Your business’s name is crucial. It helps customers identify the business and carries its reputation. This is true whether you invest in marketing to grow the brand or let your products and services speak for themselves. For limited liability entities such as corporations and limited liability companies, the business name serves another critical purpose—it is a necessary part of the liability shield.
A limited liability entity lets a business owner separate him or herself from the debts and liabilities of the business. This is important because entrepreneurship is always a risk. Sometimes it pays off handsomely, and sometimes something goes wrong and the business faces a tremendous liability it cannot cover. Even a well-intentioned, careful business can produce crippling debts in the unfortunate event of a serious accident or disaster.
On the surface, the ability to evade responsibility by working behind a liability shield may seem unfair. On the other hand, the profound economic growth of the last 150 years would likely have been impossible without the modern business corporation. The limited liability entity has proven essential to successful entrepreneurship and has evolved from the restrictive limited stock corporations in the early 1800s to limited liability partnerships, the modern limited liability company, and a host of specialized entity types.
The law balances this important commercial activity against the potential unfairness of a liability shield in a number of ways. The most fundamental is the idea of a fairly bargained contract. There is nothing unfair about using a liability shield if people voluntarily choose to do business with a known limited liability entity. For this reason, the laws of Minnesota (and other states) require limited liability entities to clearly signal their nature. For example, Minnesota Statutes section 302A.115, requires corporations to use names containing the word “corporation,” “incorporated,” “limited,” or the abbreviation thereof, or the abbreviation “company” or “Co.” if that word or abbreviation is not immediately preceded by the word “and” or the character “&.” In a similar vein, section 322C.0108 requires that limited liability company names contain the words “limited liability company” or the abbreviation “LLC,” not contain the word “corporation” or “incorporated” or the abbreviation of either or both of these words, and be distinguishable from other entities licensed to do business in the state. As another example, Limited liability partnerships must included “Registered Limited Liability Partnership,” “Limited Liability Partnership,” “R.L.L.P.,” “L.L.P.,” “RLLP,” or “LLP.”
What if you have a name you like for a specialized service and don’t want to create a whole new entity or simply want to use a less formal trade name? Minnesota Statutes chapter 333 has you covered with a certificate of assumed name. This allows you to use a shortened or different name while complying with applicable law. Under this polite legal fiction, everyone is assumed to be familiar with assumed names registered with the Secretary of State. (For this reason, of course, you should never assume a company is a sole proprietorship just because it fails to include a designator like “Inc.”)
Once you have a name, the second step is to use it. This seems obvious, but mistakes happen.
I recently observed a case where the owner of a small limited liability company entered into a routine agreement with a subcontractor on a handshake deal, which was normal for that business. When the original customer failed to pay the business owner, the business owner regretfully informed the subcontractor that there were no funds to pay and he was retiring his business. The business owner was then surprised when he was personally dragged into court to pay the debt and the court held him personally liable. Now his savings and assets were at risk.
There was no evidence that the limited liability shield should be pierced, but the business owner was still held liable. Why did the court hold him liable? Despite the fact that he had a limited liability company, the business owner neglected to communicate this fact when he hired the subcontractor. The court found that the subcontractor had no way of knowing he was dealing with the representative of a limited liability company, and reasonably believed he was contracting with the business owner personally, not the owner’s company.
This can get even more confusing for related entities, or persons who own multiple entities. An owner may intend to do business as one entity, but use letterhead or e-mail signatures that reflect the person’s work with a different company. I have seen an unrelated business facing a lawsuit because an employee used the wrong letterhead after a corporate reorganization.
In other cases, people often assume the details of a contract will be nailed down in a final written agreement, preventing misunderstandings. However, it can be surprisingly easy to form a contract. If two people agree to all the essential terms expecting to hammer out the details later in writing, a binding contract may be formed before the contract is drafted. If the deal falls apart, the wronged party may see an opportunity to make a claim.
How can you avoid these mistakes? Be mindful.
First, make sure you know your own name. This sounds like unnecessary obvious advice, but I have run into a surprising number of businesses where employees or even an owner does not know the actual name of their own company. Businesses often start by taking all the right steps but then neglect the corporate formalities after creation or fail to review their documents as their business grows and changes. Double checking the information on the Secretary of State’s website takes less than five minutes, it’s free, and you might be surprised.
Second, always communicate the correct legal name of your company clearly and completely. Never sign your name without indicating the legal name for your company and your relationship to it. Do not rely on a subsequent written agreement to make it clear. While the best way to protect against unexpected liability is a well drafted written agreement, something as simple as always handing someone your business card before discussing terms can be enough. If you conduct business for more than one company, be careful to use the right business card, letterhead, and signature block for every communication.
Third, if you have employees, make sure they know who they work for and are communicating it to customers, suppliers and business partners. If employees and others routinely leave of a designator like “corporation” or “LLC” off your name, consider filing a certificate of assumed name. If an employee interacts with multiple sub-entities of your business, make sure they understand the differences.
Tom Witt is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Litigation, Employment Law, and Family Law. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.