Listen to Your Mom! - A Follow-up to the Top 10 Legal Mistakes Small Business Owners Make

Listen to Your Mom!

Although I left my parents’ home over 25 years ago, during family visits my mom will “give me the business” and remind about those times she tried to help me but I would not listen. For example, when I was 11 or 12, she harped on me not to skate board without wrist pads. Of course, I ignored her warnings and, sure enough, I fell and broke a wrist, causing me to lose much of my baseball season. I can still hear her saying, “I told you so.”

Well, sometimes attorneys, like moms, give advice which is ignored and the result is often a lesson that is more expensive or devastating than an interrupted baseball season.

One piece of client advice that is often ignored is how to sign documents as an owner and operator of a corporation or LLC. We tell all of our clients with newly formed businesses that:

Anytime you sign something on behalf of the corporation [or LLC], it is important to designate that you are signing as a corporate [or company officer], rather than an individual. This is usually accomplished by using a signature format like the following:

ABC, Inc. or ABC, L.L.C.



By: Jane Doe, President [or
Jane Doe, Authorized Member]

Stated differently, we tell our clients, “Never, ever sign a contract, lease, mortgage or other legally binding document with just your own name. Always add your corporate [or company] title.”

A practical example of the consequences of not following this advise is be found in African Bio-Botanica, Inc. vs. Leiner, t/a Ecco Bella. In that case the African Bio-Botanica, Inc. (the “plaintiff”) sued “Sally Leiner, individually and t/a Ecco Bella” to recover an unpaid receivable for merchandise it had sold and delivered to Ms. Leiner’s business. Ms. Leiner was the sole stock holder, director and president of Ecco Bella, Inc., a New Jersey Corporation. Ms. Leiner defended African Bio-Botanica’s claim against her solely on the grounds that the merchandise had been ordered by and delivered to Ecco Bella, Inc. and that the any liability belonged solely to her corporation.

The evidence showed that when the plaintiff began selling merchandise to Ms. Leiner or to her corporation it did not conduct any credit investigation. It did not ask if its customer was an individual or a corporation. It sold the first six or seven orders C.O.D. Africa Bio-Botanica’s sales manager delivered two of the early shipments to Ms. Leiner’s home where she repackaged the merchandise for resale to retail customers. Later orders were directed to “Ecco Bella” at Ms. Leiner’s home address and shipped on 15 days credit. Initially, plaintiff’s records listed Sally Leiner as the customer but later her name was erased and the name, Ecco Bella, was substituted without any indication that it was a corporation. The evidence also revealed that Ecco Bella, Inc. had never filed a trade name certificate with the county clerk.

The order for the unpaid merchandise was placed either by Ms. Leiner or by a company employee at her direction. Plaintiff sent the bill to “Ecco Bella.” Payment for earlier orders were made by checks imprinted with the name “Ecco Bella.” Ms. Leiner’s company letterhead also read “Ecco Bella.” Neither the checks nor the letterhead carried the name Ecco Bella, Inc. or otherwise indicated that Ecco Bella was a corporation. Africa Bio-Botanica’s sales manager testified that he did not know that Ecco Bella was a corporation and that no one at Ecco Bella had told him it was a corporation.

The trial court held that Ms. Leiner’s failure to affirmatively disclose the corporate status of her company led the plaintiff to believe that it was a sole proprietorship and that, since it had not filed a trade name certificate, it was required to indicate it’s corporate status on it’s letterhead, presumably by using its full corporate name, Ecco Bella, Inc. For those reasons, the judge ruled that Ms. Leiner was personally liable for plaintiff’s unpaid bill.

Ms. Leiner appealed the judgment but the appellate court agreed with the trial judge, stating that “for Ms. Leiner to be shielded by personal liability, she was required to affirmatively disclose to plaintiff that she was acting as agent for Ecco Bella, Inc. She failed to make her representative capacity clear.”

This case illustrates the need to be vigilant and consistent in the day-to-day operation of your business. If you operate as a corporation of LLC, you need to “tell the world” or you will lose the personal insulation that these forms of business supply. Even a simple slip of the pen could result in personal responsibility despite your intention to incur only business liability otherwise.

This case also illustrates how the failure to comply with the requirements of business formation, such as filing a trade name certificate, can result in personally disastrous consequences, but the scope of that topic will have to wait until another day and another article. For now, we simply remind you to….. Listen to your Mom (and your lawyer)! They know best.

-Dan Posternock

***The information included in this newsletter is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.