THE LEGAL ESSENTIALS FOR CREATIVE SMALL BUSINESSES.
Most of this blog post comes from the book Unf*ck Your Biz. Join us on our journey to build a chill vibes business.
LEGAL LAYERS OF PROTECTION
I describe different legal and tax checkboxes as layers of protection for your business. Imagine you’re someplace frigid like that scene in Titanic with Jack and Rose, except you’re floating along in your own boat.
Picture your clothes. What are you wearing? Are you cold? Actually take about 10 seconds to think about it. Maybe you’re in a light sweater and jeans, and you have a blanket. You’re still freezing and uncomfortable, but you feel protected enough to maintain your health. Or maybe you’re fully ready to scale Everest.
Consider the layers of legal protection like clothing in the cold. There’s a minimum you can get by with, but the weather could turn even colder. At that point, you may need more protection. The more layers you have, the more protected, insulted, warm, and cozy you—and your business—are.
I love this analogy because it fits in nicely with my personal philosophy, which is that it’s not my job to tell you exactly what you have to do. Rather, I share what I think the essentials are, how much they cost, and how they will protect you. Then, you can choose how many of those layers you want to cloak your business in. As my favorite Peloton instructor, Dennis Morton, says, “I make suggestions. You make decisions.”
The first layer is your contract. Contracts lay the ground rules. To the extent permitted by law, you get to create the rules. Think of it as creating your own board game. You make the rules, but there’s this judge who provides guidelines. Your rules must meet generally acceptable board game criteria. Most things are allowed, but you can't create a bunch of rules that always result in you winning. That’s super not cool.
Let’s use an example. Say you hire a photographer to photograph some flat lays for you. The photographer’s contract, which you signed, clearly specifies that you may use the images for your website, social media, and like purposes, but that you can’t use them for commercial purposes beyond those specifically allowed. You decide to put the photos in a book. That book eventually gets published. You have now violated the rules of the contract.
The contract in this circumstance favors the photographer. Now, you’ll need to rely on your insurance and LLC to protect you. The next question is whether your insurance would cover this type of breach of contract. It may not, in which case, your LLC is the last layer of protection to shield your personal assets. We hope we never have to rely on our LLC. Insurance and solid contracts can get us pretty far. This is why I call them the essential layers of protection for every business.
The Essentials
If nothing else, I always encourage brand-new business owners to have:
Solid contracts,
Insurance, and
A simple bookkeeping template for tax purposes.
And if they have these things—and pay their taxes—they can get pretty far without fucking anything up too badly. That’s why I sell all my contract templates for $50—total! You can find them all in the Contract Club on my website. I also provide a bookkeeping mini course, the Bookkeeping Blueprint, for $10. This ensures folks have the absolute essentials they need without breaking the bank.
Insurance
Insurance policies come in all shapes and sizes. They range in what they cover and in how much. The most common and default policy is a general liability insurance policy. General liability protects against property damage or physical harm from products or services.
In addition to a general liability policy, most business owners also benefit from and should look into an errors and omissions policy (E&O). E&O protects against a failure to properly provide services. Malpractice insurance is an example of an E&O type of policy.
Let’s say you’re a wedding planner and your client sues you for failing to book a vendor. That’s an error. A general liability policy may not cover the error. Whether your policy would cover this is a question for your agent.
If you have employees, you should get worker’s compensation insurance. There are other types of specialty insurance as well for specific industries.
Here's my #1 tip when it comes to insurance: Find a good insurance agent who understands your industry and business model. Make sure they will take time to get to know your business so they can recommend which type(s) of coverage you need to be fully protected.
When discussing your coverage options, first brainstorm a list of all your worst-case scenarios for your business. (If you need help, phone an Enneagram 6 friend. Risk management is one of their superpowers.) The agent can then tell you what would be covered and how much it’ll cost you.
Once you find the right agent and get a quote, read and review your coverage. Your insurance policy tells you what is and is not covered. It’s your contract. You need to read it, review it, and question it. Specifically, dig into the exclusions. The exclusions is the section of the policy that states what is not covered.
If you want coverage for something that is not covered, ask for it. They can sometimes update the policy and charge accordingly.
Also check to see if you have “duty to defend” coverage. This means the insurance will cover your legal defense. It is standard but may not be included in some policies. If you do have it, also look for the limits. This came in really handy for some former clients. One in particular got a cease and desist letter. They weren’t totally not liable, but in my professional opinion they made a $1,000 to $5,000 mistake. The other party demanded $50,000. We tried to negotiate. They didn’t budge. My response: “Email me with the legal paperwork when it’s ready.” The client had great insurance, so we knew our worst case was that the insurance would handle it.
I’d share more on this story, but as Moira Rose once said, “Gossip is the devil’s telephone. Best to just hang up.”
Once you get the policy right, you should be fine for a while. Anytime you make a slight pivot in your business, hire employees or contractors, or create a new offer, it’s time to revisit your insurance. It’s also a good idea to check every year or about every $25,000 to $50,000 in additional revenue.
As your income increases, and as you work on bigger projects, your risk will grow. With increased risk, you need broader coverage.
Need help with a good insurance referral? Ask our fellow Besties in the Braden’s Besties Facebook group. I also had a fabulous insurance friend on the Unf*ck Your Biz with Braden Podcast. Tune into episode 279 to learn more.
We’ve got more…
Want to more about Insurance? Check out this interview on our podcast.
Contracts
I had a client who is a wedding photographer. Let’s call her Janelle. She was asked for a full refund from her client more than a year after her wedding.
Janelle is rad. She shoots weddings mostly in the Bay Area in California.
She has a light and airy aesthetic, incredible talent, and a knack for getting grumpy grooms to smile and enjoy the experience. I met Janelle about a year and a half ago. She was referred by a mutual friend, another wedding photog in NorCal. (Do people say NorCal? I’m still a Midwesterner at heart.) You see, despite doing her thing and doing it well, more than a year after her wedding, Janelle heard from her client, whom we’ll call Karen Boomer.
Karen said:
Hi Janelle,
I just got around to fully reviewing the gallery from our wedding. And while I generally love the photos (maybe you see where this is going) there were several shots missing.
Particularly, I expected to see . . . [insert extremely specific request]. As such, I’d really like a refund for half of the fee in our contract.
Ummmmm. What? Janelle booked a one-on-one consultation with me. She was worried. If I had to describe Janelle, I’d say she’s quiet but warm and friendly, professional, and non-confrontational. “What should I do?” she asked.
“Am I contractually obligated to give back the money?” She wasn’t.
“Is the client going to take me to court?” Probably not.
“What should I do? Karen edited her previously glowing, 5-star review to smack talk me all over the place.” Well shit. That’s a tougher question/problem to solve.
You can’t just pull the review down. So we talked and came to a somewhat-more-ideal solution. Janelle offered a refund of $800-ish. This was the amount Karen had paid for the second photographer. That was logical because Karen was specifically complaining about a shot or two Janelle had expected the second shooter to get. Note that Karen was originally asking for a $3,000 refund.
Janelle also offered a $300-ish photo album. I helped Janelle draft this offer in a short, professional, yet direct email. Our goal was threefold:
Get the client to accept this offer.
In exchange, have the client agree to edit the reviews back to their prior state and, for good measure, agree to not file any legal claims at any point.
Word the email in a way that would actually maintain a strong relationship between Janelle and Karen.
The result? Karen accepted and signed. Why do I share this story? These kinds of tricky situations are common in business. Our goal is to help you update your contract so that it can ideally prevent these types of situations.
These are the kinds of things we help our clients navigate in our legal subscription, Legal Rx, on the regular. It’s a great next step after you unfuck your biz. Who doesn’t want the ability to say, “Let me talk to my lawyer”?
The Contract Framework
I divide contracts into three categories:
client contracts,
contractor agreements, and
business/other contracts.
Your primary client contract is your client service agreement. This is the contract you send your clients that specifies the payment terms, the services you’ll perform, and all other key details.
A contractor agreement is the document you have for a contractor who is working on behalf of your business sign. It’s similar to a client contract, but the difference is that you have it on hand for someone you’re hiring, not someone hiring you. Make sense?
As an example, let’s assume you’re a copywriter. Another business owner hires you to draft the copy for their website. You’d send them your client contract for a signature. Now, let’s assume that’s a huge project, and you need some help. You might bring in another copywriter to assist you and have them sign an independent contractor agreement.
This nuance isn’t a huge deal, but it’s worth considering in which circumstance it makes sense. For example, I hired someone to fully set up my Pinterest account. She has a whole process and workflow, which is outlined in her contract. I, as her client, should not be giving her a contractor agreement. It’s more or less her burden/obligation to give me a client contract. On the flip side, my virtual assistant did not have a contract, so I had her sign my contractor agreement to touch on the issues of payment, intellectual property, and confidentiality.
To boil it down, contractor agreements are ideal when you’re subcontracting work, or when the person you’re hiring doesn’t have an agreement and you want some legal protections in place.
But remember: A contractor agreement doesn’t automatically make someone a contractor if the law says they must be an employee. For more on that issues, check out this blog post.
The third category is a bit of a catchall. I lump internal contracts like operating and partnership agreements, as well as privacy policies for websites, in this category. (Web terms of service, I’d argue, are a client contract. Web terms are like a client service agreement but they live on your website. When people download your products or make purchases on your website, they check that little box that says “I agree to the terms of service.” You need to have web terms that essentially serve as the agreement for that offer.)
Remember that contracts are one of the two absolutely essential layers of protection for your business. Most new businesses need a client contract, contractor agreement, privacy policy, and, if applicable, operating agreement. We have templates for each of these in the Contract Club. 🥳
Non-Disclosure Agreements
We get requests for NDAs in the Contract Club all the time. I resisted for a while because folks usually think they need them when they really don’t. I’ll explain.
A Non-Disclosure Agreement (NDA) protects you and/or others from having confidential information made public. Most of the time, an NDA can just be one of the terms within your contract. But when no contract has been signed, and confidential information is getting handed out-you might need an NDA. Here’s some examples.
Example 1
Not Your Average Law Firm offers full service bookkeeping and tax services. Before you sign a contract with us, we may write up an informed proposal and action plan. To write that plan, we need access to your Quickbooks accounts, personal information, and tax history.
Because we need confidential information from you before you sign our contract, we could have you sign an NDA so you feel more comfortable sharing that information.
The same goes is we hire another business owner to do work for our business. We could request an NDA if they needed to access confidential information before we sign on as a client.
Example 2
Mr. XYZ signs up for Not Your Average Law Firm’s monthly legal subscription. He needs an LLC formed, and sends us confidential information about his business. Does he need to sign an NDA with us? Nope! By signing up, he agreed to the terms of our program which include a confidentiality clause.
Because the terms of our program include a confidentiality clause, and because Mr. XYZ sent the confidential information after signing our contract, there’s likely no need for a separate NDA.
This is where most folks mistakenly think they need an NDA. If you don’t need sensitive info prior to the client contract, you can put the confidentiality stuff in that contract.
Employee/Contractor Notes
When hiring contractors, the confidentiality clause can be incorporated in your contractor agreement. Hiring employees may warrant a separate NDA. We have a template for that in the Contract Club too!
All the templates you need. All in one place. Just pay the cover, and you’re in for life.
Business Entities - The Third Layer
Imagine a magical bubble. I always picture the one Glinda chills inside in The Wizard of Oz, a movie that made my young, gay heart joyous. Except, for the sake of this example, imagine an object inside the bubble instead of Glinda. Otherwise, this is about to get morbid.
Try to picture something that represents your business—maybe a camera if you're a photographer, or your computer, or your favorite vase with flowers if you’re a floral designer. I’d picture the physical form of this book.
Now picture all the other big stuff you own outside the bubble, like your car, house, your bank account, and everything else.
Think back to the previous chapter and our discussion on the different areas of liability. Which area of liability was immediately the most worrisome to you? Imagine that becomes a real issue and you're faced with a lawsuit. Picture the object you placed in the bubble exploding. Not pretty, right? But, your magic bubble has encased the object. It’s protecting everything you love on the outside from the shrapnel.
The bubble in this analogy represents an LLC or corporation. I typically try not to teach out of a place of fear (that’s just ewww), but I find this analogy really helps bring home the concept of liability and the role business entities play in protecting you from potential calamities, whether they be minor, petty bullshit, or major, front-page-of-the-newspaper stuff.
Default Versus Formal Entities
For lack of better terminology, I refer to some legal structures as default entities and others as formal entities.
You have likely heard mention of LLCs, corporations, and S corps. Have you wondered what these are, which to choose, how much they cost, and what they do? Don’t sweat it; I’m breaking that down in this section.
Each entity has its benefits. When considering which entity to choose, think about:
Tax consequences,
Liability protection,
Ease of management,
Flexibility,
Ability to raise capital, and
Ease of formation.
Some entities are easy to form and manage but offer little protection for liability. Other entities offer great protection but may not have the best tax consequences nor be as flexible. This is why the choice of entity is highly specific to each individual business’s needs.
The most common form of (for-profit) business entities are:
Sole proprietorship and general partnership,
Limited liability company (LLC),
C corporation (C corp), and
S corporation (S corp).
If you earn self-employment income, have no business partners, and have not formed any legal entity, you are a sole proprietor. Forming a sole proprietorship is easy and flexible because the law places few rules on the management of sole proprietorships. However, sole proprietorships offer no liability protection.
The other default entity is a general partnership. It’s essentially the same as a sole prop. The difference is a partnership involves more than one person.
Both of these entity types are pass-throughs, which means the business income carries straight to the individual owner’s (or owners’) tax returns.
The default entities do not set up any sort of division between the business owner and the business. There is no shield—no magic bubble. In short, sole props and general partnerships provide no liability protection, whereas LLCs and corporations do. I sometimes refer to entities that are not default entities as formal entities simply because you must take formal steps to actually form them.
Note that sole props technically do have formal steps, like a business license in most cases, but if you fail to get a business license, you still have a sole prop. It’s just an unlicensed one. However, there’s no way to stumble into having a corporation or LLC. You must take proactive action by filing articles of organization with your secretary of state.
Want to learn more LLCs, corporations, and S Corps? Specifically, which one is best for you?? I wrote a whole extra post on that.
We’ve got more…
Check out this juicy post on whether you should be a sole prop, LLC, or S Corp.
Intellectual Property
We covered the essentials: contracts, insurance, and business entities. Now, we go beyond those and ask: How essential are these additional layers?
It, of course, depends. I like to think about intellectual property (IP) protection in two ways. In some circumstances, IP is like the coat, the hat, and the added pieces to your layers of protection. Even if we add them after your pants and sweater, they’re still vital in certain circumstances.
In other cases, IP might be like a nice watch, some dazzling earrings, or a Hermès scarf—not totally necessary, but they complete the look.
I’ll differentiate between these two types by calling them either our outer layers (totally necessary) and our accessories (nice to have). For one business, a trademark may be an outer layer, while for others it may be an accessory. In other circumstances, one trademark may be an outer layer for a business while a second, third, or fourth layer might be an accessory for that same business.
For example, I already already have a trademark for Unf*ck Your Biz. I should have marks for Legal Rx and Profit Rx. Those are in the works at the time of writing this edition of the book. It wouldn’t be a total catastrophe if I had to rebrand those programs, but it would be a pain in the ass. I’d maybe consider those trademarks like a nice warm hat: pretty important but not quite hitting coat level. Trademarks for my smaller programs would be accessories: I wouldn’t consider them essential, but they’d add value to my business.
The key takeaway is this: There are varying levels of importance with regard to intellectual property. You need to assess how much protection you need then take the appropriate steps to obtain that protection.
The Three Main Types of IP
The three main forms of intellectual property protection are trademarks, copyrights, and patents. Each of these serve different functions. A trademark protects brand identifiers like logos or business names. A patent protects novel inventions, and a copyright protects a person’s original work of “authorship” like a song or book.
By considering how the business landscape would be different without trademark law, we can better appreciate its value. Your trademark is a valuable asset. It tells customers or clients what they’re getting and can establish brand loyalty.
Consider a world in which a car manufacturer could sell you a fancy-looking but barely functional vehicle plastered with the Ferrari mark. You could easily be swindled. Maybe you have a secret obsession with McDonalds. You love their fries. If anyone could put the golden arches in front of their business and model their restaurant off the same color scheme, you’d never know what you’re getting. The mark conveys all sorts of expectations. Those expectations have inherent value. Imagine the horror if you thought you were getting McDonalds fries and they were actually those shitty, fat, starchy ones. Eww. Crisp fries only. Extra salt, please.
Compliance Requirements
We’ve kind of hit that point where I’m thinking, “is this too much blog post for one blog post? So here, We’re going to simply do an intro and link to other posts as we write them.
Bookmark this blog if you haven’t already. You can circle back whenevs to see what we’ve added.
Compliance is basically our catchall for what you gotta to not break the law. These are non-optional things.
We’ve got more…
Read about website compliance. Like what you gotta have on your business site. (coming soon)
Read about worker classification. We answer the question, can you hire a contractor, or do you need employees?
I WROTE A WHOLE-ASS BOOK, AND
I never thought people would be jazzed about reading a book on law in tax, but the reviews are in! And most read something like "I read this whole book, and I didn't hate it, and now I know stuff.
But for real, it walks you through my full "Unf*ck Your Biz Framework" - something I created for my first course, which was $2,000 and saw over 70 graduates - and is like the A to Z guide to get you started.
UNF*CK YOUR BIZ, THE BOOK -
UNF*CK YOUR BIZ, THE BOOK -
“I never thought I would say I enjoyed reading a book on taxes, but I definitely did. Braden’s wit and spunk made this, often times, traumatic topic of taxes, actually really fun and enjoyable. He put into perspective the proper ways of filing your taxes, as well as covering if you should become an LLC, S Corp or sole proprietor, for small business owners. It was jam packed with knowledge and key tips that I have already put into effect in my own business! I’m so thankful that Braden has decided to share his knowledge and help us small business owners. Highly, highly recommend reading this book and getting your legal stuff figured out!”
- Kelsey, Owner of Kelsey Rae Designs
