Why to Formally Form a Business

Recently, I was in a hearing for a surprisingly large number of hours, and although I held my ground, I have to say, its a tough crowd in that court. Now, I am a defense attorney, so I am used to, and enjoy, being the one to try to defend, to try to justify actions, and to try to beat up the “big guy” while protecting the “little guy.” I can’t say I always win, but I give it my all. This one is different though. Its rather inside out, and there are quite a few wrinkles.

Sure, my client says may be the little guy, but when we’re talking money like these parties are, I would say I am the little guy! I can appreciate being ganged up on, and I can appreciate feeling like you have all the answers and others aren’t listening. But then, that’s why I avoid family cases. So why take this one? Well, other than the sheer number of phone calls, I felt it was important that someone inform the judge that there was a constitutional problem with the court accepting jurisdiction. Before touching the constitutional problem though, let’s talk about how to prevent this stuff. This case was prevent-able, and in fact, four years ago, the parties all denied the prevention offered.

Here’s the skinny: Person goes to family, decades ago, informs them he is a good investor (and he sure is, who else do you know who was making money on the stock market during the economic downturn?!), and takes their money to invest. No contract. No partnership papers. No incorporation. No bylaws. And no one knows where exactly the money is, other than a monthly statement promulgated by an accountant who titles it as an entity’s monthly statement.

Any of you business people out there, I hope you are shaking your heads.

As alluded to, this gentleman passes away. He knows he is going, and asks if anyone wants to shut down, but states that if they wait, they can make more. So they say: nope, let’s all wait. Still, no one knows where the money is or what investment account it is in. Oh, and did I mention that these accounts, as all good money making accounts are, are held overseas? And that the decedent was a resident of a European country?

How many tangles do you see in this case? From this post, I only want to point your attention to the problem of forming businesses without formalities. No one knows where the money is. No one knows exactly how much money there is. No one knows who owns what. And most importantly: no one knows where this can be settled, given that the “members” are from, literally, around the world.

Folks, please don’t form a business without a contract, even the most minimal one. The most minimal should define jurisdiction, accounting principals- including distribution procedure, and method for dispute resolution. Forget your issues with termination and adding in clauses of punitive damages which will be unenforceable. Don’t worry about defining the shares each person gets over time. Ignore the issue of defining how long the manager gets to be manager. Please, please, just spend the couple hundred and incorporate, and then follow the minimal contract rules stating when accounting takes place and what to do if the members disagree.

There is nothing more important than not having to hire a lawyer to stand in front of a judge to answer the question: “How am I supposed to appoint a receiver to an entity that doesn’t exist, for accounts that are unknown?” Trust me on this one question you can avoid.