Secrets to a Successful Business Contract

Note: This article was excerpted from Business Contracts: Turn Any Business Contract to Your Advantage, which is available from EntrepreneurPress.com.

John, the owner of a rapidly expanding limited liability company called Carpet Glow, buys his company's cleaning supplies from Acme. Acme sent a contract to Carpet Glow to cover an order for $100,000 in supplies. The contract seemed pretty simple, requiring half of the amount due on signing and the rest a month later, so John signed it. A month later Carpet Glow had not paid the remaining balance to Acme due to a cash flow problem. Acme sued John.

John went to court and argued that he couldn't be sued because he'd formed Carpet Glow as a limited liability company to protect his personal assets. The court ruled against him because of the way he signed the contract with Acme. A very simple change in the way the signature section of the Acme contract was written would've saved John from this threat to his personal assets. If you want to avoid this mistake, read on.

How a Company Name Can Be Good as Gold
Well over half of the contracts I review have the name of one of the parties wrong. I don't mean spelled wrong, although that is a basic starting point, but legally wrong. The parties' names are the most basic part of the contract and they must be:

  • included in the agreement
  • indicated as a party to the agreement
  • spelled correctly
  • legally correct

What does this mean?

Miff Company, Moff Company, and Muff Company agree to share the cost and use of a booth at a trade show. They, smartly, draft a written agreement to document this. The agreement goes as follows:

Example A: Miff Co., Moff, and Muff Company agree they'll split the cost of a booth at the Uffelhoop trade show. Each of us gets to use it.
Signed: Peter Pink, Georgia Grey, Steven Silver.

Go back to the list above. This agreement has all the parties included. It's clear that each company named is a party to the agreement. It's not necessary that you specifically state, "The parties to this agreement are ...," but the parties to the agreement should be obvious from the context. It seems like the names are spelled correctly. But are these the real names of these companies? Probably not.

Most companies have an official legal name stated on a "birth certificate." Sole proprietorships will not have birth certificates; partnerships may or may not have them; but every other type of company will. A company's birth certificate is the form filed with the state where the company was started, which states the company's name, the type of company it is, and its ownership. These forms may be called "Articles of Incorporation," "Articles of Organization," "Certificate of Limited Partnership," "Statement of Qualification," or other similar titles. The name stated on these forms, as filed with the state agency overseeing formations of companies (usually the Secretary of State or Corporation Commission) is the company's real name.

Whenever you use your company's name or the name of a company you're contracting with it should be the exact name stated on the company's birth certificate. For example, let's say Miff Company was incorporated as "Miff Company Inc. of Boston." That would be its legal name.

It's possible to have a legal name that differs from the name your company is conducting business under. For this to be legally effective, often a notice must be filed with the state where the company is doing business that indicates the real name of the company is one thing but the company is doing business under another name. These are usually called "DBA" filings, which is shorthand for "doing business as" filings. If your company is doing business under a name different from its legal name, contracts it enters into should state the legal name of your company followed by the DBA such as Miff Company Inc. of Boston DBA Harry's Pillow Shop.

Why is it important to state the legal name of the company? Because if you don't, it can be used as evidence that it wasn't the company that entered into the agreement but the individual who signed the contract. If you sign the agreement, your personal assets could be tapped to pay contract damages. Whether you're the owner of the company or an employee of a business signing a contract on behalf of that business, you probably don't intend to risk your personal assets when you sign the contract. Failing to use the company's real name could jeopardize your intentions.

Incorporated businesses must act as entities separate from the people that run them, and evidence of that is consistent use of the actual legal name of the company. This is a simple step that can save controversy in a lawsuit. Determine the correct legal name of your company and use it consistently in contracts. Is it good enough for the agreement above to state "Miff Co." if the legal name is Miff Company Inc. of Boston"? It's always best to use the exact official legal name of the company as reflected on its birth certificate. Otherwise it creates the opportunity for disputes, and the whole point of a contract is to avoid disputes and create rules for resolving controversies. Use your company's actual correct legal name consistently in contracts.

What if Peter Pink, the purchasing officer for Miff Company, drafts and signs the following contract:

Example B: Joan Miff and Miff Co., Moff, and Muff Company agree that they'll split the cost of a booth at the Uffelhoop trade show. Each of us gets to use it.
Signed: Peter Pink, Georgia Grey, Steven Silver.

By including Joan Miff in the list of parties to the agreement, the agreement may be enforceable against Joan Miff's personal assets, as well as the assets of Miff Company, Moff Company, and Muff Company. Do you think Peter Pink has a long career in purchasing at Miff Company? Draft your contracts to avoid controversies--they should state very clearly who has agreed to what. If Joan Miff doesn't intend to be personally responsible for this contract, her name shouldn't be there.

To meet the basic requirements above we'd revise this agreement as follows:

Example C: Miff Company Inc. of Boston, Moff Inc., and Muff Company LLC agree that they'll split the cost of a booth at the Uffelhoop trade show. Each of us gets to use it.
Signed: Peter Pink, Georgia Grey, Steven Silver.

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