How to Limit Liability for Minnesota Business Contracts: Pre-Formation Contracts
Organizing your Minnesota business as an LLC or Corporation does not always prevent personal liability on business contracts.
A common issue I discuss with clients, is the failure to draft adequate contracts. Clients often believe that a handshake agreement will protect them in the future. While this is understandable, as small businesses are often comprised of family members or long-time friends, unfortunately, this is not always the case or the client wouldn’t be in my office discussing with me a “handshake deal” gone awry.
While partners should trust that their co-business partner will treat them fairly at all stages of the businesses development, it is important to remember that a signed contract brings clarity and formality to your business structure and should be executed at every stage of the business.
If a contract is not drafted early on, a common issue that comes up is dealing with pre-formation contract contracts. A pre-formation contract is contract that is entered into before the formation of the company. Barring certain circumstances, the individual who entered into this pre-formation contract is personally liable and will have little recourse to look to the business to protect his or her personal liability.
Avoid Personal Liability
Only enter into any contracts after the LLC or Corporation legally comes into existence. In order to do this, each entity must be created formally under state law, by filing articles of organization with the Minnesota Secretary of State, along with the appropriate fee. The state then approves the articles and sends back a written acknowledgment indicating the date the entity came into existence. Only after this date can the owner act as an agent for the entity, and thus form contracts on behalf of the LLC or Corporation.
For questions regarding liability and business contracts, please call Keirnes Law at 612-805-0144.