What to Ask to Protect Your Business from Liability
When you first start a business, the thrill and inspiration of so many different pieces can be exhilarating. But when it’s time to start laying bricks for the foundation of your new endeavor, all those details and seemingly moving pieces may start to feel more like overwhelm than excitement.
One of the things I love most about supporting creative entrepreneurs in getting set up with the legal aspects of their business is the opportunity to take some of the stress response out of thinking about the law as it applies to makers and shakers like you.
Do the legal details of your business ever feel elusive? Here are 7 simple questions to help guide you back to the center of your small business infrastructure:
Who? What / Where / When? What if? How? and Why?
Let’s start with Who.
Of course, that’s you! But specifically, it’s you as separate from the distinct legal entity that is your business. Most creatives who are bringing in dollars hear somewhere along the way about limited liability. Limited liability is what happens when you as the human being creative entrepreneur present your business to the world as legally distinct from you. It helps because if and when your business runs into contractual liability (ie: a client sues you for breach of contract), the only money on the line is whatever is in your business’s (not your personal!) bank account.
Forming an Limited Liability Company (LLC) is the easiest way to obtain limited liability (other entities like corporations are options but they come with more paperwork), and it is super easy to do so on the Colorado Secretary of State’s website! When you provide all the information required (here’s a guide to help you DIY your Colorado LLC - don’t forget to put “LLC,” “Ltd.” or something similar in your name), you’ll self populate your business’ Articles of Incorporation. Consider this the birth certificate for your new business -- separate from you and eligible for its very own bank account! Follow through by getting an Employer Identification Number from the IRS website, opening a business bank account at your bank of choice, and putting any money from your creative endeavor into that account.
Sign any written agreements you enter as your LLC rather than yourself (cheat sheet: sign “Your Name, Member, Your LLC’s Name”) and set up a reminder for $10 periodic reports. Voila! You’re good to go with limited liability.
“But what if I don’t want to run into a situation where I need limited contractual liability?” All the better to be uber clear from the beginning about the nuts and bolts of how you run your business, where the risks lie, and where responsibility lies. In other words…
What, When, and Where?
These, my friends, are questions for your contracts. By putting it in writing with the people you do business with -- whether that’s your 1:1 clients, members of your group program, business partners or cross collaborators -- you ensure that it is very clear from the start what the parties intend. It does require a bit more formality to decide in advance how you want to run your business, but it also does a world of good if you’re ever in the position of trying to prove what you actually agreed to in retrospect. Plus, our clients often say that taking the time to sit down and think through all of the details about their business -- from payment terms to cancellation policies to how intellectual property rights apply -- gives them peace of mind. It is the ease that comes from clarity around what you mean to do.
Contracts allow you to set the terms, assign risk, and put in place protections based on the unique risks associated with your business. Client agreements can include key provisions related to services and costs, as well as necessary protections like those that waive claims for damages based on negligence, or disclaim any guarantee of a refund based on client dissatisfaction. Operating agreements add an extra layer of proof that your business has limited liability (if you ever need it). And partnership agreements give you and your business bestie an opportunity to dream for the best and plan for the worst. If the thought of a dispute gives you the creeps, you can even set an agreement to hire a facilitator if things ever go south, through a mandatory mediation clause. Just don’t forget to sign any written agreement as your LLC!
(Pssttt… need some assistance with your written agreements? Our firm drafts custom contracts at a flat rate and designed for the creative and well-being based industries. Book a free consult with us any time if you want to chat!)
What If?
This one needs no introduction. As small business owners ourselves (I am a yoga teacher and my business partner Allie ran a photography business for ten years), we can totally relate to the feeling of late night fear over worst case scenarios. But we do this work so that you don’t have to worry too much. The truth is that unlike construction companies or large corporations with lots of stakeholders and high stakes activities, most small creative businesses have pretty low levels of risk. Having limited liability and quality written agreements that apply to your industry go a really long way to protecting your business liability.
And for the gaps that remain, there is insurance! After you’ve formed a business entity and started using contracts, carrying insurance is the answer to your what-if-woes. Most brokers will give you their time for free answering questions about what different policies include and how much they cost. Find one that applies to the particular activities you plan to be engaged in, and get some extra coverage! Once you’ve done that, there’s just one more question to be sure you’re asking if you want to be as legally covered as you can be.
How?
How do you run your business, day to day? The lawyer’s answer to this question is: reasonably, according to your industry. Reasonable conduct is the big umbrella shielding your business from costly liability. What exactly constitutes reasonable conduct depends on what an objective person, in your shoes, would do.
A good place to start in discerning the standard of reasonable conduct to apply is by looking at industry practice. How do creatives in your position handle the issue you’re wondering about, most commonly? You can also look for certifications and licensure requirements, if there are any. And when all else fails (in law and in life) -- be an honest person. Looking at your business landscape from where you stand, how would someone who was really good at their job proceed? Do that!
Finally, our favorite question (and admittedly the one that has least to do with the law)...
Why?
On the journey from swirling legal jargon and occasional shivers of liability related fear, your Why is your quickest route back to the central pillar of being the confident creative that you are. It’s the thing that gets you out of bed in the morning, the reason you want to do this work in the first place. As you take the steps to legalize your business through entity formation, contract drafting, insurance coverage, and reasonable conduct, remember the heartbeat of your business. Our Why for becoming small business lawyers for creatives, after all, is because your Why tends to be so beautiful and inspiring!
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Ashley Basta is an attorney for creative and wellness-based small businesses at Creatives Learn Law. After starting her legal career supporting judges as they drafted opinions on the Colorado Court of Appeals, she became a yoga and mindfulness teacher, and then launched a law firm to support wellness practitioners like her in feeling more empowered and less overwhelmed by the law. Alongside her business partner and best friend from law school, Allie, Ashley drafts custom flat-rate contracts, assists with entity formation, provides trademark support, and offers legal consultations that are as smart as they are kind and approachable. She is grateful to run her practice from beautiful Buena Vista, where she lives with her partner and dog.