Limited Partnerships – Advantages and Case Study

by Garrett Sutton, Esq | Dec 27, 2021 | Corporate Direct, entity types, Start a Business

Advantages of Limited Partnerships

LPs allow for pass-through taxation for both the limited partner and the general partner.
Limited partners are not held personally responsible for the debts and liabilities of the business, although the GP, if an individual, may be personally responsible.
The general partner(s) have full control over all business decisions, which can be useful in family situations where ownership – but not control – has been gifted to children.
Estate planning strategies can be achieved with LPs.
Limited partners are not responsible for the partnership’s debts beyond the amount of their capital contribution or contribution obligation. So, unless they become actively involved, the limited partners are protected.
As a general rule, general partners are personally liable for all partnership debts. But as was mentioned above, there is a way to protect the general partner of a limited partnership. To reduce liability exposure, corporations or LLCs are formed to serve as general partners of the limited partnership. In this way, the liability of the general partner is encapsulated in a limited liability entity.
Because by definition limited partners may not participate in management, the general partner maintains complete control. In many cases, the general partner will hold only 2% of the partnership interest but will be able to assert 100% control over the partnership. This feature is valuable in estate planning situations where a parent is gifting or has gifted limited partnership interests to his children. Until such family members are old enough or trusted enough to act responsibly, the senior family members may continue to manage the LP even though only a very small general partnership interest is retained.
The ability to restrict the transfer of limited or general partnership interests to outside persons is a valuable feature of the limited partnership. Through a written limited partnership agreement, rights of first refusal, prohibited transfers, and conditions to permitted transfers are instituted to restrict the free transferability of partnership interests. It should be noted that LLCs can also afford beneficial restrictions on transfer. These restrictions are crucial for achieving the creditor protection and estate and gift tax advantages afforded by limited partnerships.
Creditors of a partnership can only reach the partnership assets and the assets of the general partner, which is limited by using a corporate general partner which does not hold a lot of assets.
The limited partnership provides a great deal of flexibility. A written partnership agreement can be drafted to tailor the business and family planning requirements of any situation. And there are very few statutory requirements that cannot be changed or eliminated through a well-drafted partnership agreement.
Limited partnerships, like general partnerships, are flow-through tax entities.

For more information on this topic, get the book!

Click here to get it on Amazon

Case Study:

When a Limited Partnership is Best

Jim is the proud father of three boys. Aaron, Bob, and Chris are active, athletic, and creative boys almost ready to embark upon their own careers. The problem was that they were sometimes too active, too athletic, and too creative.

At the time Jim came to see me, Aaron was seventeen years old and every one of the seemingly unlimited hormones he had was shouting for attention. He loved the girls, the girls loved him, and his social life was frenetic and chaotic.

Bob was sixteen years old and sports were all that mattered. He played sports, watched sports, and lived and breathed sports.

Chris was fifteen years old and the lead guitarist in a heavy metal band. When they practiced in Jim’s garage the neighbors did not confuse them with the Beatles.

Jim has five valuable real estate holdings that he wants to go to the boys. His wife had passed on several years before and he needed to make some estate planning decisions. But given the boys’ energy level and lack of direction he did not want them controlling or managing the real estate.

Jim knew that if he left the assets in his own name, when he died the IRS would take 55% of his estate, which was valued at over $10 million. And while estate taxes were supposed to be gradually eliminated, Jim knew that Congress played politics in this arena and no certainty was guaranteed. Jim had worked too hard, and had paid income taxes once already before buying the properties, to let the IRS’s estate taxes take away half his assets. But again, he could not let his boys have any sort of control over the assets. While the government could squander 55% of his assets, he knew that his boys could easily top that with a 100% effort.

I suggested that Jim place the five real estate holdings into five separate limited partnerships.

I further explained to Jim that the beauty of a limited partnership was that all management control was in the hands of the general partner. The limited partners were not allowed to get involved in the business. Their activity was “limited” to being passive owners.

It was explained that the general partner can own as little as 2% of the limited partnership, with the limited partners owning the other 98% of it, and yet the general partner can have 100% control in how the entity was managed. The limited partners, even though they own 98%, cannot be involved. This was a major and unique difference between the limited partnership and the limited liability company or a corporation. If the boys owned 98% of an LLC or a corporation they could vote out their dad, sell the assets, and have a party for the ages. Not so with a limited partnership.

The limited partnership was perfect for Jim. He could not imagine his boys performing any sort of responsible management. At least not then. And at the same time he wanted to get the assets out of his name so he would not pay a huge estate tax. The limited partnership was the best entity for this. The IRS allows discounts when you use a limited partnership for gifting. So instead of annually gifting $14,000 tax free to each boy he could gift $16,000 or more to each boy. Over a period of years, his limited partnership interest in each of the limited partnerships would be reduced and the boys’ interest would be increased. When Jim passes on, his estate tax will be based only on the amount of interest he had left in each limited partnership. If he lives long enough he can gift away his entire interest in all five limited partnerships.

Except for his general partnership interest. By retaining his 2% general partnership interest, Jim can control the entities until the day he dies. While he is hopeful his boys will straighten out, the limited partnership format allows him total control in the event that does not happen.

Jim also liked my advice that each of the five properties be put into five separate limited partnerships. I explained to him that the strategy today is to segregate assets. If someone gets injured at one property and sues, it is better to only have one property exposed. If all five properties were in the same limited partnership, the person suing could go after all five properties to satisfy his claim. By segregating assets into separate entities the person suing can only go after the one property where they were injured.

Jim liked the control and protections afforded by the limited partnership entity and proceeded to form five of them.

Is a Limited Partnership right for you? Get your free 15-minute consultation today!

Schedule a Consultation

How to Set Up Single Member LLCs

by Garrett Sutton, Esq | Dec 26, 2021 | Corporate Direct, entity types, Forming an LLC, Maintaining Your LLCs, Start a Business

You must be very careful when you are the only owner of your LLC. Single member LLCs require extra planning and special language in the operating agreement.

One example: What happens when the single owner/member passes? Who takes over? It may be months before that is sorted out, and your business will falter without a clear leader.

Difficulties of Owning a Single Member LLC

You want the asset protection benefits of a limited liability company. But what if you don’t want any partners? What if you want to be the sole owner of your own LLC?

You can do that with a single owner LLC (sometimes known as a single member LLC).

But you have to be careful.

Before we discuss how to properly set up and use a single owner LLC we must acknowledge a nationwide trend. Courts are starting to deny sole owner LLCs the same protection as multiple member LLCs. The reason has to do with the charging order.

The charging order is a court order providing a judgment creditor (someone who has already won in court and is now trying to collect) a lien on distributions. A chart helps to illustrate:

Illustration showing typical multi-member LLC structure

John was in a car wreck. Moe does not have a claim against XYZ, LLC itself. The wreck had nothing to do with the duplex. Instead, Moe wants to collect against John’s assets, which is a 50% interest in XYZ, LLC. Courts have said it is not fair to Mary, the other 50% owner of XYZ, to let Moe come crashing into the LLC as a new partner. Instead, the courts give Moe a charging order, meaning that if any distributions (think profits) flow from XYZ, LLC to John then Moe is charged with receiving them.

Moe is not a partner, can’t make decisions or demands, and has to wait until John gets paid. If John never gets paid, neither does Moe. The charging order not only protects Mary but is a useful deterrent to frivolous litigation brought against John. Attorneys don’t like to wait around to get paid.

But what if there is only a single owner?

Illustration that shows a single member LLC structure

In this illustration there is no Mary to protect. It’s just John. Is it fair to Moe to only offer the charging order remedy? Or should other remedies be allowed?

How the Court Has Ruled Against LLCs With One Member

In June of 2010, the Florida Supreme Court decided the Olmstead vs. FTC case on these grounds. In a single owner LLC there are no other members to protect. The court allowed the FTC to seize Mr. Olmstead’s membership interests in order to collect. Other states have followed the trend.

Interestingly, even two of the strongest LLC states have denied charging order protection to single owner LLCs in limited circumstances.

In September of 2014, the US District Court in Nevada decided the bankruptcy case of In re: Cleveland.

The court held that the charging order did not protect a single member LLC owner in bankruptcy. Instead, the bankruptcy trustee could step into the shoes of the single owner and manage the LLC. This is not surprising since bankruptcy trustees have unique and far reaching powers, which are routinely upheld by the courts. (But know that, incredibly enough, a bankruptcy trustee can’t get control of the shares of a Nevada corporation. This is a special planning opportunity available to Nevada residents – or those who may become Nevada residents.)

In November of 2014, the Wyoming Supreme Court rendered a surprising verdict in the Greenhunter case.

The court held that the veil of a single owner LLC could be pierced. The issue centered on a Texas company’s use of a Wyoming LLC it solely owned. The LLC was undercapitalized (meaning not enough money was put into it) and it incurred all sorts of obligations. It wasn’t fair for the Texas company for the single owner to hide behind the LLC. The fact that a single owner LLC was involved was a material issue. The court pierced through the LLC and held the Texas company liable for the LLC’s debts.

Even though these are fairly narrow cases, both Nevada and Wyoming have held against single member LLCs. Again, this is the trend.

Luckily there are some things you can do to protect your assets as a single member LLC…

Strategies for Protecting Your Assets

One strategy is to set up a multi-member LLC structured in a way that gives the intended single member all of the decision making power. For example, parents can have adult children over 18 become member(s) or for those under 18 you can use a Uniform Gift to Minors Act designation. You may want to use an irrevocable spendthrift trust for children or others. A local estate planning attorney can help you set these up correctly.

But what is the smallest percentage you have to give up for the second member? Could you give up just 1/100th of 1 percent? Most practitioners feel that the percentage should not be inordinately low and that 5% is a suitable second member holding. So the ideal structure would be that John owns 95% of the LLC and the other 5% is owned by a child (or other family member) and/or an irrevocable trust.

Accordingly, in a state that doesn’t protect single owner LLCs, you have an excellent argument for charging order protection. There is a legitimate second member to protect. To further that legitimacy it is useful to have the second member participate in the affairs of the LLC. Attending meetings and making suggestions recorded into the meeting minutes is a good way to show such involvement.

But what if you don’t want to bring in a second member?

There are plenty of good reasons to set up a sole owner LLC. Other owners can bring a loss of privacy and protection. And if you paid 100% for the whole asset, why should you bring in another member anyway? Or, what if you don’t have any children or other family members that you want to bring in?

If a single member LLC is truly the best fit for you, there are three key factors to know and deal with.

1. The Corporate Veil

Many states’ LLC laws do not require annual meetings or written documents. Some see this as a benefit but it is actually a curse.

If you don’t follow the corporate formalities (which now apply to LLCs) a creditor can pierce the veil of protection and reach your personal assts. With a single owner LLC this is especially problematic. Because you are in complete management control it may appear that you aren’t respecting the entity’s separate existence or that you are comingling the LLC’s assets with your own personal assets. Without a clear distinction of the LLC’s separate identity, a creditor could successfully hold you personally responsible for the debts of the LLC (as they did in Wyoming’s Greenhunter case above.) Maintaining proper financial books and records and keeping LLC minutes can help demonstrate a definitive and separate identity for your single owner LLC. You must work with a company which appreciates the importance of this for single owner LLCs.

2. Different State Laws

LLC laws vary from state to state. Some states offer single owner LLCs very little protection. The states of California, Georgia, Florida, Utah, New York, Oregon, Colorado and Kansas, among others, deny the charging order protection to single owner LLCs.

Other states offer single owner LLCs a very high level of protection in traditional circumstances. So we have to pick our state of formation very carefully. In order to deal with this trend against protection, we use the states that do protect single member LLCs.

Wyoming, Nevada, Delaware, South Dakota and Alaska (collectively “the strong states”), have amended their LLC laws to state that the charging order in standard collection matters is the exclusive remedy for judgment creditors – even against single owner LLCs.

So how do we use these state laws to our advantage? Let’s consider an example:

A chart showing a properly structured single member LLC

In this example, John owns a fourplex in Georgia and a duplex in Utah. Each property is held in an in-state LLC (as required to operate in the state). The Georgia and Utah LLCs are in turn held by one Wyoming LLC. (This structure works in every state except California, which requires extra planning. Be sure to take advantage of our free 15-minute consultation if you are operating or residing in California).

I break down potential lawsuits into two different types of attacks: Attack #1, the inside attack and Attack #2, the outside attack.

In Attack #1, the inside attack, a tenant sues over a problem at the fourplex owned by GEORGIA, LLC. They have a claim against the equity inside that LLC. Whether GEORGIA, LLC is a single owner or multi-owner LLC doesn’t matter. The tenant’s claim is against GEORGIA, LLC itself. Importantly, the tenant can’t get at the assets inside UTAH, LLC or WYOMING, LLC. They are shielded since the tenants only claim is against GEORGIA, LLC.

The benefit of this structure comes in Attack #2, the outside attack. If John gets in a car wreck, it has nothing to do with GEORGIA, LLC or UTAH, LLC. But, the car wreck victim would like to get at those properties to collect on the judgment. If John held GEORGIA, LLC and UTAH, LLC directly in his name, the judgment creditor could force a sale of the fourplex and duplex since neither state protects single owner LLCs.

However, since John is the sole owner of WYOMING, LLC he is protected by Wyoming’s strong laws. The attacker can only get at WYOMING, LLC and gets a charging order, which means they have to wait until John gets a distribution and therefore could possibly never get paid. If John doesn’t take any distributions, there’s no way for the attacker (or his attorney) to collect. A strong state LLC offers a real deterrent to litigation, even for single owner LLCs.

3. Operating Agreement

Like bylaws for a corporation, the Operating Agreement is the road map for the LLC. While some states don’t require them, they are an absolute must for proper governance and protection. A single owner LLC operating agreement is very different than a multi-member operating agreement.

For example, if a single owner transfers their interest in the LLC, inadvertent dissolution of the entire LLC can occur. This is not good. Or, again, what if the sole owner passes? Who takes over? Our Single Member Operating Agreement provides for a Successor Manager (a person you pick ahead of time) to step in.

The best way to deal with these issues, as well as others, is to have a specially drafted operating agreement to properly govern your Single Member LLC. Corporate Direct provides such a tailored document for our clients. When it comes to business and investments, you must do it the right way.

Incorporate First – Deduct Second

by Garrett Sutton, Esq | Mar 27, 2021 | Case Law, Forming an LLC, STARTING A BUSINESS

Should you set up a corporation or LLC before you start trying to deduct expenses? A recent case suggests you should.

Many think that they can deduct all of their start up expenses before formally incorporating a business. But in Carrick v. Commissioner of Internal Revenue (T.C. Summ. Op. 2017-56, July 20, 2017) the Tax Court ruled otherwise.

The Facts of Carrick

The taxpayer had a bachelor’s degree in electrical engineering. For approximately 15 years, he was employed in the oceanographic industry. Before the years in issue, and during 2013 and 2014, he was employed by Remote Ocean Systems (ROS), building underwater equipment such as cameras, lights, thrusters, control devices, and integrative sonar.

During the years in issue, ROS was experiencing financial difficulty. The taxpayer was provided some flexibility in his work schedule, and he began exploring business ventures with other individuals, using the name Trifecta United as an umbrella name for the activities, which he named Local Bidz and Stingray Away.

The Local Bidz activity involved creating a website with features similar to those of the websites of Angie’s List, Yelp, and eBay, which would permit people to bid on hiring contractors for products and repairs. The taxpayer first had the idea for Local Bidz in 2012, and he went “full force in the beginning of 2013,” spending time accumulating data and developing software and the website.

At some point in 2013 the web developer moved to Los Angeles and other individuals left the project. For some unspecified period in 2013, the taxpayer traveled weekly from his home in San Diego to Los Angeles to consult with the web developer. The taxpayer abandoned the Local Bidz activity before the end of 2013. Sometime in 2014, the taxpayer began the Stingray Away activity, which involved researching and developing a device to prevent surfers and swimmers from being injured by stingrays.

The taxpayer initially noticed that sonar devices might affect the behavior of sharks and other species, so he conducted research at beaches in La Jolla, where swimmers and surfers often were stung and bitten by stingrays. The taxpayer did not fully develop any devices nor list any devices for sale in 2014. He had had no gross receipts during 2013 or 2014 from either the Local Bidz activity or the Stingray Away activity.

The Decision in Carrick

In Carrick, the taxpayer asserted that his reported expenses were deductible as ordinary and necessary business expenses relating to the activities of Local Bidz and Stingray Away. The Tax Court noted that 26 U.S.C. § 162(a) provides the general rule that a deduction is allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The Tax Court stated that it was clear that the taxpayer was not “carrying on” a trade or business in 2013 or 2014 when the expenditures for the Local Bidz and Stingray Away activities were made.

Carrying on a trade or business requires more than preparatory work such as initial research or solicitation of potential customers; a business must have actually commenced. Expenses paid after a decision has been made to start a business, but before the business commences, are generally not deductible as ordinary and necessary business expenses. These preparatory expenses are capital expenditures.

The Tax Court pointed out that, while the taxpayer may have been conducting research in 2013 with respect to Local Bidz, or in 2014 with respect to Stingray Away, neither activity reached the point of actually commencing. There was neither sales activity nor evidence of the offering of products or services to the public. The taxpayer was still in the very early stages of research and development in each of these activities.

The Tax Court observed that there was nothing in the record indicating that the taxpayer had commenced any business activity as a sole proprietor. The taxpayer had not set up a formal business entity. Therefore, the Tax Court concluded that the taxpayer was not “carrying on” a trade or business in 2013 or 2014. See, 26 U.S.C. § 162(a); Frank, supra, 20 T.C. at 513-14 (1953); Shea, supra, T.C. Memo. 2000-179, 2000 WL 688593, at *5n. 10; Christian, supra, T.C. Memo. 1995-12, 1995 WL 9151, at *5.

Brief Discussion

If you’re preparing to open a new business, then you need to make certain that you understand the tax rules. It is crucial that you offer the product or service to the public and that you begin sales activity, because start-up expenditures, i.e., expenditures paid before a business begins, are not deductible in the years they are actually incurred. Instead, they are capital expenditures, which generally must be amortized over a 15-year period, once business begins, meaning gradually write off the cost over 15 years. See, 26 U.S.C. § 195. Thus, in order for an expenditure to be an ordinary and necessary trade or business expense, it must be related to more than a preparatory expenditure.

So, if the taxpayer in Carrick had opened his business first, then he might have been able to deduct his expenditures in the years they were actually incurred, instead of amortizing them over a 15-period.

Conclusion

The moral of the story is: Open your business first, and deduct later.

ADA Compliance and SEO

by Garrett Sutton, Esq | Feb 1, 2021 | BLOG

By: Melissa Matheson
Corporate Direct Webmaster

Back in 2017, we published an article regarding ADA compliance on websites. The Winn-Dixie case was the case that defined websites as “public spaces,” thereby requiring that they be accessible to those with disabilities. This in itself is not an issue, I think we can all agree that we want all people to be able to freely access information and services. And in brick and mortar business, these requirements are clearly outlined in the Americans With Disabilities Act Standards for Accessible Design (ADASAD). These standards are now embedded in building codes and permit requirements so there is no confusion as to how to make your brick and mortar business ADA compliant.

Website accessibility, however, has proven to be a more difficult issue. There are no strict guidelines for websites set by the ADA or in the ADASAD. You will however, be strictly liable for following these guidelines that do not exist. Strict Liability means that even with the absence of intent to harm and/or absence of negligence, you can be held liable for violating any provision of the law. There will be no leniency granted if you aren’t aware of the law, or if you are “working on it.” You are either in compliance, or you are not.

But there has to be some sort of guidelines, right? Well…yes, and no. The Web Content Accessibility Guidelines (WCAG 2.0 and WCAG 2.1) have been established. (WCAG 2.1 are appended guidelines to WCAG 2.0). The WCAG are extremely technical and reading them is akin to learning another language if you aren’t a complete tech nerd. As well, you can make your site accessible without meeting all of the WCAG. There is information contained in WCAG for all possible scenarios, so there is a ton of information making it nearly impossible to digest. So if you can make your site accessible without implementing all the WCAG, but there are no other clear guidelines, how exactly do you go about becoming compliant?

Good question. I have found that a common sense approach is much more beneficial than trying to read all of the WCAG. As stated in the beginning of the article, we want everybody to have access to our services, right? So this is just a matter of making sure that is possible. And it turns out, if you have built your website with SEO in mind (which I hope you have) you probably have the bulk of the work already done.

If you have not focused on using the best SEO practices, you’ve probably got a lot of work to do. And if that is the case, please remember that there is no quick and easy miracle solution. There are many out there who have capitalized on the fact that people need to make these changes to their sites. But unfortunately, there are no miracle cures for this. Please do not spend your money on WordPress plugins or fancy scans. They won’t help. There are many WordPress Plugins out there (premade snippets of code that can be easily imported into your site) that are available both for free, and for sale. Be careful with these. If they are free, secure, and you like what they do, that’s great. Use them. But don’t be fooled into thinking that any of these plugins (even if they cost a fortune) are going to make your website ADA compliant. They will not. Regardless of how fancy they are, there are no tools available in them that make it easier for say, a screen reader, to access your content. They also usually provide functionality that can be achieved by just using the web browser functions (i.e., enlarging text).

As well, there are free scans that are great and can give you a very good idea of where you are in regards to compliance. A company called aCe for example, will scan your site and give you scores on different categories of your site for free. It will also show you code snippets of where the issues are along with any successful examples (if you have any) so that you can easily find where errors are and understand how to apply the fixes. Again, there are tools to help, but the solutions are largely manual and will take some time to complete.

Back to SEO. If you have built your site with SEO in mind, you have probably made sure to add alternative text to your images, captioned your videos and have a site map. You probably have a content rich site and have focused on presenting the content in a logical manner. You know that you will be punished by the SEO masters for any deceptive anchor text or other such tricks from the early days of the internet, so no worries there. You regularly speed check your site and apply fixes to anything slowing you down.

It turns out that by following SEO best practices, you are also in line with the four principles of the WCAG. The WCAG says (broadly) that your site should be: Perceivable, Operable, Understandable, and Robust. While there will still be some technical issues for you to bring your site into full compliance, if you have paid attention to SEO, you’ve also knocked out some of the biggest reasons that people get sued for not complying with ADA.

ADA website compliance lawsuits often begin because a company has failed to provide alternative text on their images. Again, using common sense, you can see how this can be a problem. If you have 25 products listed as images with no text, a visually impaired person would not be able to use your website with their screen reader as there would be nothing to read. Also, crawlers can’t read images so you have to add text if you want your site to be indexed properly. So adding that alternative text to help you climb higher in search results actually serves two purposes now.

The second biggest issue is not providing alternative multimedia support. The type of media will dictate your approach to making it fully accessible. Captioning videos may not be a huge SEO issue directly, but we all know how much it helps to have a video captioned when we put it out on social media. The click through rates, exposure and added interest in your company all indirectly affect SEO so if you’re not currently captioning videos that you put on social media you should start anyway. If it is audio only, like a podcast, you need to include a complete transcript. You can either have a link to it, or display the full text near the podcast. (Bonus: If you are lacking text content on your site, displaying the entire text will help to easily add some good text content).

Last but not least, the structure of sites often get people in trouble. Just like with SEO, your site must flow easily and not contain deceptive or unclear link structures. Anchor text to your links should clearly show the purpose. For example, your link should not be anchored with only “click here,” it should show as “click here to see an article about anchor text.” Get rid of any redundant links or any information that clutters your site and make sure that all of your menu items are available through keyboard navigation.

Although ADA compliance seems daunting and confusing at first, you may have more of it done than you realize. This is by no means an exhaustive list of requirements but if you don’t have much done, then taking compliance measures will not only keep you on the right side of the law, it will help you on the SEO side.

Through our research, we found Kris Rivenburgh, who does an outstanding job of breaking the WCAG down into terms that normal people can understand. He offers a WCAG guide at no charge (at the time of this writing) which can be found on the website he founded: accessible.org. If you have questions on ADA compliance, definitely check him out at accessible.org and KrisRivenburgh.com.

Can Emails Create a Binding Contract?

by Garrett Sutton, Esq | Jul 15, 2020 | ASSET PROTECTION RESOURCES, RUNNING A BUSINESS

Joe exchanged emails with Mary. They were investigating whether Joe wanted a consignment of Mary’s embroidered toilet seat covers for Joe’s hardware store. The email conversation trailed off and Joe went on to other things.

Two days later, to Joe’s surprise, the toilet seat covers arrived.

Instead of emailing, Joe immediately called Mary.

“Why did you send these over?”

“Because we have a contract” said Mary.

“No we don’t,” said Joe. “We only have a string of emails”

“Which created a contract,” said Mary. “Aren’t you up on the new laws?”

Joe ended his conversation with Mary and called Hank, his attorney. After laying out the scenario, Hank told Joe what was happening in the world of emails.

“To create a contract,” said Hank, “you need to meet four elements. You must have offer, acceptance, mutual obligation or valuable consideration and capacity to contract. While I haven’t read the emails, courts are now saying that you can piece together the strings of an email conversation to find all of those elements.”

“But,” said Joe, “I didn’t sign a contract.”

“You don’t need ink anymore,” said Hank. “There’s a recent Texas case saying that the name or email address in the ‘from’ field satisfies federal law for a signature under the Uniform Electronic Transactions Act.”

Joe was exasperated. “That’s enough to create a contract?”

“In that case it was. Do you put your stylized signature at the end of your emails?”

“Yes. My web guy says it makes the emails look more personal.”

“And more binding. Some cases have looked to that as a binding signature, even for real estate contracts.”

“What do I do?”

Hank laughed. “I’m not going to charge you $5,000 to settle a $1,500 dispute. Just sell the merchandise and never do business with Mary again.”

“But for the future?” asked Joe.

“Today,” said Hank, “talk to your web guy. Tell them to change your name to block letters, so that it looks less similar to a real signature.”

“Anything else?”

“Yes,” said Hank. “Tell them to add this disclaimer to the language at the end of your emails:

The content of any and all communications from this email address shall not be interpreted as an enforceable offer or acceptance and shall not form the basis for a binding contract.

“Okay,” said Joe. “Thanks. Seems like this has become an issue.”

“Exactly,” said Hank. “Especially for my real estate clients. In real estate transactions the Statute of Frauds requires a signature for an enforceable contract. Some courts are holding that a purposely typed email signature now satisfies that requirement.”

“It’s a brave new world.”

Hank agreed. “Everyone needs to be careful.”

The Lesson: Beware of email conversations that create a contract and use disclaimer language to prevent contract formation. When negotiating terms via email, make it clear in the beginning that the email exchange is for discussion purposes only and that all communications are non-binding until the parties fully execute a formal contract.

Beyond including disclaimers, there are a few other things that you should keep in mind when communicating by email. Along with piecing together emails and ruling that emails can constitute a contract, some courts have also deemed certain emails as amendments or waivers to an existing contract. It should be expressly stated in your contracts that emails are not qualified to amend or waive any terms of the contract. Also, be sure to stay away from contractual language in your email conversations. Avoid using words like “agree,” “accept” and/or “offer”.

It may be helpful to remember that a signature is not needed to create a valid contract – there need only be offer, acceptance, consideration and capacity. Although a signature is the most common form of acceptance, that element can be proven in other ways. If all of the four elements can be proven, the lack of a signature alone may not be a sufficient argument of non-acceptance.

On the other hand, emails can be a quicker and more efficient way to create and/or amend contract terms. If you are comfortable doing business in that manner, it is acceptable to do so. The most important thing either way is that you know from the outset how you would like to conduct business and immediately make that clear to all parties involved.

« Older Entries

Cookie	Duration	Description
cookielawinfo-checkbox-analytics	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional	11 months	The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance	11 months	This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy	11 months	The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.