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Cleveland Business & Commercial Law Blog

Considerations for removing an ineffective partner

Ohio business owners may face a situation of a business partner who is not performing well. There are alternative actions that can be taken so that the non-functioning partner is not an impediment to the success or growth of the business. The available steps could be determined by the organizational structure of the company and any agreements that exist between the owners.

If the business is set up as a corporation, the majority of the owners can make decisions and take actions that do not require input or agreement from the under-performing owner. Partnerships and limited liability companies do not have this option. Conflict resolution, either among the owners or with impartial third-party assistance, may lead to a workable agreement among the owners.

Sales contract breaches

Businesses engaged in the selling of goods often enter into sales contracts with buyers. These contracts are formed when a business agrees to supply goods to the buyer by a certain time, and the buyer agrees to pay money in exchange. Sales contracts are legal documents, and when a party breaches the contract, the breaching party can face negative consequences.

Breaches can be relatively minor, such as missing a delivery date. Minor breaches will most likely not result in a lawsuit. Material breaches are those that are so severe they destroy the contract itself. Examples would be providing a different item than that specified or failing to pay the money owed under the contract.

Choosing a business structure

An important decision that all Ohio business owners have to make is how to structure their entity. The legal structure that a person selects for their business will have a dramatic affect on taxes, liabilities and paperwork requirements. Some of the most common business structures that are used in Ohio are corporations, limited liability companies, partnerships and sole proprietorships.

Those who have businesses that they operate by themselves usually choose the sole proprietorship business structure. For one person working alone, a sole proprietorship may be appealing for its simplicity and its inherent tax benefits. However, choosing a sole proprietorship makes the business owner personally responsible for all of the company's liabilities.

Reasons to put an Ohio contract into writing

One of the easiest ways to have a deal nullified is to not put it in writing. In most cases, a court will rule that a contract does not exist unless it is written out. Having a physical document helps to outline the agreement and the obligations of both parties concretely.

The first step in putting together a valid contract is to address the intent of the contract. This could be anything from partners agreeing to split profits from a business or a service provider agreeing to outsource a portion of the project to a third party for completion. In addition to addressing the intent of the agreement, the major terms of the contract must also be considered. For instance, it may be worthwhile to specify the price of services performed or products sold and set deadlines for when payments must be made.

Protecting against a business lawsuit

It is possible that an Ohio business owner will be the subject of a lawsuit. However, there are steps that a business can take to protect itself from unnecessary litigation. The first step is to acknowledge the fact that a lawsuit could occur at any time.

It can also be better for a business to spend more on legal fees ahead of time as opposed to spending more to defend against a lawsuit. To reduce the odds that a lawsuit occurs, it may be beneficial that an attorney reviews all agreements before they go into effect. This makes it less likely that there are loopholes or other issues that lead to the parties to that agreement finding themselves in court. It may also ensure that all agreements are put into writing before they are executed.

The SBA 7(a) loan program

Business owners in Ohio may benefit from understanding more about how proceeds from the 7(a) loan program of the U.S Small Business Administration may be obtained and used. Entrepreneurs and owners who are interested in receiving such a loan need to be aware of any restrictions on use that may be applicable. There are several restrictions in place for these types of loans.

These loans are not to be used for any venture that is not considered to be a sound business by the SBA. These loans may not be used for repaying outstanding federal or state withholding taxes or other capital that could be in escrow or a trust. The SBA also prohibits business owners from using the loans as reimbursement to any owner, including as means to sustain business operations. The SBA prohibits anyone from using the loans to refinance debt and take on debt that would otherwise transfer directly to the owner.

Hormel Foods sued in court over dishonest business practices

Some Ohio business owners may be interested in a lawsuit that was filed on Oct. 29 in a U.S. Bankruptcy Court; the suit alleges that Hormel Foods Corp. engaged in dishonest business practices, leading AgFeed Industries Inc. to file bankruptcy. The suit, filed by shareholders of the now defunct AgFeed Industries, also claims that Hormel Foods withheld information related to livestock raising company M2P2's business practices. The lawsuit is seeking an unspecified amount of damages.

The complaint filed against Hormel states that the company knew about contract violations being committed by M2P2 long before AgFeed decided to purchase the company's operations. Once the operations were owned by AgFeed, Hormel filed for arbitration in August 2012, claiming that M2P2 was inflating the prices that were to be reimbursed by Hormel. This arbitration ended in an award of $8 million for Hormel.

What remedies are available in a breach of contract case?

The remedies available to a plaintiff in an Ohio breach of contract case depend on the terms of the contract. The most common remedy is money damages, but the plaintiff may in some circumstances pursue rescission, specific performance or injunctive relief, either in lieu of or in addition to money damages. As a preliminary matter, the non-breaching party should generally notify the other of a breach as soon as possible. Failure to timely notify the breaching party may preclude or limit recovery in some cases.

In calculating money damages for a breach, a court may use different formulas in different cases. The breaching party is not necessarily liable for the entire value of the contract. Sometimes damages are limited to the actual loss suffered by the injured party. For example, if a person contracts to buy an item for $500,000 and fails to perform and the item is able to be sold to another buyer for $450,000, a court will likely award $50,000, rather than $500,000, in damages, plus any other damages the seller may have suffered due to the delay.

What must be include in the Articles of Incorporation?

According to Ohio law, anyone as an individual or jointly may form a corporation in the state, but they must get a license from the Ohio Secretary of State to be able to operate in the state. Before doing business, Original Articles of Incorporation must be filed, and the documents must contain a variety of information, including the name of the corporation, which must indicate that the business is a corporation and must name its location. A Statutory Agent must also be named. The Statutory Agent is the person responsible for accepting and passing on information related to legal processes and notices.

The Articles of Incorporation must also state the number, classification and value of stock, if there is any. Further, if the corporation has initial stated capital, the amount must be provided.

New business partner agreements

It is important for Ohio entrepreneurs to take care of legal matters when forming a new business. Many start-ups fail to have in place basic legal documentation outlining each founder's role in the business. Many times, this is because the owners would rather spend the company's money on products and advertising rather than on legal matters. However, businesses that have legal documentation in place that gives a blueprint for what will happen if major changes take place or the company shuts down tend to be more successful than those that do not.

Legal agreements should be negotiated early in business's life. If there is a lack of clarity with regard to an individual's role in the company or the value of any ownership they may have, then unexpected surprises may lead to unpleasant legal disputes. Additionally, sourcing external financing will be easier with legal agreements in place since venture capitalists will look at these agreements before becoming an investor. Legal agreements are even more important when a business's products are strongly tied to intellectual property.

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