Don’t Let Your Marketing Strategy Unnecessarily Expose You to Personal Liability by Daryl Manhart

Published on in Attorney Articles

Paradigmby Daryl Manhart

You completed all the statutory steps to organize your business as a corporation (or LLC or other entity). Why? Because creating a separate entity for your business can insulate you, as its owner, from becoming personally liable for business debts. Nevertheless, while you’ve followed all the steps to create the corporation, you may have been convinced to not use your long, clunky “corporate name” for marketing purposes. Instead, your marketing guru may want you to use an abbreviated or truncated version of it or some different tradename for one or more reasons (works better with a selected logo, more mobile-friendly, easier to remember, etc.).

Marketing recommendations may be to use a short name or phrase, rather than your full entity name.

What could go wrong? Well, you could be exposing yourself to the personal liability that you probably incorporated to minimize or avoid.

First, statutes authorizing the creation of entities invariably state that the name of the business “shall” contain one or more of certain words or abbreviations identifying the type of entity. Corporate statutes require the name to contain something like “Corp.” or “Inc.”

Second, since entities can only act through individuals as their agent, here’s some agency law. When an agent (i.e., you) makes a contract for its principal (i.e., your business), the party who is liable as between the principal and the agent is dependent on the level of disclosure. An agent who fails to disclose that the contract is being made for its principal, is personally liable on the contract as if the principal does not exist. An agent who discloses that he/she is acting for a principal without identifying that principal also is liable personally (unless the other party otherwise agrees). Only an agent who, in making a contract, discloses both that he/she is acting for a principal and identifies that principal is not personally liable on the contract.

When you hold yourself out for business with just your marketing name, you may be giving up entity protection.

So when your website (and other marketing material) is all about identifying your business with that catchy tradename, but doesn’t include your full, actual business name, you could be leaving yourself open to trouble. The burden of disclosure is on you and the disclosure must have occurred by the time of transacting business – that is, before or at the time of contracting.

People conducting business using business cards, purchase order or receipt forms, stationery and the like with only some shortened version of their entity’s legal name (particularly if omitting statutorily required words like “Inc.”) or just a fictitious (albeit catchy) tradename have had to defend against claims of personal liability of the business owner. You may defend based on past dealings or some other basis from which you can show that the other party should have known you were acting as agent for a disclosed entity, but that costs you extra time and money and may not be successful. You organized as an entity in the first place intending to avoid that risk.

Consider some examples of what could go wrong.

O’Brien had formed an entity named Eurowest, Inc., but also used the name “Eurowest Tours.” O’Brien made arrangements with Aeroflot to provide air travel to Ireland as part of a vacation package, with O’Brien authorized to issue tickets and collect the payment for reimbursement to Aeroflot. During their dealings, O’Brien had used business cards, stationery, a written agreement and invoices which all identified his business as Eurowest Tours. As a result of scores of tickets for which no payment was ever received, Aeroflot sued O’Brien personally for over $29,000. In Aeroflot Russian International Airlines v. O’Brien, 824 F. Supp. 3 (D.D.C. 1993), the court held that at the time of contracting with Aeroflot, O’Brien had failed to disclose the name of his corporation or that he was acting as its agent. He was held personally liable.

Bakker had hired a landscaper to work on his backyard. The name on the business card he received was “D&A Landscaping,” along with reference to Andrew Thomas as the landscaper. Besides the card, Thomas had provided Bakker with proposals, an estimate, and a drawing, but none indicated that D&A Landscaping was an LLC or that Thomas was an agent for an LLC. When Bakker sued, the court in Bakker v. D&A Landscaping Co., 2012 ND 170, 820 N.W.2d 357 (2012), held Thomas personally liable because he had failed to disclose the identity of his LLC.

Derr had formed a corporation named JCDER, Inc., but he began doing business as “J.D. Construction,” sometimes identifying it as “J.D. Construction Co., Inc.” Treadwell got a quote by mail and thereafter signed a contract with J.D. Construction, which was also signed by Derr, without indicating his office or authority to sign for J.D. Construction Co., Inc. After Treadwell had paid $91,000 on a $111,000 contract, Derr abandoned the construction job, and Treadwell sued. As there was no J.D. Construction Co., Inc., Derr was deemed operating with an assumed tradename, not as the disclosed agent of JCDER, Inc., and he was held personally liable. Treadwell v. J.D. Construction Co., 2007 ME 150, 938 A.2d 794 (2007).

In Odyssey Travel Center, Inc. v. RO Cruises, Inc., 262 F. Supp. 2d 618 (D. Md. 2003), RO Cruises, Inc. sought to avoid liability on the basis that it was a disclosed agent for another corporation, ROC, Ltd. Odyssey had relied upon, among other things, a brochure from RO Cruises referring to itself as agent for “Royal Olympic Cruises,” which the court held to be a trade name and not a disclosed entity principal. The only references to ROC, Ltd. were in fine print and identified it as a cruise operator, but never as the principal for which RO Cruises, Inc. was acting. The court held that the representation of RO Cruises, Inc. was agent for what was merely its trade name, without disclosure of ROC, Ltd. as the principal, was insufficient to shield it from liability on the contract with Odyssey.

Make sure you can point to pre-contractual disclosures of your full entity name.

Consider this, then. On your website, set it up however you want for your marketing – use the short version of your entity name or your desired tradename. But somewhere on that page, for example if you have a physical address at the bottom of the page, include your entire business name (particularly if you are doing sales via that website). If you have a form of purchase order, receipt or stationery, however much you want to emphasize that name you are using for marketing, make sure your entire business name is somewhere on there, too. Although less problematic, it’s a good idea to have your business cards also reflect the full entity name.

Don’t forget it’s important how you sign documents, too.

Now, while we’re on this subject, remember that when your business contracts with others, you want to show the full entity name on any promissory notes and contract documents, and you also want to show that the person signing is doing so as a disclosed agent of the entity, and not personally. So, don’t just sign your name to that service contract your vendor put in front of you. If it does not already show your entity is the contracting party, write in the full name of your business, sign below that entity name, and after your signature indicate you signed as an officer or agent (i.e., “its president”).

You intend to operate your business as an entity to minimize or avoid personal liability. That makes it your responsibility to make sure those with whom you do business know that they are transacting with that entity and not with you using a fictitious name for a sole proprietorship or general partnership.


Daryl Manhart

Daryl Manhart is a senior shareholder at Burch & Cracchiolo, P.A. handling commercial and real estate transactions, commercial litigation and general business representation. He is also the firm’s principal appellate attorney handling civil appeals, including special actions, in state and federal appellate courts in diverse practice areas, including cases before the U.S. Supreme Court.

Phone: 602.274.7611
dmanhart@bcattorneys.com
bcattorneys.com

Originally published in Paradigm Spring 2019.