Q: Does my business need to be a corporation?

A: In a perfect world, all businesses should be limited liability entities: either corporations or limited liability companies ("LLC's"). A corporation or LLC shields its owners from personal liability for debts of the business. There are also different tax rules that apply to corporations and LLC's , which may be beneficial to the business owners.

Most everyone is familiar with a corporation: owned by shareholders who have stock; managed by a Board of Directors; and operated on a day-to-day basis by its officers (President, Secretary, Treasurer). LLCs are run like a partnership, but possess the limited liability protection of a corporation. They have made partnerships virtually obsolete.

So why doesn't everyone have a corporation or an LLC? There are some expenses involved with forming a separate business entity: an annual franchise fee of $800; attorney's and accountant's fees in organizing and maintaining the entity (including preparing a separate tax return each year); and a gross receipts tax imposed on LLCs.

Also, the limited liability protection is not completely bulletproof. If the owners fail to run the business according to the law or if they mix personal money or assets with that of the business, the entity may be disregarded by a court. Also, many parties that the business entity deals with, such as lenders or landlords, will require that the owners personally guaranty the obligations of the entity. Further, if the owner is the person who actually is at fault in causing injury to someone, the owner will be sued personally, in addition to the entity.

Having said all that, if the costs of forming and maintaining a limited liability entity is not prohibitive, then it is usually a good idea for a business to be a corporation or an LLC. Depending on your type of business, your financial situation, and other relevant factors, your attorney and accountant should be able to advise you which type of entity would best suit your business.

Q: Is an oral contract enforceable?

A: Yes. With a few exceptions, most of which relate to real property, there is no difference between the enforceability of written and oral contracts. The big difference between the two is how hard it is to prove what was in the contract. With a written contract, you look at the words of the document. With an oral contract, you have to show the terms of the contract by testimony from the parties to the contract. Even if both sides are trying to be truthful, memories can differ and can fade over time.

You should keep in mind that an oral contract has to meet the same requirements as a written contract. The fact that one person said something to another doesn't mean a contract was formed. Both sides have to agree on the terms of the contract, and each party has to give something of value to the other party (like money or a promise to do something) in order to form an enforceable contract.

If you're going to have a contract, it's far better to have it in writing. And while a contract doesn't have to be written by a lawyer in order to be enforceable, a lawyer can usually help you prepare a better contract than you could do yourself.

By the way, many people use the term "verbal contract" to mean a contract that isn't written down. However, the proper legal term is "oral contract." "Verbal" just means "in words," and both written and oral contracts are expressed in words.

Q: How can I split up with my partner?

A: Many people use the term "partner" to mean someone they're in business with. Technically, only people who own partnerships are partners. However, there are different types of businesses (for example, partnerships, corporations, and limited liability companies or LLCs) where people are in business with one another, and all of them may someday involve having to split up the business.

By far the easiest and cheapest way to split up a business is if the parties can agree. If they can't agree, the law provides ways of splitting up each type of business. All of those legal mechanisms involve dividing the assets and liabilities of the business in a fair way among the owners. However, a lawsuit has to be filed, and determining the value of the assets and liabilities can be a long and expensive process, involving lawyers, appraisers, and accountants.

One way to avoid long and expensive battles over splitting up a business is to agree in advance. The owners of the business can enter into a "buy-sell" agreement when they start the business. The buy-sell agreement determines what will happen if the business ever needs to be split up. People starting a business don't always think about this, but it's a good idea to think about how to get out of a business before you get into one. If you have a lawyer help you organize your business, your lawyer can also advise you on buy-sell provisions.

Q: I have just received a notice that a debtor has petitioned for bankruptcy relief, what can I do now to collect the debt owed?

A: At Curtis Legal Group we represent creditors, both large and small, secured and unsecured. Regardless of the nature of the debt, creditors are prohibited by the automatic stay of the Bankruptcy Court from taking or continuing any action against the debtor to recover the amount owed. The purpose of the automatic stay is to preserve the status quo pending the bankruptcy proceedings and the determination of which assets the debtor may retain and which are available to pay obligations owed creditors.Over the years, there has been much litigation as to what constitutes a violation of the automatic stay. Certain actions by creditors subsequent to having notice of the bankruptcy may or may not be a violation of the automatic stay. If you have any doubt, assume the stay applies. We recommend that you contact legal counsel prior to taking any action which may be considered a violation of the stay.

Q: I have just been sued by the trustee for receiving an alleged preferential payment. What is a preference and do I have any defenses?

A: The bankruptcy code defines a preference as a situation where a creditor receives any transfer (or payment) of property of the debtor within 90 days before the debtor files for bankruptcy when the payment is for an pre-existing debt, while the debtor was insolvent.

The bankruptcy laws are designed to promote equal treatment of creditors and prevent the debtor from favoring one creditor over another. Certain diligent or fortunate creditors who obtained payment from the debtor immediately prior to the debtor filing bankruptcy may be compelled to return assets received from the debtor to the bankruptcy estate for distribution pro rata to the other creditors, even the more passive creditors. In bankruptcy, this pre-petition payment may be considered a preference. In other words, if a creditor receives more than it would have if the debtor had petitioned for bankruptcy relief before the transfer, then the creditor may have to return the payment to the bankruptcy court. Whether the creditor knew that the debtor was insolvent at the time of the transfer is irrelevant.

However, the bankruptcy code provides certain defenses to this otherwise harsh and seemingly unfair provision. If you are the subject of a preference lawsuit, we recommend that you consult counsel because defenses are available and unless asserted, they may be waived.