Don't Start a Business Until You Understand Promoter's Liability!

Join James White and attorney Andrew Easler in Learn Laws Episode 3 as they tackle Promoter’s Liability—the personal risks entrepreneurs face when acting for a business before it’s legally formed. From lease pitfalls to novation fixes, get the legal know-how to protect yourself. Listen now and share with fellow business starters!

Transcript

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- Welcome to Learn Laws where knowledge is power.- Now, legal advice just for education, the real counsel,- Don't roll the dice. Always speak with the license to serve. Welcome to Learn Laws. I'm James White, and we're here with attorney Andrew Eastler. How are you doing today?- Oh, I'm doing well. How are you?- I'm doing excellent, actually. I'm very excited about our third episode and we are getting better and better by the episode, so to speak. So I'm very proud- In our subjective opinion. That is- In our subjective opinion. Yes, we definitely like critical feedback. Our whole goal is to create content and making, learning about laws easily and easily and more enjoyable, I guess, right?- Yeah.- So we don't wanna bore people. So obviously constructive or critical feedback is very important to this podcast. Otherwise, Andrew, today, I think our topic that is going to be very popular is promoter's liability, right?- Yeah.- What is, so lemme go back. What is promoter's liability first and foremost?- Yeah. So when we talk about promoter liability, at least as attorneys, we're talking about liability that somebody incurs as somebody who's going out there and starting to operate a business, essentially.- Yeah.- Before it's been formed, or the articles have been filed with the Secretary of State.- Okay. So it's basically, if I am, so I'm an entrepreneur, I'm starting a business, whatever business I'm starting, I am, I'm excited, I'm happy. I'm telling my family and friends about it, and I go look at it and say, I'm looking to lease a building for my storefront.- Yeah.- Okay. So I go to the landlord, this is just my opinion, right? This is my example, and you let me know if I'm wrong. I go to the A building, I tell my landlord, Hey, I'm starting new business. I'm very excited. I would like to lease this building. And the landlord sends me the lease agreement with my name on it. I sign it, and my business name, I tell my landlord the business name, he puts my business name and I sign it. But I don't have that articles, articles of organization, or that incorporation done yet, or that business formed at the state. Correct?- Absolutely. Yeah. That, that's gonna be the, the big problem is that you're signing on behalf of a company that technically, according to the Secretary of State, doesn't exist yet.- Oh, wow. Okay. So what happens? So what's the default? Okay, so I don't have my company incorporated yet, or formed at the state level articles of organization, and I go start conducting business on the behalf of the business, essentially. So I'm saying, Hey, I'm James White from Learn Laws, for instance, and I would like to do this, this, and this, and I'm, I'm, you know, I'd like to buy this and buy that, but I'm not incorporated yet. So the company is technically because it's not formed yet, I would personally be liable for that, those actions.- Yeah. So that's the general rule that by default, if you're just signing on behalf of a company that doesn't exist yet Yeah. For any kind of obligation contract or other particular obligation, then you will be personally liable.- So it's really important. So the first lesson here is, it's really important to, before you conduct any business operations or make any arrangements for your business, or any agreements, so to speak, verbal or written, that you have the business formed at from the Secretary of State. So you submit your business formation, it gets incorporated, you get your articles or organization, and then you can go out and start,- Then go sign all the contracts you want on behalf of that company. So that, that's the ideal. Okay. Right. As, as an attorney, our preference would be, Hey, follow the right order. Let's just get, get our ducks in a row first and then start our operations. But it doesn't always necessarily work that way in business. So let's say you wanted to do a, you know, a a large, very large endeavor, right? Something that you're gonna need an investor for, for example. And you go to an investor and you say, Hey, bill Gates, I wanna do a server farm, right? And I wanna, I, I want to invest in this AI program. I'm gonna, I'm a tech guy, I know all about servers here, here's the plan, right?- Yeah.- Bill Gates might turn around and say, well, I'll invest in you, but only if you can show me that you've got commitments and a lease agreement in place for the warehouse and commitments from the local power authority to provide power, and that, that you've got all these other agreements in place for the business. And then I'll, I'll give you the money to start. Right? But you don't wanna be going out there and signing a lease agreement if it's, it's all contingent on the word of some billionaire, right. Who may or may not come through next week,- Or any investor for that- Matter, or any investor.- It's not a billionaire, but it could be anybody, right? Absolutely. A lot of people go out and look for money to start businesses. And this is, I think the reason why you're bringing up this example is because this happens to a lot of people, right? Right. Especially new entrepreneurs that don't understand how the actual legal side of it- Works. Exactly. So you've got this idea for this big server farm, you've got an investor lined up, but the investor wants to see that you've done your due diligence, that you've got all your ducks in a row, that you've got everything in place before he gives you the money. Well, you don't wanna go out there and necessarily start that company if you don't have the money in place yet. So really what you wanna do is you wanna make these contracts contingent upon the formation of the company ah, and the ratification of the agreement by the company.- That makes sense. So whenever you're negotiating a contract, if it's before you actually have the official incorporation done, or the organization's filed and issued Right. The articles organization to make everything contingent on the company being formed.- Right. So, so there's a, there's a couple different ways we can deal with it, depending on what type of contract you have and what jurisdiction you're in. Sure. And of course, we like to, to talk about Florida a lot because that's where we're at. Yep. But every jurisdiction's a little bit different. But the general rule is, of course, number one, if you are signing contracts on behalf of company that isn't formed isn't filed, then you're gonna be personally liable.- Personally liable. That means that- Personally liable. They,- So even if you have a company afterwards, then somebody could easily come, a creditor could come, or a, a vendor could come and say, you entered into this agreement before you had your incorporation, therefore you're personally liable because you, you engaged me as yourself as a- Yeah. I love, I love the direction you're going- There. Yeah,- Yeah. Because that's really kind of the next step. Let's say you've accidentally done this. You've, you've created some pre incorporation liability for yourself. You've, you've, you've signed a lease agreement, for example, before forming the company.- Yep.- You decided to form the company. The company now exists, and it's technically on the lease. Right. Because you're signing it on behalf of the company- That doesn't exist.- That didn't exist, but now does. Right.- Okay, perfect.- So what, what ha what has to happen now for the company to be officially liable and for you to remove that personal pre incorporation liability? First we have to have the company ratify the agreement. What do we mean by ratify? If it's a corporation, you have to have a resolution that's been passed by the corporation acknowledging that the agreement was signed before it existed, and that it now has blessed that transaction and agrees to be liable for whatever duty and performance obligations it has under that contract. So for a lease, it agrees to abide by the terms of the lease and pay the payments and everything else. But that alone in most jurisdictions, does not remove your personal liability.- Yeah. Because it's not like the vendor or the creditor is agreeing to that your company is agreeing to essentially indemnify you. I would assume that's what it is.- Well, it's not necessarily indemnifying you, it's really just saying, I'm going to also be liable under this agreement.- Be liable. Okay, perfect. Right. So you sign the agreement prior to your articles of organization being issued. Then once they're issued, you sign another, like, almost like a resolution, so to speak, saying that, okay, we, we bless this transaction, so now the company's also liable for it.- Right.- In addition to you, but that doesn't take your personal liability away from the actions that you've conducted prior to the articles of organization being filed and issued.- Right. So, you know, the, that the express way to ratify that agreement is through resolution, some kind of document on behalf of, you know, an authorized person for the company. The second way is by implication, right? So let's say there's an lease agreement and you sign the lease agreement under your individual name before the company is formed.- Yeah.- You form the company and then the company starts operations in that, in that space, puts up a big old sign with the company name on it. Then of course the, it's gonna be hard for the company to turn around and say, oh, I, I'm not liable under this lease. It's only James White who was the one who signed, signed the lease originally. I, I'm not responsible. We never signed a resolution. Well, you've received the benefit of that contract and you've basically treated it as if it was something that, that you were entitled to. Therefore, a lot of the courts are going to say, well, you've ratified it by your actions rather than through a specific- Conduct, like a wet signature or resolution or- Correct.- Or something- Along- Those lines. That's,- That's something you don't wanna leave up to the courts to decide.'cause that would be a court decision. Right. The judge would have to look at it, and we don't wanna have to get to that point. Right.- Got you.- So, so that's- Ratification. Yep.- Now how do, how do we get you off of the table now, right? Because now you're on, on the, on the other side, on the hook for with a contract and the company's on the hook for that contract. So you're both jointly on there. So how do you, how did we get you off? What do you think?- Well, I think the first lesson is fomo, right? Fear of missing out. So I think my lessons that I've learned in my business career or my entrepreneurship career, whatever you'd like to call it, is we all get excited. Entrepreneurs get excited, we have an idea, we want to go out and just accomplish it and get it done. Right? So we do these things, and this is why we brought this topic because this happened to me once. Right? Right. And Andrew helped me with this situation, and I thought, hey, everybody else would probably wanna know this knowledge too. So I would think that you would have to go to the creditor or vendor and get them to release you from personal liability, right?- Yeah. - Now it, I would assume that's the way to do it, but can you also do like an effective date on your contract? So for instance, if I'm going to, and this might be off topic, but if I'm going to sign a lease agreement before my company's incorporated, because I have somebody that says, Hey, I will invest in you, but I need this, this, and this. Could I not say that it's the effective date? So this contract will be effective on this specific date after my incorporation ISS done.- So that's an interesting strategy. Unfortunately, if the company never gets formed before that effective date, then that's, that's not gonna work- For you. Ah, okay.- Right. Okay. Perfect. So it's kind of a, kind of a gamble in that, in that regard. So really it's, it's making sure that the, the contract is worded in a way that it, that either you are, you're not personally liable under the contract. Right. Any performance obligations don't come to fruition until the company comes to fruition. And otherwise, if it doesn't come, come within a certain period of time, then there's no performance or ability to enforce that contract.- Perfect. - So just putting the right language in the agreement in the first place is important.- So this is why I think this is why it's so important. You know, I'm cheap sometimes too, right? I don't like to spend money, just like, I'm sure our listeners don't like to spend money, right? Or we like to spend the least amount of money possible, right. And get the same result or something similar. But this just goes back to my, my whole theory on why you always need attorneys when you're doing things like this. So it may seem expensive at first because you're like, Hey, I don't wanna pay an attorney x amount of dollars to, to help me negotiate a lease agreement or a contract. So instead of saying, well, I can, I can save 500 or a thousand dollars, and if I sign this myself, I'm going to pay the bill. And that's, we always expect to pay the bills as- Entrepreneurs,- Right? But, you know, things happen. 2008 happened, 2020 happened, you know, there's a lot of unexpected things that happen, and that's when an attor, what an attorney can help protect against, right? Can help limit your personal liability and also your corporate liability too, from a corporation perspective. But this is why I think it's so important to speak with an attorney when you're doing any of these kind of negotiations, especially on a lease, because a lot of people in my experiences as being a real estate investor, a real estate broker that does a lot of commercial real estate,- Right, - Is a lot of tenants just sign these agreements. They don't even look at this even residential, how many people have ever reviewed a lease agreement? I mean, it, I'm serious. It's, it's, it's like, it's, it's crazy that nobody- Reach these things. Well, and and if you read it are, do you really understand what some of these provisions mean?- Correct. And I think that's the most important thing. That's why you need an attorney to review lease agreements, to protect you, even if it's a, a, a benign agreement that really is, is very fair and, and balanced. You still need to know what's in that contract. So that just brings me to my, my belief that hiring an attorney for any kind of document review or lease review would be beneficial. Because if somebody is starting a business and they, they've done some things already, there might be ways to rectify that. So it takes their personal liability off. Right. And that's what we were getting to before I kind of interjected with my thoughts,- Right? It's, it's much easier for us to try and get you off of the, the contract or outta the liability before something bad happens. Right? Of course. I always say that, that my client's job as the entrepreneur is to think of sunshine and rainbows, right? Yeah. You wanna be optimistic. If you don't believe that the company's gonna be successful, then what are you doing? Right? So you should have this, this honest belief that the company's gonna be successful before you come to me. And then my job is not to see those run sunshines and rainbows, but to actually look at the clouds on the horizon.- Yeah.- Right? And say, oh, well, you know, this is a great idea, but have you thought about this, this other potential problem, these things that are coming on the horizon, keep those lightning storms away from the business.- So when I, when I do some business consult consulting and I help people start and design their businesses, a lot of people say to me, well, does it matter if I, I have pre incorporation liability because I'm gonna personally guarantee the lease again, I'm gonna, it doesn't really matter because if I sign it today and incorporate next week, yes, I do have that promoter's liability, that pre incorporation liability, but they're gonna make me personally guarantee the lease anyways. Right? So does it really matter at that point if they're gonna make you personally guarantee the lease?- Well, it depends, right? So first and foremost, if you're signing the contract on behalf of the company that doesn't exist yet, then more than likely you're doing it because there's no personal guarantee that's gonna be required of you. Yeah. Now, if you are doing that under the assumption that there's gonna be no personal guarantee, and then you get in there, you form the company, and now you are based off of listening to this podcast Yes. Liable, right? Yes. Now you have your promoter liability that's coming into effect, then you're gonna have to get what's called innovation, N-O-V-A-T-I-O-N, okay.- N-O-V-A-T-I-O-N.- Yep. Innovation.- Okay. Can you explain what innovation is?- So innovation is going back to the person that you owe some kind of obligation to and saying, Hey, can you release me from liability? Right? Hey, I know that I agreed to do X, y, and Z for you in the future, but you've got this new buddy over here, this company that we formed, you know, a, b, C corporation who was really supposed to be signing this contract. Yeah. They've ratified the agreement. Now, can you go ahead and kick me off? Because you've already got a good enough creditor in place to perform those obligations.- So what is like, I mean, if it was me and you signed a contract with me Yep. Right? And I had that guarantee essentially from you, why would I allow you to be removed from the contract? That would be very foolish of me from a business perspective. Right? So why would, what incentive would, what incentive would somebody have or a vendor or creditor have to remove you using- Innovation? Right? That's the tough part, right? Especially if there's already problems that have started to arise. If you're late on your lease payment, your company's going broke, and then you realize, oh man, I have incorporated a li pre incorporation liability. Let me try and get off this contract. Going to the landlord at that time, or the creditor at that time and saying, Hey, I know I'm, I'm already in breach of this contract. Can you just go ahead and kick me off of it? It's not gonna go over well, right?- They say no, they're gonna,- Of course. And foremost, it's more likely to do it when, when things are going well. Right? Hey, I've, I've been in this lease for four years. Yeah. Right? I've paid on time every, every month for, for four years straight. You know, I've kept the property up, I've maintained it. You can see that this is a good business. It's making tons of money. Can you go ahead and kick me off? Okay, well, maybe you have a good relationship with your landlord, that might be enough. But for probably nine outta 10 commercial landlords, that's not gonna be enough.- Now, in my experience as well, a lot of the creditors and vendors that enter into these agreements don't understand the pre incorporation liability or the promoter's liability either. So I, I think that's the gray area here because, you know, talking to people and speaking with people, doing research for the show, you know, a lot of, a lot of people don't even know what pre corporation liability is. Which is why I said, Hey, this is a great topic for the show. Because not only can a a a real estate investor, a a a small business person that's dealing with the new businesses or vice versa, you know, if they understand these kind of the pre corporation liability, promoters liability aspects, they can better protect themselves when they're enter into agreements currently and in the future. But also look at the agreements they currently have and try and mitigate some of those risks now and be proactive, then reactive. Especially because our economy in the situations in, with a lot of changes going on with the tariffs, with some deregulation, a lot of these issues are going to be popping up in the next, you know, three, six months, a year to two years. And I think a lot of people are gonna be surprised and it can innovation be used, because we're talking about pre incorporation, promoters liability. Can innovation be used when you're selling a business to remove yourself from a contract as well? Because I think that is, and I hope it's not off topic for this- Show. No, no. This is, this is important,- Right? But is, but okay, I'm selling a business now I've, whether or not I have pre incorporation liability, promoters liability, I still, I'm personally liable on that contract, which sort of the very similar kind of- Right. Legal- Thing, right? So- Like a commercial lease, you, you usually have a personal guarantee. So yeah, now you have personal liability, whether that's from pre incorporation,'cause you signed it before you, you, you did the co Yeah. You form the company or they required it as part of a condition before they would allow you to lease it.- Perfect. So you need to, so it's really important when you're selling a business to also review your contracts and make sure you don't have that pre corporation liability, that promoter's liability and or just the business liability. I remember a situation before we started the law firm, and I helped you design and build it that we had a vendor we were working with, and they, they were telling us a story about them selling their, their, their business. I think it was like a mail shit business or something. And they sold it, it was good. They actually made money from it. And then all of a sudden, a year later, they get a call from the landlord saying, you owe us $200,000 or something astronomical like that. And they said, well, we sold the business. We have a business sale purchase agreement. You know, why are we liable for this? And he said, or the landlord or whoever the investor said, you know, I don't know if it was a he or she said, well, it doesn't matter. You still personally guaranteed this lease, regardless of who purchased the business, you should have called me and had yourself removed and the new people put on. So these people actually had to restart the business.'cause obviously the business went broke. Right? That's why they were contacted by the landlord. And then to start the business again outta the same location and now try and rebuild the same business.- Otherwise, they would just be liable for the remainder of the term of the lease.- So that's why they had to start the business again, right? And then hopefully finish the lease off or sell it and then remove the personal guarantee. So innovation is really, really important. I think that that legal concept of even me as an entrepreneur didn't fully understand. And again, when you're buying and selling businesses, this is what a business attorney should be going through and helping you with is, Hey, let me see the agreements you have. Are you personally guaranteed on any of these agreements? Right? And if you are, let's get you removed as part of the closing or the business transaction,- Right? Yeah. So what I, what happens often in, in that kind of situation, let's say you have a commercial lease, it's 10 years, you're only five years into it, and you're ready to sell.- Yep.- Okay.- Yep.- As part of that, that sale agreement, you might have a contingency saying that the landlord's either going to give you a novation or they're gonna negotiate a new lease for the new buyer to execute and take you off. And usually it's gonna be at more favorable terms to the landlord at that time,- Of course. Because the benefits in landlords, it, it's obviously in their, their bulk.- Right. I've also had it where the landlord agreed to take an extra lump sum to get rid of the, the, the innovation. Right. Oh, wow. As long as you, you brought a, a buyer to come and replace you. Yeah. Right? Yeah. More credit worthy cease of financials. Comfortable with that. Yeah. Okay. Give me an extra five grand and I'll give you- Innovation. Yeah. Because I think a lot of people, even like, it doesn't really end. So if you sign that at 10 year lease agreement, your pre incorporation liability or your promoter's liability as it's often called, extends for the term of the lease, right? So Correct. Even in eight years, if you've done it and you think, oh, it's over, you know, I don't have to pay it, you still have to pay it. If you've, you've executed the contract using the those steps, meaning that you executed it before you were incorporated or you formed your- Business,- And if you don't have any of those specialized terms in your business agreements, right. So, right. I think when people are starting businesses, they need to be hyper aware of this situation because it's very rare now in, in 2025 that any landlord's going to allow you to lease a building without a personal guarantee. Right. Even national tenants that I've represented, you know, they have lease insurance and stuff like that to off, so, you know, the directors and officers of these large companies don't have to personally guarantee, but that often happens a lot too, where there's some sort of manager that guarantees that- Lease. Yeah, yeah. You don't, you don't wanna be caught up in one of those situations. And when we're talking about special provisions and we talk about business, a lot of our real estate investors are like, ah, well, you know, I don't really count my real estate investment stuff as, as an actual operating business. Right? Yeah. I'm just a flipper or something.- Yeah, yeah.- Right. In, in Florida, we actually have a special provision in the real estate contract, the standardized form we call the far bar Florida Association Realtors with a Florida Bar Far bar. They have a special provision in that contract that allows us as buyers to determine whether or not there's gonna be pre incorporation liability. Oh, really? So it's just in a, in a little bit of a different figure. There, there, it says this contract is assignable, but, and, and it would absolve the buyer, whoever signed that original contract of any potential liability when it does get assigned.- Yep. - Or it's assignable without absolving liability, meaning you can assign it to a third party company that you incorporate, let's say your LLC real estate investment holding company.- Yeah. - But you're still gonna be purchasing liable for performing your end of the, the contract before closing. Right. Or you, you just don't, it's not assignable at all. So those are the three options in that far bar contract. Correct. But that's also dealing with pre incorporation liability- And Yeah. That actually, that's a really good example for people that are buying and selling real estate, real estate agents representing, you know, customers in Florida, we call it customers because you're a transaction broker and that's another- Episode- By default. By default, you're a transaction broker. And that's another episode that we can go into.- Right.- So that's a very good example because I think a lot of people say like, you're right. Hey, I have real estate, I'm a real estate entrepreneur, I'm, you know, an investor, whatever, and this doesn't apply to me because I'm the landlord. But it still applies to, in many aspects, whether you're buying a business, whether you're buying real estate, whether you're buying any kind of product or service from anybody really.- Right. Right.- So it, it could be just, and it's, I I think it's, it's kind of, we use a sole proprietorship concept, right? If you're a sole proprietorship, you're basically d bing as something, so it's James White doing business as x, y, Z cleaning or XY, Z pressure washing or, you know, whatever, manufacturing. And so even though I'm doing my business as a certain entity, or I guess a certain name, I'm still personally liable because it's a sole proprietorship. I haven't filed for an LLC or an Inc or a limited company. So I'm personally liable for that. So I'm jointly and personally liable for both the actions of myself and the business that I'm doing business as. That's why, you know, it's always important for the cost to have an a, a limited liability company or some sort of entity with some, some personal protection and separation.- Yeah, absolutely. If you're, if you're going into business, definitely talk to a legal counsel before you start operations. Yeah. Right. Discuss whether or not, you know, you have to, to inform an entity whether it's recommended. Yeah. What are the different benefits and drawbacks of each one, you know, what kind of tax election are you gonna be utilizing? Get that, get that information up front, of course, before you start signing anything Okay. On the dotted line.- So I, I think the most important thing here is saying speak with an attorney, especially even experienced entrepreneurs, right? That's, that's a major thing. So getting back to promoters liability, and I wanna make sure, so promoters liability is for those starting their own businesses, or could it be anybody that's starting a business with that owner of the, or the incorporator or whatever you wanna call it. So is everybody going to be liable? So if I say to you, Andrew, I have this business idea, I want you to help me negotiate contracts, and you're a partner of mine, right?- Right. - And eventually we incorporate the company, I own 50%, you own 50%, are you, are you liable for the company's actions for the stuff you've engaged in? Or are we both liable for the actions that you've engaged in on behalf of the company? Does that make sense?- Yeah. So let me just, I'm gonna back up. Okay. And then I'm gonna return back to where we, where you, where you're asking. Awesome. Okay. So promoter liability is a deriv derivation of agency liability. Okay? Okay. What is agency liability? It means if I'm acting as your agent, you've asked me to do something, or we, we've agreed that I'm going to do something on your behalf, then you can be liable for my actions. Right? Okay. So if you tell me to go down to the grocery store and buy a, a carton of milk Right. Using your credit card.- Yeah. - Right. But I get there, but credit cards decline and I say, oh, James is good for it.- Yeah. - Right? Then it's okay for the grocery store to rely on my representation that I'm acting on your behalf and put it against your liability.- Oh, wow.- Okay. So that's the idea. Yeah. Behind promoter- Liability.- Okay. Because you're going down to that grocery store and saying, Hey, I'm buying this carton of eggs for this third party. We're gonna call him George, right? Yeah. But that George is really a company.- Yep, yep.- Right. And George is good for it, but the grocery store doesn't see George, the grocery store doesn't know who George is. Right. So they're just gonna say, well, I know Andrew and Andrew's the one who's gonna be liable because he's the one who, who came in here on behalf of George. Now if George comes in here and gets those eggs, picks them up, now he's getting the benefit of that agency relationship, and now he becomes liable. So getting back to your question, you've got two people that have decided, Hey, we're we're gonna start up this new business, James, you go do X, Y, and Z, drew, you go and find us a lease.- Yep.- Right? A, a place to lease.- Yep. - So I go and I, and I find a place to lease, and I say, Hey, we've got this new venture, a, b, C company that's gonna come in here. Can we lease this space? They say, great. Yes, of course. Sign on, on the dotted line on behalf of a b, c company.- Okay, that makes- Sense. That would make me personally liable. Wow. Unless the contract is set otherwise.- So, but there has to be, so if, if George goes into the store and buys eggs in our example, right? And I'm, and I'm not getting the benefit, what if George is just pretending to ha work for me? Right? I mean, 'cause that, that's, that's what came to my mind. Well, what happens if George goes into the store and says, Hey, James told me to pick these up. They know who I am, they know who James is, but they have no notice that George is actually working for me. So I guess they would call us up and confirm, Hey, does George work for you? And if I say yes, then I guess that would make that representation. Right?- Yeah. So this goes back into more complex agency law.- Okay.- So, and did I have, or George, have apparent authority to enter into that contract on your behalf? Was it reasonable for the grocery store to believe that they had your permission? Did did he come in with, you know, papers? Did they look on the Secretary of State website and see his name on, on the company? Right. Okay. Perfect. Where, what, what made them believe that he had the authority to enter into a contract on your behalf? If there's nothing, then more than likely it's just gonna be George gonna be liable and you're not gonna be liable.- Okay. Perfect. I just wanted to clarify that, because I think a lot of people would have that question. Right, right. With that example. So I guess, so promoters liability applies before a company is formed, but any representations made before that. So if you make representations before the company's formed, then the liability, the promoters or pre incorporation liability will attach to you personally, unless there's a disclaimer or some sort of clause in your contract that says that it'll either be effective in this date or upon the company being- Formed. Right. So you wanna be very explicit in those kind of contracts. If you have to sign a contract before forming the company for whatever- Reason. Yeah.- Right. Then you wanna make sure that the contract itself is, is expressly conditional upon the formation of the company, and that James White, specifically as the promoter, is not going to be liable under this contract at all whatsoever.- Yeah. And it's better to do this before something happens, because most people are not going to be as tough. Right. Because if something happens where you get yourself into financial distress, there's, you know, a, a pandemic where the government forces your business, which is crazy to begin with, but forces your business to shut down.- Right? - There are very, it's highly unlikely that, that, that anybody is going to want to remove your personal liability. Right? Right. So it's better to do it ahead of time whether there's no issues, there's no fighting.'cause people are a little bit more relaxed and they want to make a deal. So why they want to make a deal, it's better to negotiate these things ahead of time than try and do it afterwards. Even if you're trying to sell a business, you know, would you put, lemme go back, would you put a clause in agreements like, almost like a proactive clause where it says, if the business sells, like in a commercial lease agreement, if the business is sold, then the liability will be removed from me and automatically added to the new buyer. Would that be a good clause? I mean, would that even be li would that be doable in a commercial lease agreement or even a residential lease or any kind of commercial contract?- So most landlords aren't gonna sign it in that kind of language. They may actually, what I have seen is that the, the landlord will not unreasonably withhold consent to the assignment of the obligations ah, under- The lease. So it won't be unreasonable. So they'll still need to do background checks, qualification checks and so- Forth. Right. Because I mean, if think, put yourself in the landlord's shoes, right? I know James White, I know that he's credit worthy. I've seen his financials, I've done a credit credit report. Yep. Whatever. I trust him. He's the one who's going to be performing these obligations, but we now he wants me to sign this piece of paper that says he can give those obligations up to anybody on the street. So now he finds somebody on the street Yeah. And says, here, you know, you've got a zero credit score, right? You're, you're bankrupt, whatever. Right. Take on all my liabilities- And I'm walking away- And you're walking away, Scott free. Now that leaves me holding the bag,- Essentially. So most people Yeah, you're right. Most people with competent legal counsel would not agree to that. Right?- Right. - But again, most, a lot of people, you know, in my experience, don't even go to attorneys. Right. So this is, I I think this is where attorneys sometimes get a bad reputation where people say, well, that attorney doesn't do this, or that attorney doesn't do that. They didn't protect me or, or whatnot. But the reason why people have attorneys is to protect them from these kind of situations. And when people don't have attorneys, whether it's a personal legal advice business, legal advice, they get caught up in these kind of nuanced legal situations where it's very hard to get yourself out of these legal situations. So, you know, I I really think it's, you know, it's, it's very interesting how a lot of people get caught up in these things by trying to do good things for themselves and other people, and then they get caught up. So,- Right. And I- Think I just, yeah,- I think, I think those kinds of provisions that you were talking about Yeah. Would have flown over a little bit better maybe 50 years ago. Yeah. Right before we had all the, the.com bubble and all these other crisis, even non-qualifying assumables, remember those?- Yeah, I remember those. That's how I started my real estate company. Yes.- Right. Yeah. So that, that would essentially be the same kind of provision that you're talking about with the lease agreement where you have obligations under the contract.- Oh. So it's like consumable mortgage. So for instance, where, okay, this makes a lot more sense to me now. So when I was buying real estate and I was buying real estate at 17, they were called non-qualifying consumables. And this is how crazy this is. How crazy and how much opportunity there was in the west back in the nineties and early, early two thousands.- Right. - Where and how much trust we had in a society. I remember buying properties. I had a real estate agent, what was his name now? Was it Roger Levine? Yeah, I think it was, I wonder if he's still around. He might be still around. He was older back then. But anyways, I called him on a house. It was like an assu, no qualifying assumable 5,000 down, three, two, you know, those little yard signs you see on the streets. So I called him and I was a landscaper at the time, and I had some money and I said, tell me about this deal. So I, you know, innocently, I didn't really do any work. I just went and gave him a 5,000 check. He did the sales purchase agreement and I had the title in my name, and all I had to do was call the bank and say, Hey, I'm paying the payments. Here's my new bank account. And as long as the bank got the money, they didn't care.- Yes. Ho hold on. Yes. Hold on, hold on. Pause, pause, pause. Yes. Because there's gonna be some listeners who are listening to your story saying, what the heck is he talking- About? Yes.- Because non-qualifying assumables don't exist really anymore. They don't exist. No,- They're gone.- There's nothing.- Yeah, they're gone. Yeah.- Okay. It's- Very rare.- So they're probably like, well, what is he talking about? What is this non-qualifying consumable? What does that mean?- Okay. So what that means is if I'm willing to buy it, I buy it off you, I pay you a fee or no fee at all, and I automatically qualify for the mortgage. So the mortgage, the house, the title would be in my name and the mortgage would be in my name, but it wouldn't release the liability from the person who sold me the home. Right. That is their name is still on.- So there's no qualification process whatsoever.- Correct. So- It's just a sign, a piece of paper, and it, the note now just moves down a chain of title of people,- But anybody that's associated with that title that hasn't been removed by innovation is liable. So this is why they stopped doing it, because what happened was you had a lot of sellers that said, Hey, I can make an extra $20,000 selling my house if it's non-qualifying assumable. Right. So they would say, yeah, that makes sense. Why wouldn't I? And so then a year or two down the road when on a, you know, 15 or 10 or 20 or mortgage term, whatever the term was, you know, when the people stopped paying the payments during a recession or some sort of economic calamity, the bank would be calling the prior owner and saying, or the pri the seller and the prior owner and saying, Hey, you owe us, you know,$10,000 in back payments, otherwise you're liable. And they're like, Hey, what do you mean I sold my house, you know, my real estate agent or my whoever said that it was a non-qualifying assumable, I thought my name was removed off the contract. And then you find out that your name was not removed off the contract. Right. And then now you have to come up with the money and sometimes the acceleration part starts happening, and now you have to come up with a whole- Balance. So for benefit of the listeners who are not familiar with, with fancy lending terms,- Yes.- What is an acceleration?- That means it's all due at once?- Not a good thing. No, you don't wanna accelerate.- Yeah. A lot of people don't understand the acceleration side of contracts, but yeah, you do not want to accelerate because once you start that you on that road, it's very hard to walk yourself back.- Right. - From an acceleration agreement or I guess so- Accelerating basically means, hey, whatever financial obligation you have remaining under that contract or loan agreement in this instance- Yeah.- Is we want it now today. So if you have a, a 10 years left on your mortgage, the lender says, I'm accelerating the remaining 10 years.- Yep. - All of those payments that you would be making monthly are now due and you have 30 days to to That's crazy. Provide it. Otherwise it's gonna start- For closure. Yeah. And so think about having pre incorporation liability or any kind of personal liability in that respect. Right? So you have a couple business partners. You, you, you know, again, everybody has high trust, that's why you're becoming business partners to begin with. And then you sign the lease agreement, you personally guarantee it, your business partner doesn't, all of a sudden two years later, he leaves or she leaves,- It happens.- And it happens all the time. Right. This is why a lot of people, we have a unique relationship because we're business partners in a lot of different business oppor opportunities that we've, we've embarked upon. But I don't suggest having business partners personally, I've had a lot of horrific experiences and this is why we're result, this is why you became an one, one of the other reasons why you became an attorney is because we've had situations similar to this come up and, hey, we didn't know this stuff. And so we wanted to educate ourselves to keep ourselves, keep prevent ourselves from having these kind of liabilities. But it happens all the time,- Right?- So again, if you're going to sign a lease agreement with a partnership, make sure that partnership also personally guarantees that lease. Right. Or try and waive the, the, the personal guarantee away and make sure those clauses are in the contract to prevent any pre incorporation or promoter's liability from even taking effect when you're actually trying to start your business. Yeah. I hope that makes- Sense. Yeah. Address it upfront, right? So, you know, before you start signing any contracts Yeah. Get your company formed, right, of course. Get your separate entity, put together, formed, get your operating agreement in place, deal with the internal governance if you're gonna work with somebody else as a business partner. Yeah, of course. As a manager, maybe even just paying a salary, not even getting equity.- Yeah. - Right. Deal with the roles and responsibilities. Discuss what you guys wanna do if the business starts falling apart, right?- Yeah.- Again, you guys, as the entrepreneurs are supposed to be out there sunshines and rainbows thinking about, Hey, how are we gonna deal with all the money that's gonna roll in, right? Yeah.- Right.- It's gonna start raining gold coins and we're gonna just gonna have to find bags to go collect it.- Yeah. And nobody wants to talk about, one of the things is when you're starting a business or you're starting any venture or any investment take, taking, taking part in any investment, nobody ever wants to think you're going to fail. Because if you thought you were going to fail, you're never going to invest in the company or start a partnership anyways. So it's like buying a life insurance, right? Everybody says, oh, I don't wanna buy life insurance or, because, you know, it's kind of morbid. Why would I wanna buy life insurance on my life so somebody gets rich or somebody gets a big benefit if I pass away? And that's the wrong attitude, obviously, because the reason why you purchase life insurance is so the people that you love, for instance, can, can have a stable life afterwards or kind of readjust their lifestyle over a period of time. Right. And that's why the same thing as a business failure, whether we're talking about pre corporation liability or whether we're talking about, you know, just, you know, any kind of LLC operating agreement. Again, we talked about that in the last episode, where you make sure the attorney does the LLC operating agreement prior to if you haven't had a effective date of organization articles or organization or formation or do it afterwards. So you're not gonna caught up in that kind of like legal, like gray area from it. But yeah, it's a very, it is a very interesting concept how, you know, a lot of people get caught up in these little tiny details, right? Yeah. Where details do matter. I mean, they really do.- Right. So I just wanna recap for our listeners just one more time. Sure. Right. We've- Got, I'm all over sometimes,- Right? We've got, we we've gotten over a lot, a lot of different Yes. Particular topics. Correct. So here's some, some big takeaways from today. Yep. Okay, let's do it. So promoter liability is the type of liability that applies when you're an individual trying to go and sign contracts or agreements or obligate a company that has not been formed yet, right? Something you've not filed with Secretary of State or division of corporations, whatever, you know, in your state it is, you are signing a lease agreement, you're signing a record contract, you're signing a, a vendor contract, something that's gonna obligate the company, and the company hasn't been formed yet. By default, you're gonna be personally liable for that. And even after the company is formed by default in most jurisdictions, you're still gonna be liable. It's just gonna be you and the company, right. That are gonna be liable after the company has ratified that contract. If the company is formed but then never ratifies it by either conduct or in a resolution or something in writing, then the company's not gonna be liable. It's just gonna be you alone. That is- Interesting,- Right? In order to, if, let's say you've messed up and now you want to get off of that contract, at that point you have to get what's called innovation, right? You have to novate yourself from that contract, which means you have to go back to the person who you owe those performance obligations and say, Hey, can you take me off of that liability and only have this company be the one to be obligated to perform these obligations, like pay rent instead. And then they have to sign it in writing.- Perfect. That's a really good ex explanation. That's also doesn't include for A DBA, because that's basically you operating as a business name. So A DBA is, you cannot get rid of personal liability from A DBA'cause it's they're associated with you personally. Correct. I just wanted to confirm that.- So yeah, let's, let's talk about that. Yes. So there's a misconception out there in, in the marketplace that if you file a fictitious name that, and you're just, and that fictitious name is owned by you personally. So James White owns the fictitious name- Yep. A BC record company. Sure.- Right?- Yep.- That means that you are operating as a sole proprietorship and sole proprietorship has unlimited personal liability. So you're essentially creating an alter ego. It's just James White, who's also known now as a BC record company, which means if a BC record company gets sued, that's just the same thing as James White getting sued.- And so if you're doing business as essentially an alter ego- Yep. DBA doing business as also known as a fictitious name registration,- And then you decide to form an LLC, you're still gonna be person liable unless you get innovation- To- Take you, remove you away from that. So that's why I would never suggest, again, it depends on people's unique circumstances, but I would never in my ever suggest having somebody start with a DBA. I think that's just risking a lot.- Yeah. Because you have unlimited personal liability there.- Yeah. It just doesn't make any sense. People- Still, no, obviously, I mean, we saw a lemonade stand this morning on the way to the, to the studio.- I, I, I gave them a silver coin. I, you know, this is the thing I, I see a lot of people, you know, again, off topic, but I see a lot of people, you know, on the streets begging for money and they're fully capable of working. And it drives me crazy that people will give money to, to these like middle-aged guys or women that are fully capable of working. It's not like they're disabled in the legs or arms or something. So, you know, I I, I think when you see people, whether it's kids or whether it's an adult and they're trying to start a business, a support their business, especially if they're, you know, competent, what they're doing and, and they like doing it, but especially kids, you know, if kids are, are showing some form of entrepreneurship, you know, again, a $35 silver, one ounce silver coin that probably made their day and they'll remember that for the rest of their lives.- Right.- But now that memory is going to be etched in their brain. And so now that, that sparked the business aspect, the entrepreneurship aspect in both the, I think it was a boy and a girl because now they, they've realized, oh my god, they got a $35 coin for setting up a lemonade stand. And now that just made their, that just made them become entrepreneurs for the rest of their lives because now they'll go back and say, how can I get more silver coins? Right. Right. They can't believe it. And some people, when you have a lemonade stem, they'll pay a dollar for the lemonade and some people give you a dollar plus a tip and some people pay you $3. Right?- Yeah. It's the tip culture now, right?- Tip culture. Yes. Yes. I mean, they got me for 35 bucks or everything, it was like three whatever. So one ounce silver coin, right? So whatever. But it, you know, again, it reinforces that, hey, entrepreneurship is, is, is, is there, so that's, I know that's a little off- Topic, right? So to get back to Yes. The reason I brought it up was the sole proprietorship. Yes. Right. If you're, if you're just a eight and 10-year-old kid that's putting up a lemonade stand and you don't wanna pay.- Yeah. I think you're,- You to incorporate LLC maybe you can do- Yeah. Unless your parents are like lawyers and they say, no, you need an LLC. No. Again, obviously, you know, kids, the liability is lowest. So if your liability is low, I mean, maybe think about that. But again, LLCs, they, there's a lot, you know, there's a lot of benefits for the amount of work you have to actually do corporate structuring and just corporate responsibilities. And that's why LLCs exist, right?- Yeah. And I think one thing that, that a lot of people who come to this country don't necessarily understand, but until they get here- Yeah.- Is how easy it is to form and a company.- It is very easy. That's what makes America great.- I I, I agree. You know, if you're in Europe, they have minimum capitalization requirements.- You can't even start a business in Europe. It's like $30,000 or 30,000 euros just to,- Depending on the jurisdiction, they have a minimum incorporation. You have to prove that you've got enough money to sustain the business, which I mean, it's, it makes sense. They're trying to protect the public from people just opening up fraudsters, you know, fraudsters, you know. Yeah. A fly by night operation, right? Yeah. Be there one day off to the- Next. Yep.- But America's not like that.- That's what makes America so powerful.- America's like, Hey, pay the filing fees, we'll get you started- And we'll give you that, that- Liability- Protection you got.- Exactly.- Yeah. That's amazing. So again, sole proprietorships do not protect you from pre incorporation promoters liability because it's basically you doing business as a new need. Yep.- You are the business.- Perfect. And then an LLC, as long as it's you're entering into agreements or contracts after the incorporation or the, OR articles of organization are issued, then you are protected from as long- As it's clear that you're signing on behalf of the company. Half company. Not personally. And not personally.- And a lot of lease agreements or a lot of agreements, even in credit card agreements from banks or SBA loans, they'll always make you personal guarantee that loan. So some things you're not going to be able to get, you know, rid of personal guarantees. But this is where when you speak with an attorney, they can also help with estate planning and asset protection to make sure your life is structured in a way that if you are going to be taking risks. Right. 'cause every business, no matter how rich you are, how experienced you are, there's always risks when crossing the river. Right? Right. That's my term, always risks when crossing the river. So you wanna make sure that you're fully prepared in the event that something was to happen and you are personally guaranteed that your family and some of your other assets are protected. Right. And that's where like estate plan comes in. So a business attorney with some estate planning experience would be good to help with that. But that's, I guess pre-print promoters liability, DBAs, you're not covered. You know, there's no, like, you know, you're, you're going to be liable for any actions on that. DPA a- Right? Yeah. There's nobody else. It's just you, you are the business.- Yep.- And the sole proprietorship there. Yeah. LLCs you can, it's, it's the company that is going to be the one that's signing. So as long as that's clear on the agreement, then the company and anything it owns Perfect. Be potentially subject- Wow.- To obligation there. Now, one of the things I did wanna bring up is, let's say you're trapped in a contract or a loan agreement and you're personally guaranteed. How, what are some of the steps that, that a business owner would do to try and increase its reputation? Its credibility, its credit worthiness. In order to try and either convince the creditor to get rid of their, their personal guarantee, or maybe find a new person to then assume those liabilities. Let's, like, let's say like if it's a loan to get a refinance, right? How do we improve the, the credit worthiness of a business? And what I'm thinking about is like applying for a DUNS and Bradstreet number.- Yeah. A DUNS number. And there are, so they do charge you, but there's a secret by the way, is if you say you're applying for a government contract,- If you, if you are for a government contract or you're looking to register for sam.gov. Yes. And those kinds of things.- And you should always register for sam.gov is what I'm saying.- That's the point. I mean, I mean the government's always looking for suppliers and vendors. Correct. So, you know, if you're, if you offer a product or service Yeah. That the government may want,- Yes.- Then it's a good idea to register. Right. So- As long as you're going to apply for a government contract, go to Dun and Bradstreet, mention you're applying for a government contract, they have to issue that number free of charge. They usually, they say like, it could take up to like, I don't know, 30 days or something, maybe a couple weeks, but they usually do it within 24 to 40 hours. Then go on sam.gov, get your company profile set up there, and then you're good to go. And a lot of creditors will report to DUNS and Bradstreet and you can build a separate credit profile for your business.- Right.- So that's a way to build- Credibility. So it's just like your TransUnion number?- Yeah. Or your social security number,- Stuff like that. Yeah. Right. So you're, you're, it's your business credit rating.- Yep.- Is your d and B number.- Yep. Duns and Bradstreet. Yep. There you go. Perfect. Sounds good. So I think we're all good. That's, this really gives me a really good explanation of a pre incorporation liability, promoter's liability. Obviously this is not legal advice, you know, these are just generalized questions. Always speak with an attorney for specific legal advice to your specific situation. Never, you know, do it yourself. I, I just, I'm a big believer in that, just don't do it yourself. It's just not worth it long term. So anyways, thanks for listening to our third podcast and we'll be back next week. Yeah, have a great day everybody. See you then.