By Attorney Kelly Rains Jesson and Associate Attorney Danielle Nodar
Forming a corporation in the state of North Carolina is pretty easy to do yourself, but that may get business owners into trouble. Numerous corporations exist without any bylaws and without issuing any shares (especially those who do-it-themselves). Failing to complete all the steps can have negative consequences.
A corporation is owned by its shareholders. Shortly after a business is incorporated, it should issue shares to the owner(s). If there are no shares issued, there are no shareholders, and thus no owners. Why do so many business owners fail to complete this step? Probably for two reasons: (1) they don’t know this is the way it works and (2) in order to incorporate, all the Secretary of State’s office requires is that Articles of Incorporation be filed with its office. It does not require proof of bylaws or shares.
Shareholders do not manage the business just because they are shareholders. The Board of Directors manages the business. For small, family businesses, the shareholders and the directors are often the same people. However, these are still two distinct roles. Most business owners that have not issued themselves shares are simply acting like directors of the corporation.
To incorporate, the incorporator (could be a future director, shareholder, or third party, like an attorney) files Articles of Incorporation. North Carolina law states that if no directors are named in the Articles of Incorporation, the incorporator shall hold a “meeting” (can be informal) to name the initial directors. “The incorporators or board of directors of a corporation shall adopt initial bylaws for the corporation.” N.C.G.S. § 55-2-06 (emphasis added). The law states that there SHALL be bylaws, not that there MAY be bylaws. The bylaws govern the management and affairs of the corporation. The bylaws state how shares will be issued, how directors will be named/replaced, and how the company is managed.
So why should you care?
First, the liability protection corporation owners enjoy is at risk if you do not follow the corporate formalities required by North Carolina law. You risk having a creditor ask a court to “pierce the corporate veil,” making you personally liable for debts and judgments of the corporation. When a court “pierces the corporate veil,” it determines that the corporation and owner are basically the same, with the corporation serving as merely a shell for the owner to act. If this finding occurs, your personal assets can be used to satisfy corporate debts, which defeats one of main purposes of owning a corporation in the first place.
Second, you will probably not be able to obtain an SBA loan if you do not have bylaws. These loans are backed by government guarantees. The government wants to make sure it is not lending to an entity that has not been set up properly. The SBA wants to make sure the bylaws do not contain provisions that make the loan risky.
Finally, another reason why we talk to our clients about shares and bylaws is for estate planning purposes. When a person passes away, they leave their property to beneficiaries. Shares of corporations are personal property. If a business owner has not issued himself or herself shares of the corporation, what is there to pass to their beneficiaries?
Further, as we explained above, corporations are managed by the board of directors and not the shareholders. Therefore, even if a shareholder owner passes their shares to their beneficiaries, that does not mean that the beneficiary now suddenly starts managing the company as a new director. If you are the sole director of your corporation, who will take over management when you pass away or are sick? The bylaws of a corporation will govern what happens when a director passes away or otherwise becomes unable to act.
We can do some pretty creative estate planning with owners of corporations. We can help them restrict management or ownership of shares to family members. We can ensure that their shares stay out of probate through using trusts, saving their families money.
For assistance with drafting bylaws, issuing shares, and implementing an estate plan, give Jesson & Rains a call!
By Attorney Edward Jesson
It happens more often than we would like to see, but sometimes work is complete, a dispute arises, and suddenly it is discovered that the contract that everyone assumed to be in place was not signed. This happens frequently in construction cases (most often seen with contracts between General Contractors and Subcontractors) but the issue can also rear its ugly head in any other contractual setting, especially where independent contractors are involved.
In legal terms, in order for an agreement between two parties to be binding and valid, there needs to be a “meeting of the minds”. Put simply, it needs to be clear that the parties to the contract intended that contract to govern the relationship between them. Most frequently, a signature on a contract signifies each party’s intent to be governed by that contract.
So what happens when, sticking with the construction industry example, a subcontractor performs all work under its subcontract agreement with the general contractor and then a dispute arises and it turns out the contract wasn’t signed?
Generally, when courts are confronted with an unsigned agreement, their default opinion will be that the parties never reached that “meeting of the minds” and therefore they did not intend to be bound by the terms of that contract.
However, this doesn’t mean that no contract between the parties existed and that the party seeking to enforce its rights under the agreement has no recourse. The court will next look to all other evidence which indicates what the agreement was between the parties. For example, if there were multiple drafts of a contract with different terms included, the court may decide that the earlier draft contracts that had parts removed from them at a later date is evidence that those removed contractual terms were not a part of the parties’ agreement.
Courts may also look to whether there was a “contract implied in fact” between the parties. In the general contractor subcontractor example, evidence that the general contractor asked the subcontractor to perform work and the subcontractor did perform that work would certainly be evidence of a “contract implied in fact”. It would be unreasonable for a court to decide that the subcontractor did that work and did not expect to receive any payment for that work. Oral agreements are oftentimes valid. There is no requirement that many types of contracts be in writing. Therefore, if you’re on the other side (someone completed work for you but you didn’t sign the contract), you don’t get a free pass! If you do not pay, you may find yourself on the receiving end of a lawsuit.
In any event, it is important to have a written contract signed by the parties. It sets the expectations of both parties – what they’re supposed to do in exchange for compensation. When it is reduced to writing, there are less evidentiary issues in court. When it is reduced to writing, it is less likely that there will ever be a lawsuit about the terms because a signed contract shows that all parties agreed to the terms.
The attorneys at Jesson & Rains are ready to assist with drafting and review of contracts, and, importantly, assist clients who find themselves in disputes arising from unsigned contracts. Just because you do not have a signed contract, it does not mean you have no rights.
By Associate Attorney Danielle Nodar
If you have ever formed a business through the Secretary of State’s office, you know that you get a lot of junk mail shortly thereafter. Recently, there have been some new schemes targeting North Carolina business owners through the mail. These mailings look like official government documents, and they quote statutes, cite scary penalties, and prompt the business to pay a fee for a certain “required” form.
One misleading mailing comes from the Filing Labor Compliance Department Services (FLCD), a Florida company that sends a “2019 Certificate of Status Request” form. This form implies that all business entities are required to obtain a Certificate of Status and return the form with a $78.00 fee. Another misleading mailing comes from NC Certificate Service, offering a 2019 Certificate of Existence for $74.50.
However, there is no state requirement that each registered business entity obtain an annual Certificate of Existence. A Certificate of Existence is only required if a business does business in another state. The certificate is issued by the North Carolina Secretary of State for a whopping fee of $10.00 online!
Finally, another mailing scheme comes from the Labor Compliance Department, also based out of Florida, and asserts that businesses are required to purchase state and/or federal labor law posters to display at the business address. The scam offers to provide a labor law compliance package for an $83.00 fee. This scam cites scary penalties for failing to display these posters in a visible location at the business. While the posters really may be required depending on the type of business, these posters can be obtained for free online from the North Carolina Department of Labor.
Do not blindly mail in a check when you receive mail like this. Read it carefully. Contact your attorney or the Secretary of State’s office before paying anything.
Each year, the Small Business Administration (SBA) designates the first week in May as the SBA National Small Business Week. The City of Charlotte and its small business resource partners have declared May to be Small Business Month 2019. Charlotte Mayor Vi Lyles announced with an official proclamation that the city will be celebrating all month long!
As part of Charlotte’s Small Business Month, CharlotteBusinessResources.com (CBRBiz.com) will be spotlighting a different small business for each day for the month of May.
CBRBiz.com supports Charlotte’s small business community in partnership with 26 supporting partners. It is designed to connect entrepreneurs with free resources to start and grow a business in Charlotte, and it provides educational, networking, and mentoring services to Charlotte-area business owners. CBRBiz was founded and is funded by the City of Charlotte. It is an excellent resource for minority and veteran business owners.
Did you know that area community colleges have Small Business Centers that offer FREE classes for community member business owners? The classes offered range from how to get your product on store shelves to bookkeeping and designing websites and doing your taxes.
The colleges offer two-hour classroom seminars, as well as on-demand computer seminars (in case you cannot attend an in-person class). Using the link below, you can search your local community college for in-person classes as well as searching the catalog of on-demand courses from any school that you can watch from the comfort of your own home.
Small Business Center Network
Charlotte Mecklenburg Library offers classes for adults ranging from learning computer skills (learning to use Excel, for example) to learning how to apply for grants or file business taxes.
Have you heard of SCORE? SCORE stands for “Service Corps of Retired Executives.” SCORE is a nationwide non-profit with thousands of working and retired business professionals who volunteer to support the success of small businesses. SCORE offers free live and on demand webinars for all things business-related: https://charlotte.score.org/content/take-workshop-249
Not only does SCORE offer webinars, but they offer FREE one-on-one mentoring. The Charlotte chapter has over 75 certified mentors that provide one on one mentoring to business owners and entrepreneurs. Sign up for a mentor here: https://charlotte.score.org/content/find-mentor-282
By Attorney Edward Jesson
People and businesses get sued every day, and while no one enjoys being on the receiving end of a lawsuit, there are certain things that should be done to try and make the experience as painless as possible. In North Carolina, a lawsuit is generally started when an individual or a business (also called the “plaintiff”) files a complaint. The clerk of court issues a summons, which must be served on the defendant (the party being sued). This can generally be done by mailing it certified mail, return receipt requested, sending via FedEx or UPS, or having the county sheriff personally deliver a copy of the summons and complaint.
Once the summons and complaint have been served, the defendant has 30 days to respond to the complaint in district and superior courts. In small claims court, when a defendant is served (in some instances this can be achieved by the sheriff leaving a copy of the complaint taped to the front door), they will usually receive a notice of hearing along with the complaint.
Here is the first point that I would like to make clear: if you are served with a lawsuit, please do not wait until day 29 to contact an attorney. Evaluating your position as a defendant in a lawsuit and preparing the correct response takes time. While you can usually get a 30-day extension of time to respond, doing so at the last minute is not always possible, and the extension likely won’t be granted if it is after day 30. If you fail to respond to the complaint in time, the plaintiff may be entitled to a default judgment. It is exactly what it sounds like— they will automatically win “by default”! A default judgment can be hard to overcome once it is entered, and the excuse that you simply “forgot” to respond is usually not enough.
Point number two: Do not answer the complaint without first consulting with an attorney. In an answer, you will generally just admit or deny the allegations to the complaint, but that is not the only response that is available. There are several ways that you may be able to get the lawsuit dismissed (meaning the case is thrown out), but that option is not available if you admit or deny allegations in the answer first. By doing that yourself, you may be preventing an attorney from later dismissing the lawsuit.
For most people who are sued, it is for the first time in their lives (and hopefully the only time). Once the shock, confusion, and anger has worn off, it is important not to bury your head in the snow. Contact a litigation attorney who can help you navigate through the civil system and, hopefully, get your case resolved in the most efficient way possible. If done correctly, you may save a lot of money; however, trying to handle it yourself oftentimes results in the expenditure of more money. If you or anyone you know has been sued, please give the attorneys at Jesson & Rains a call.
A trademark is a “word, phrase, symbol and/or design” that identifies and distinguishes the goods or services of the owner of the mark from another party. Examples include brand names, slogans, tag lines, logos, and design elements (think, Tiffany blue boxes). In order to get a federal, registered trademark, the mark has to be used in commerce, so normally the owner of the mark is a business or business owner. Someone can apply for a trademark before the mark is used in commerce if the owner intends to use it in commerce, but the United States Patent and Trademark Office (“USPTO”) will not register the trademark until the applicant shows that it is actually being used. Trademarks don’t expire, as long as the mark continues to be used in commerce and the owner files periodic documentation with the USPTO.
The trademark application process is fairly simple, but actually obtaining the trademark can be quite tricky. Not only does the applicant have to worry about the application being denied because the mark is too similar to another in a similar industry (“likelihood of confusion” according to the USPTO), but the applicant has to worry that the USPTO will deny the application for other grounds such as the trademark being “merely descriptive.” For example, the name “Northeast Interiors” merely describes the business (interior design in the Northeast). The strongest trademarks are “fanciful and arbitrary,” meaning they are words that have no relation to the good or service sold (like Apple computers), and the second strongest trademarks are “suggestive” meaning they suggest the good or service without literally describing it (think, Facebook). Unfortunately, most people name their businesses something that describes them for marketing purposes! Is marketing more important or trademarking? This depends on the nature of your business.
A business can also have a common law trademark, but there are benefits to federally registering: first, inclusion in the national database deters others from using similar marks in similar industries; second, there is a legal presumption that the registrant owns the mark and was the first to use it, meaning that in a dispute with another, they would be presumed to be the winner.
A common law trademark is established simply by a business starting to use the mark in commerce. The mark should be identified with the ™ symbol. Only a federally registered trademark can use the ®. A common law trademark is limited in geographic area, so you could have a competitor business open up with the same name in an entirely different state, as long as you didn’t share customers. If a competitor opens in your geographic area, you could sue them for trademark infringement if they did damage to your mark. You would have to prove you were the first to use the mark (unlike having a presumption in federal court).
If you’re thinking of trademarking something in your business, give Jesson & Rains a call!
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