Month: February 2012

Business Contracts: What you need to know about automatic renewals and extensions

Effective May 1, 2011, a new Wisconsin law requires businesses to notify customers of automatic renewal or extension provisions in business contracts.

According to the statute, “business contracts” are contracts “entered into for the lease of business equipment, if any of the business equipment is used primarily in this state, or for providing business services.” The statute does not apply to contracts that allow customers “to terminate an automatically renewed or extended contract period by giving the seller notice,” but only if the contract requires one month or less of advanced notice from the customer.

Referred to as 2009 Wisconsin Act 192, the law impacts business contracts involving equipment and services in a variety of industries (construction, food service, consulting, IT, and manufacturing, to name a few). To remain compliant, you are required to notify your customers as to how they may decline renewal or extension of business contracts. If you fail to notify your customers, the renewal or extension provisions will become unenforceable.

The notice requirement consists of both an initial disclosure about the automatic renewal or extension provision in the contract and a reminder notice in certain cases.

These notices must include information regarding:

  • any increase in charges that will apply under an automatic renewal or extension
  • what the customer must do to decline renewal or extension
  • the date by which the customer must decline renewal or extension

The statute also allows customers to bring an action or counterclaim for damages against a seller for violations. Damages can include twice the amount of the damages incurred by the customer, including reasonable attorney fees.

Now is a good time to go back and take a look at your business contracts to ensure compliance with this new law, as it applies to all business contracts entered into, modified, or renewed after May 1, 2011.

Business Startup: A Legal Checklist

There are a million things to consider when starting a business, not the least of which are the legal aspects of such an important undertaking.

The following checklist will help you identify key legal concepts all business owners should consider:

  • Obtain a Federal Employer Identification Number (EIN): A federal Employer Identification Number (EIN) is a 9-digit number assigned to sole proprietors, LLCs, corporations, partnerships, estates, trusts, nonprofit organizations, farmers’ cooperatives and other entities. It’s used for tax filing, reporting purposes and establishing business tax accounts. It’s important to complete this application correctly, and business owners should use this instead of their individual Social Security numbers. NOTE: Anyone who hires independent contractors in Wisconsin must insist that the contractor use a federal EIN instead of a Social Security Number!
  • Determine the proper legal entity: When starting a business, you’ll need to decide what form of business entity to establish. The type of business you own, whether it’s a sole proprietorship, partnership, LLC or corporation, determines the extent to which your liability will be limited, and how your income will be taxed.
  • Articles of organization or incorporation: Articles of Organization must be drafted to form a Wisconsin LLC, and Articles of Incorporation are required to form a Wisconsin corporation. Be careful when selecting whether an LLC should be member-managed or manager-managed, as this will dictate who can make decisions on behalf of the entity.
  • State identification number: A Wisconsin Employer Identification Number (WEIN) is required for employers who pay wages subject to withholding of Wisconsin income tax or for other persons with a withholding requirement (e.g., third-party payers of sick-pay plan benefits, etc.). Only one WEIN is issued to an applicant for withholding tax purposes, regardless of the number of business locations.
  • Seller’s permit: In Wisconsin, a seller’s permit is required for every individual, partnership, corporation or other organization that makes retail sales, leases or rentals of tangible personal property or taxable services in the state. It is issued by Wisconsin’s Department of Revenue.
  • Operating agreement or bylaws: An operating agreement is an essential organization document for an LLC which governs the business and defines the members’ financial and managerial rights and duties. Such an agreement is similar in function to corporate by-laws. If a business is ever sued, the court will look for the company’s operating agreement or bylaws to ensure that the company, so it is important to have this to avoid having the court “pierce” the corporate veil and get to the business owners’ personal assets.

Other Key Considerations:

  • Put everything in the name of your business – Litigation in America is often absurd and losing your business to a lawsuit, if you are not properly protected legally, makes you more vulnerable to losing your home, your car and your retirement savings. It is essential that you protect your assets by having all leases, customer and vendor contracts and other legal documents and permits listed in your business name instead of your personal name. It is also essential that you avoid commingling funds between personal and business accounts.
  • Have a business plan – A business plan is a document that outlines every critical aspect of the business’ operation. It’s an important communication tool that should be a work in progress. Writing a business plan can be intimidating, but it’s not something that should be avoided. There are a number of local, state and federal resources at your disposal that can help with the process. Along those lines, it’s a good idea to enlist the help of a team of reliable advisors when it comes to the formation and operation of your business. They can provide valuable guidance for situations that occur from day to day and well into the future.