You’re busy, your business is booming, it’s rocking and rolling and hopefully, you have money coming in or else there’s a plan for that money to come in. You’re acting like you’re in business, but you get this creeping feeling that something might happen, and you will wake from this entrepreneurial dream. You don’t want to lose this. You’ve worked way too hard.
Because of this, you need to understand that protection tools work in layers.
Think of them like the layers of an onion. If you ever watched the movie Shrek, that’s totally what I think about when says, “I’m like an onion. I have layers.” You know that you need contracts (rather legal documents) or maybe you thought about your business formation, such as sole proprietorship or an LLC, and maybe even a handful of you have thought about having insurance.
Protection is best served in layers for your business. Each of these tools that I mentioned offers some sort of protection, but they work best together in layers, not necessarily by themselves. I actually affectionately refer to this as the legal trinity. I don’t know if that’s really a good accurate name because I really do feel like the layers all pile on top of one another to protect you. In case of liability or if there’s an issue that gets through one layer, you’ll have another layer there that will potentially work. Protect what you worked so hard for.
The second tool is liability insurance. If you are a virtual based business and don’t have a brick and mortar and don’t ever meet any of your clients or customers in person, you may think, “I don’t need liability insurance.” You just never know what’s going to happen. By having this layer, you can divert clients to this company to handle your issues for you. They can potentially resolve any potential liability issues that may arise. This will free you up to focus on your business instead of having to extinguish any legal fires that may come up.
The third tool is business formation. I actually worked backward here from the outer layer, inward; from the contracts and legal documents then to liability insurance and then to your business formation, which is at the core of your business. It’s what builds and creates what your business is. Business formations include sole proprietor that does not separate you as an individual from your business, limited liability company (LLC) which divides the business and personal assets for protection, and a corporate structure that can divide assets as well.
How These Layers Work Together
When you have an LLC or corporation at the core of your business, then customers that get to the last two layers that I just mentioned have to engage in a legal transaction, such as court or mediation or arbitration for a resolution. You can see how this will work a little bit for you. You’ve got all these little hurdles (layers) that your clients will have to get through.
Let me give you an example. Let’s say that you end up with an extremely unhappy client or customer. You don’t have liability insurance, but you were smart enough to form as an LLC. When trying to settle the matter, you’ll have to go all the way into court or just settle into mediation or arbitration to settle it. Whereas if you had a liability insurance policy in place that covers the legal issue that was at hand, you may have been able to have it handled in a shorter amount of time with a lot of less amount of money and hopefully, with a lot less stress.
Unfortunately, many of you will check the legal marks on your checklist off, and you’ll never revisit these tools again. Or worse, you’ll leave some of these tools off the checklist and never get to them. You need to set up a calendar reminder to revisit all of your legal documents, disclaimers, insurance policies, and even your business formations as you grow. Do all of this on a regular basis because as your business grows, the legal aspect needs to grow. I suggest reevaluating them on a quarterly basis at a minimum, if not monthly, for some of your contractor policies that you’re putting out to your clients or customers.
I don’t just say this as a lawyer but as a business owner as well. As someone who’s worked so hard to build my brands, I don’t ever want all those long hours and the tears and frustration and the successes to all go down the drain, simply because I didn’t have this protection thing in place.
If you’re thinking, “I’m not even to that point yet,” make sure that you get this tool on your belt before you even start taking any funds or acting like a business. Whether you have clients, you sell a product or service, or you’re simply blogging and taking sponsors, you need to consider if you’re acting like a business. If you are found to be a business, then you are opening yourself up to liability as a business.
If you think you have all of this on lockdown, maybe you’ve been in business for a bit and consider that it is cheaper and easier to be protected by layers, that’s good. I’m so glad you’re there because it will be easier than trying to scramble when an issue occurs.
My goal is to push preventive methods, rather than those clean-up-on-aisle-four methods because the more protected you are, the more confident you will be. This will also help you to stand firm when you have clients or customers trying to steamroll you. It will give you the ability to discern which policies to relax in the name of customer service and when to stand up against a client trying to take advantage of you or get you to do something unethical or illegal.
I strongly recommend, again not saying this as a lawyer but as a business owner, that you need to have any of your legal documents done by a lawyer. There are a lot of underlying legal theories that we, as lawyers, spend years and years learning that you may not readily understand. You don’t want to inadvertently draft against yourself and hurt yourself even more in the long run. Even if you purchase attorney-drafted templates online, you will need to have your own attorney review and amend them to fit your business and to take local laws into consideration.
On the second tool of liability insurance, I really recommend that you don’t just try to add it on to maybe a homeowner’s insurance policy or some other type of a personal insurance policy. This is especially true if maybe you’re going to do equipment insurance on your laptop or other business equipment. Many times, insurance companies will not cover actions and/or equipment when used in the course of business. Even if you may not be turning a profit yet, if you have used your equipment as though you’re in a business, they’re going to find it as though you’re in a business and not cover you.
The last tidbit on tool number three business formation is if you’re acting like a business and you’re taking money, you probably can be found as a sole proprietor by default. There is no division of assets and no legal protection between your business and your personal assets. You’re leaving yourself wide open. Really take a good strong look at setting up as an LLC or a corporation for your state to give you that nice little division, and you can also add tax benefits that are available for you as well.
I hope these three tools, these layers protection, have given you a nice little checklist that you can go through to protect all the effort, the time, the resources, and the energy that you’ve put into your business. I don’t want it to be gone in the blink of an eye simply because you get an upset client, or something occurs, and you end up having to spend all of your time and money, even if you are not in the wrong. The time and money spent into a legal action can actually make businesses go under. I’d hate to see that happen to any of you.
Disclaimer: Everything that I’m saying here is US-based law. I’m an American attorney. If you are from overseas, you may need to see if there are any other specifics that you need to have.
This article is for educational purposes only and not legal advice. No lawyer/client relationship is created. For specific legal advice for your business, please seek out a local attorney.
Meet Rachel Brenke. As a lawyer, photographer and business consultant for photographers she helps creative industry professionals all over the world initiate, strategize and implement strategic business and marketing plans through various mediums of consulting resources and legal direction.
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