your field. Judge carefully whether a prospective customer or client can pay for the LLC’s goods or services before you make the sale. You can go to civil court to collect unpaid amounts, but doing so can be slow, expensive, time consuming, and harmful to your LLC’s reputation.
Key Points
An LLC has the capacity to enter into and enforce contracts.
An LLC should expect to fully perform all contracts it enters into.
Contract only for goods and services the LLC needs and can afford.
Your LLC should prefer written contracts over oral contracts.
Execute contracts on the LLC’s behalf to limit liability to the LLC.
Your LLC’s sales contract should clearly describe the sold item.
Your LLC’s sales contract is a marketing and advertising tool.
Your LLC should sell only to customers or clients who can pay.
Follow clear and consistent billing and collection practices.