One such occurrence that I see is people are gradually (or sometimes all at once) modifying the name of their business entity. As an example, I’ll use the name of my business Phocus Law. Hypothetically, imagine I initially set up my entity as Phocus Legal Group, LLC, then over time dropped the last part to just calling myself Phocus Legal. Next, to further simplify things, perhaps I trimmed it down to just Phocus Law. Each of those changes seems harmless and it’s hard to imagine anyone being confused as to who they were doing business with.
Unfortunately, while it seems like the changes to my business name were small and insignificant, such changes could result in substantial liability for me personally if I were to fail to properly record and document those changes. Simply put, if you enter into a contract with another party and you are not using the name of your business entity but rather using some adaptation of that name, then if that contract was to go south – there is a significant risk that the other party could sue you individually for damages. The reason for that risk is if the party with whom you are contracting had good substantiated reasons to believe that they were contracting with a sole proprietor rather than with an LLC, they may be able to avoid the protection your LLC or corporation would have otherwise provided for you and your personal assets.
With all that in mind, the question becomes what level of adaptation your business name can experience before there becomes a significant risk to your personal assets. Is dropping the LLC from the end of your business name in advertising materials risky? No, it is not. While I would certainly still include the LLC or Inc. in actual contracts, if I market Mick’s Auto Garage, LLC as Mick’s Auto Garage, then any curious person could go onto the Corporation Commission page and verify without any guesswork that the business is an LLC. However, if the business name was Mick’s Heavy-Duty Automotive Repair, LLC and I marketed as Mick’s HD Auto Garage, I would be opening myself up to the risk that someone searching for my business to verify the entity type would not be able to find it and would assume that they were actually contracting with Mick McGirr who happened to be doing business as Mick’s HD Auto Garage.
To bring this all into focus:
1. If you are just dropping the entity type from the end of your name (LLC etc.) – you are not increasing your risk;
2. If you are abbreviating or significantly shortening words in your entity name (Automotive to Auto or Heavy Duty to HD) then you are beginning to put yourself at a bit more risk. If your contracts make very clear the actual name of the business with language like Mick’s Heavy-Duty Automotive Repair, LLC d/b/a Mick’s HD Auto Repair, then you should be just fine;
3. Finally, if you are actually changing words in your entity name (i.e. Mick’s HD Auto Repair Services, LLC to Mick’s HD Auto Garage) then you run a significant risk that your personal assets may become exposed to liability should things go wrong in your business.
So, what is the solution? Well, if you are utilizing business name changes similar to those found above in item (2) and your business does not use many written contracts where you could clearly document the actual name of your business or if you are using name changes at all similar to those above in item (3) then you should simply register the modified name with the Secretary of State as a Trade Name.
To do so, you’ll complete a form on the Secretary of State website that has you identify the Trade Name and who wishes to own it. Then, a few weeks later after the Secretary of State verifies that the Trade Name is not already in use, you’ll pay a fee of a whopping $10 to complete your registration. The whole process of registering the Trade Name takes less than 20 minutes for someone who has never done so before. Once you have registered the Trade Name, that adapted name will be linked to your actual entity, making it so that you can carry on business under your Trade Name exclusively without running any risk that those with whom you contract will be able to hold you personally accountable based on their confusion regarding your entity.
If nothing else, take away from this article that one question that you should always ask yourself when entering into a contract with another party is “does the other party know who the entity is that they are contracting with?” If there is a chance that they do not, you should take the steps mentioned above to protect yourself.
If you have questions on how to protect your personal assets from liability that is incurred as a result of your business dealings, please don’t hesitate to reach out to me. I can be reached by email at Mick@ PhocusCompanies.com or by phone at 602-457-2191.
by Mick McGirr, Phocus Law