We recently participated in a free, open-to-all webinar hosted by American Alliance of Museums (AAM) that focused on all the crucial legal aspects of running your own business that contractors (or as AAM terms it, independent museum professionals) should be aware of. Read on for our summaries of some key takeaways and answers to all your basic legal questions! We would like to thank AAM as well as legal professionals Ginny Cascio Bonifacino and Heather Hope Kuruvilla for taking the time to share their knowledge and insights with so many contractors.
** Much of this information varies from state to state, always check with your state and city/county governments for specifics**
Sole-Proprietorship vs LLC: What’s right for you?
This is something that is frequently discussed in contracting communities, but it was good to hear official explanations of the two business models from actual attorneys. The two business models are summarized below, but it is important to remember that no matter what type of organization you decide to form, both sole-proprietorships and LLCs are taxed the same.
Sole-Proprietorship: Owned and run by 1 person, who is not legally differentiated from the business. This means you, personally, are liable and responsible for business debts. Net income and loss are reported on your personal tax returns.
LLC: Owned and run by 1 person, but that person is legally separate from their business. This gives you a ‘corporate shield’ of protection against liabilities and debts. This method requires slightly more initial effort to get started, namely a Certificate of Organization and an Operating Agreement, as well as any other requirements required by your state.
Once you’ve decided what type of business model works best for you, you have to actually register your business! This can be a little confusing and varies from state to state, but here are are some helpful hints about navigating your business registration process
-Get an Employee Identification Number (EIN)- these 9 digit codes are issued by the IRS and are like a SSN for your business. If you are an LLC you need one of these, and if you are a Sole-Proprietorship then you can use your SSN but it’s really better to just get an EIN. They are free and you can request one online.
-You must register your business in every state that you have a ‘nexus’ in, which is defined as anywhere you have a physical office location OR multiple clients.
Example: If you’re registered in Virginia but you do one job for one client in Maryland, you don’t need to register your business in Maryland, but if you have multiple clients or recurring jobs in Maryland you would want to register in both Virginia and Maryland.
-Again, always check state and local regulations as a few states require you to file and pay sales taxes on your work.
-States can and sometimes will revoke your business’s registration if you do not pay your taxes! However, if you are late on/forgot your taxes, most states will just charge you a penalty that must be paid (along with your taxes) before you can resume business.
What to Include in Contracts
We found this run-down of standard terms and clauses super helpful, especially because we know many contractors are never formally taught how to write their own contracts! One of the biggest messages throughout this seminar that successful contracting depends of establishing enough independence for you to be able to protect yourself. Not all of the following things may need to be included in every one of your contracts, but think of this as a road map for the options you have when drafting a new agreement.
Terms: Always make sure you are being treated as a consultant, not an employee. Include terms in your contract to specify your expectations regarding:
- The hours you’re expected to work (i.e. that you schedule time during your work week to take care of your own business needs– this is similar to what we heard from Kim Cullen-Cobb about administrative time, so check out that post for more details!)
- What equipment you’re using and who is paying for it
- If you will be supervised, by who, and what type of relationship they will have with you (i.e. will you have a supervisor and if so what will they be able to ask from you)
- Your right to set your own rates
- Who is responsible for all expenses incurred while working on this project
Clauses: Your contract should also include a number of clauses, explained briefly below.
- Scope of Work: Essentially saying what you’re going to do, including deliverables, timing, etc. Be as specific as possible.
- Standard of Services: Set reasonable professional standards for your work, based on whatever standards are present in your specific industry.
- Payment Terms: How much you will be charging, when you will be invoicing, late fees, the right to terminate your contract if you aren’t paid within a reasonable time.
- They said you should always have late fees and charge interest, but you may eventually come across a client who will not sign a contract that includes late fees. In such a scenario, use your best judgment and do all you can to protect yourself against late payments and other issues.
- Intellectual Property: State who owns what you create during the scope of the project. The general standard is that you own whatever you create (your deliverables) until you have formally turned them over to the client.
- Risk Management: State who is responsible for damages, incidentals, etc. Also include indemnification, which generally states that each party is responsible for its own actions, or at least will be held accountable for gross negligence and misconduct.
- Non-Solicitation: This clause should prevent the client from actively seeking to replace your contract with one from another business for the length of your contract.
- Termination: Give yourself a way out for if you don’t like the project or if the client violates the terms of the contract
- Dispute Resolution: Determine how any conflicts between yourself and the client will be settled (i.e. in what court or by what means of mediation)
- Venue and Laws: Determine under which state’s laws you will be operating and negotiation.
- Attorney’s Fees: Agree who will pay what legal fees in the event of a dispute. Standard is usually that the client will pay your legal fees if you win the settlement.
Last but not least, we covered what is possibly the most complicated and headache-inducing part of contracting; insurance. Bonifacino and Kuruvilla emphasized that insurance needs differ with each individual and contract, but laid out some basic types of insurance that an independent professional might want to consider.
Types of insurance to consider are:
- General liability (required)
- Errors and omissions (advised)
- Cyber liability (depending on your project)
- Workers comp (if you employ anyone else at your business)
- Auto (if driving is part of your job)
Insurance tip: Try to limit your liability to direct damage caused by you and/or to a specific dollar amount. A good recommendation is to limit it so that you are only responsible for damages that cost up to half of your total compensation for a contract.
Well, there you have it; a quick but thorough run-down of all the legal situations and implications that contractors should be aware of as they do business. We know that this only scratches the surface of some of these scenarios, and we encourage you to reach out to us here at CoC, or to AAM, with any questions you may have!