TexLawThursday: Starting Up? Avoid creating personal liability.

If you’re starting up a business as corporation or limited-liability entity the following are things to consider to avoid creating personal liability as you bring your business to life:

1) How you sign contracts matter.  Every time you sign a contract on behalf of the entity make sure that it is clear that you are signing in your corporate representative capacity, and not as an individual.  Simply signing your name without indicating that you are signing for the entity or as an officer of the entity may create personal liability.

2) You are personally liable for any contract you sign prior to the entities formation.  Once the entity has been formed through the Secretary of State’s office, you’ll need to takes steps to have the entity adopt the contracts (via resolution or when the entity starts receiving a profit from the contract) and seek a novation from the other signatory.  (NOTE: the novation is what releases you from liability, not the entity’s adoption of the contract.)

Also, if there are multiple parties acting prior to formation, any two parties signing a contract together may have inadvertently created a partnership (at the very least, both signatories will be personally liable).

3) You are liable for the actions of your agent.  This liability is not limited to start ups but frequently occurs during the start-up phase because new businesses are generally overwhelmed with the magnitude of the tasks needed to get their business off the ground.  Thus, owners tend to delegate when help is offered.  Outside of the employer/employee and franchisor/franchisee context, keep in mind that agent authority can be created three ways: (1) express (you tell agent s/he is empowered to act), (2) implied (agent is empowered to act as reasonably necessary to get an expressly assigned job done), and (3) apparent (you tell a third-party that agent is authorized to perform X, Y, or Z) authority forms of agency.  Court review of agency is fact intensive so if you’re working through an agent, be clear and keep documentation.

If any of these items ring a little too close to home, give your attorney a call, they should be able to answer any questions that you have.

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