We encourage business owners to form formal business structures like Limited Liability Companies and Corporations in order to protect their personal assets from business debts and creditors. However, simply filing the Articles of Organization or Articles of Incorporation with the Secretary of State’s office is not enough. If you do not keep your business and personal finances and operations separate, a court could potentially find that, while there was an apparent separation of the two, in reality, the individual was using his or her business for their own personal affairs and order that the two are not really separate. If this happens, a court could satisfy a business debt or judgment with your own personal assets.
What can you do to avoid this? First, the easiest thing to do is to keep your finances separate. Open a business bank account and only use that account for business income and expenses. Do not pay for personal items out of this account, even if you’re going to reimburse yourself. Keep good records. Do not take liberties with categorizing something as a business expense when it’s really a personal expense. Use a trustworthy business accountant. It is not worth the risk of stretching your deductions to pay less taxes (if it’s not really a business expense) because you’re opening yourself up to personal liability. Second, sign all of your contracts as member of your LLC. Don’t sign them as you personally.
Third, if you own a corporation, you have to comply with the North Carolina Business Corporation Act. You are required to have bylaws, even if you are the sole owner. You are required to vote and install a Board of Directors. If you want to own your corporation, the board (which may just be comprised of you) needs to issue you shares so that there’s a record that you own the business and that you’re not simply just a director or the president of the business. Directors need to keep thorough records of annual meetings and need to vote on business decisions (even if it is just yourself voting). If you do not have robust corporate records, you risk having a creditor ask a court to “pierce the corporate veil” … meaning that a court may find you and your corporation one of the same, and you may be ordered to satisfy corporate debts and judgments with your personal assets, defeating one of the main purposes of owning a corporation. If you or someone you know on a business and you believe that the books and records need to be improved, please give us a call.
No one ever wants it to happen, but it happens. The mailman asks you to sign for certified mail, or, even worse, a sheriff’s deputy shows up on your doorstep and “serves” you. Once the dust settles you are left with a summons and complaint, which are the documents showing that someone has sued you. Furthermore, because you signed for the documents when the USPS dropped them off, or because the sheriff’s deputy personally handed them to you, the person suing you (the “Plaintiff”) knows that you received them.
What to do next? The answer is not to ignore these papers! The clock is now ticking.
Under the North Carolina Rules of Civil Procedure, you have 30 days to respond to a lawsuit (whether that response is an “answer,” “motion for extension of time to respond”, “motion to dismiss the lawsuit” or otherwise). If you do not respond to the lawsuit in any way within 30 days, then the Plaintiff has the option to pursue a default judgment against you. A default judgment is a court order granting judgment in the Plaintiff’s favor because you failed to respond. It is the same as a regular judgment, just as if you had gone to trial and lost. You now owe the Plaintiff money. By ignoring these legal papers, you have waived your ability to present any valid defenses to the Plaintiff’s case.
The first step in obtaining a default judgment is to obtain an entry of default from the clerk of court. The clerk (or judge) will look at the court’s records and any affidavits provided by the party seeking a default in deciding whether to enter default. The most important effect of the entry of default is that all allegations in the Plaintiff’s complaint are deemed admitted.
The second step is to obtain a default judgment. The party moving for a default judgment must show the court that complaint and summons were properly served on the defaulting party and that personal jurisdiction exists.
In certain instances, a default judgment can be granted by the clerk without the need for a hearing, but in most cases an evidentiary hearing in front a judge will be required before awarding an amount of damages. Further, the court may not award punitive damages by way of a default judgment.
If you mistakenly fail to respond to a lawsuit, there are ways to set aside the entry of default and/or a default judgment, though it is not certainly not guaranteed that you will be successful. To set aside an entry of default, you need to show the court that there is “good cause shown” for you to fail to respond to the complaint. The North Carolina Rules of Civil Procedure also provide a procedure to have a default judgment set aside, but again, you are only able to do so under a limited set of circumstances. Of course, to set aside a default judgment you must show that there was mistake, excusable neglect, fraud, or other extenuating circumstances. If you received a copy of the summons and complaint but simply ignored the lawsuit, the default judgment will not be set aside.
Because there is no guarantee that a court will set aside an entry of default or default judgment, especially if legal papers are intentionally ignored, if you receive a summons and complaint, be it in the mail or personally delivered to you, the best course of action is to contact a
litigation attorney, like Edward Jesson at Jesson & Rains, who can guide you through the process and make sure to avoid any issues with defaults. If you learn that a default judgment has been entered against you or your business, and you believe you have never been served with any legal papers, please contact Jesson & Rains at once.
We are frequently asked what is the difference between an independent contractor and an employee. Hiring independent contractors is often the cheaper choice for employers as the employer saves on taxes and other administrative costs that are involved with hiring and firing traditional W2 employees. However, mistakenly (or intentionally) classifying employees as independent contractors can cost employers thousands of dollars in fines, taxes, and back wages, as well as cost the government millions of dollars in taxes. Several years ago, the News and Observer wrote an article about contractors in the construction industry who were intentionally misclassifying those who should have been employees as independent contractors in order to save money. The article found that the misclassification of employees cost the state of North Carolina $467 million in lost tax revenue that should have been paid by employers; and that was just from a sampling of federally funded projects in North Carolina—ignoring the vast amount of private construction in the State.
On August 11, 2017, Governor Cooper signed into law the Employee Fair Classification Act (S.B. 407). Many in the construction industry have supported this move, feeling that the misclassification of workers by their less scrupulous competitors was making it difficult for them to compete. Companies that misclassify employees and independent contractors can save more than 20% on their labor costs.
The new act provides a way for the state to receive complaints that employees are being misclassified as independent contractors by creating the Employee Classification Division within the North Carolina Industrial Commission. The Employee Classifications Section’s website states that:
Upon receiving the complaint for employee misclassification the Director will provide this information to the North Carolina Department of Labor, North Carolina Industrial Commission – Compliance and Fraud Investigative Division, North Carolina Department of Commerce - Division of Employment Security, and North Carolina Department of Revenue where each separate agency shall conduct independent investigations to determine whether violations of their operating statutes has occurred. If determined there has been a violation of any operating agency statute, each agency will ensure the necessary enforcement actions under the respective statutes.
As such, should a complaint be made, independent investigations will be made into the company being complained of by several different North Carolina governmental agencies and employers could be facing multiple fines from multiple state agencies. Also, employers are now required to post notices including the following information:
To avoid any issues with the Employee Classification Section, employers must ensure that they are correctly classifying employees as either employees or independent contractors. While the classification is determined case by case and depends a great deal on the specific facts surrounding each individual’s employment, here are some basic considerations:
That is not an exhaustive list, and no one question will determine whether a worker should be considered an employee or an independent contractor. However, if in answering those questions, you are finding that you have a lot of control over how the worker performs his or her work, then it is likely that they should be classified as an employee and not an independent contractor.
If you find yourself questioning whether your worker should be classified as an employee or an independent contractor, or if you find yourself being investigated by the Employee Classification Section, please give Jesson & Rains a call to assist you in the matter.
The number one reason why we recommend individuals form businesses instead of operating as a sole proprietor or partner is for liability protection. Generally, a member of an LLC or an owner of a corporation will not be personally responsible for the debts and liabilities of the business.
1) If the member or owner signs a personal guarantee. It is very common for banks and landlords to require new business owners to sign a guarantee which “guarantees” the bank or landlord that if the business is unable to pay back the loan or pay the rent, the member/owner will pay personally.
2) If the member or owner is personally negligent. A member/owner can be held personally liable for his own careless actions if he injures someone while operating the business. Professionals can be held personally liable for their own malpractice. This is why we also recommend getting commercial liability insurance. A member/owner can also be held personally liable for conduct occurring outside the scope of employment.
3) If a court “pierces the corporate veil,” meaning the LLC or corporation was merely a shell for the member/owner to carry out his wrongdoing and served no legitimate business purpose. Three elements must be satisfied before a court will hold the member/owner personally liable:
We have written before that businesses do not necessarily have to have written contracts to form a binding contract. If a customer verbally offers to pay you $200 to do X, and you verbally agree to do X for $200, you may have a binding contract. To form an oral contract, there must be an offer, an acceptance, and mutual assent. This last requirement, also called “meeting of the minds,” means that you both agree to the terms of the contract – which can be tricky if the contract is not written down.
Even though oral contracts are valid, we always recommend contracts in writing because (1) then there is proof that the parties contracted with each other, other than just two people’s versions of the truth, and (2) there are oftentimes many more terms and conditions other than X and the price that need to be included in the contract. What time does X have to be completed? When is payment due? Inclusions/exclusions? For example, if X is painting a house, does the painter include white paint on the front porch railings but exclude the stain on the wood deck?
If you and the customer are not on the same page and do not have a “meeting of the minds” as to these terms, there can be no contract. However, if you hand your customer a piece of paper with terms and conditions written on it, that is simply an offer (or a counteroffer to their offer). How do you know the agree to the terms? This is why people get their customers to sign it, which acknowledges that they agree to the terms (even though a signature is NOT a legal requirement to form a contract).
For a lot of our clients, written contracts and signatures just aren’t practical. The house painter is going to want the homeowner client to agree to the terms and conditions BEFORE the painter buys supplies and drives out to the house, for example.
These days, everyone has e-mail. A lot of our clients are already utilizing e-mail to send their customers appointment reminders and quotes. Why not incorporate terms and conditions into the email? To legally guarantee that those e-mailed terms are incorporated into the contract, the customer would need to take some affirmative step to acknowledge that they’re agreeing to it. They could hit reply to the e-mail and say they agree to everything, you could include a way for them to electronically sign a document, or you could utilize software that allows the customer to click “I agree” or “I disagree” to the terms. This latter example is called “click-wrap” and technology companies like Apple have been using it for years to get consumers to agree to their terms of service. Click-wrap contracts are universally upheld as long as some procedures are put in place, like allowing the customer to click “I disagree,” putting the terms and conditions near the “I agree” button, and allowing the customer to download or print the terms of service.
Putting all the terms of the contract in writing helps to avoid confusion between the parties and prevent potential lawsuits if customers become unhappy. Please keep Jesson & Rains in mind if you or a colleague needs assistance drafting a click-wrap contract or other terms and conditions.
Litigation happens. We believe it’s beneficial to all parties involved to amicably resolve disputes before getting the courts involved; but sometimes that just isn’t possible. Litigation costs can be wildly unpredictable, vary on a case by case basis, and can add up quickly.
Take two similar cases: In “Case 1,” the case moves quickly towards trial but resolves early at mediation. In “Case 2,” the case moves slowly through discovery, with all parties objecting to the other party’s discovery requests; there is a day-long mediation where the case doesn’t settle; there are complicated issues of law to be researched and argued before the Court; and then a costly trial. It is obvious that “Case 2” would cost more money; however, what is not always obvious in the beginning is whether a case is going to follow “Case 1” or “Case 2”’s path. We try our best to estimate costs for our clients and be honest (sometimes brutally) about potential cost, but a lot of the cost depends on your opposing party.
For our business clients, and in some limited circumstances, individuals, there may be a cheaper and more predictable way: Alternative Dispute Resolution (“ADR”). ADR has been around for a long time and can be contractually mandated between the parties, usually in the form of mediation and/or arbitration. Mediation is when a neutral third party goes back and forth between the parties in an attempt to negotiate a compromise. Arbitration is a middle ground between mediation and a lawsuit. The parties present their evidence to a neutral third party who will decide the case; however, arbitration is generally far less formal than a lawsuit and costs less time and money because there are no motions filed or discovery exchanged between the parties.
There are other advantages to just saving time and money. For example, disputes that a business may not want made public (which would be a matter of public record should litigation ensue) can be resolved in a confidential nature through ADR. Where ADR really shines is in the resolution of complex disputes, like a complex breach of contract dispute or complex construction defect case. Using ADR, the parties can select an expert in the field to act as the arbitrator or mediator, instead of relying on a jury of average people who likely would not have the necessary specialist knowledge to properly decide your case.
However, businesses should be careful about blindly throwing in arbitration clauses into their contracts without first consulting an attorney. If the arbitration clause in your contract is not enforceable, then you will end up in litigation anyway. For example, there have been many lawsuits filed recently regarding the Samsung “exploding” phones. People who have been injured when the Samsung phones spontaneously combust are finding that, when they file the lawsuit, Samsung is filing a motion to dismiss the case because there is an arbitration clause contained within the phone’s warranty guide. While the consumer has 30 days to opt out of that provision after buying the phone, the majority of people do not do so because they do not know about it! Further, pursuant to the contract, the proceedings between the consumer and Samsung are secret, Samsung has the right to choose the arbitrator, and, if Samsung wins, the consumer may be required to pay Samsung’s costly legal fees.
Seems like a great deal for Samsung, right? However, In January of 2017, a federal appeals court in California ruled that the arbitration clause did not comply with California law and, therefore, the consumers were not bound by the clause. There have been many other cases in recent history where Courts have refused to enforce arbitration clauses against consumers. Frequently, the Court’s reasoning is that the clauses are hidden among other terms (so the consumer is “tricked”), not negotiable, and unfair.
The takeaway from all of this should be that, while ADR is a useful tool to move cases towards a quick and often relatively cheap resolution, the arbitration clause needs to be enforceable. Litigating the issue of whether an arbitration clause is enforceable can be extremely costly. Make sure to consult an attorney who can check to ensure that your arbitration clause is enforceable in the states in which you do business.
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