UNTETHERED, BUT STILL PROTECTED: LEGAL COMPLIANCE THAT EMPOWERS FREELANCERS
July 28, 2016
By Aaron Gard
According to the Bureau of Labor Statistics, more than 53 million Americans enjoy the freedom and financial rewards of freelancing. For some, freelancing offers a creative outlet, the first steps of entrepreneurism, to add to traditional income sources. For others, freelancing becomes a way of life, whether you’re a designer, writer, programmer or contract sales executive.
At the Forrest Firm, we’ve seen many freelancers evolve from that former set, those looking for “side income,” into going concerns generating tens of thousands of dollars. Many freelancers, however, forget to put into place the necessary legal safeguards to protect them from liability and fuel business development.
Let’s take a look at a few necessary documents and processes that freelancers need to pursue.
According to the complexity of your business and other factors, such as taxation, you’ll want to register your business with state and local authorities. Different entity types have different advantages for freelancers:
- Sole proprietorship: Registering your business as a sole proprietorship allows you the simplicity of being a contractor, while empowering you to use a business name to build a brand separate from your personal name.
- Partnership: Some professions naturally complement each other (i.e. copywriters and designers). Partnerships allow for legal protection, as well as articulating your relationship with your partner with regard to decisions, revenue and other aspects of the business, but additional tax reporting is required.
- Limited liability corporation (LLC): The LLC is a very popular entity type used in North Carolina. LLCs are known for flexibility, in that they can be formed by individuals or multiple parties. When properly executed and maintained, LLCs protect the owner’s personal property in the event of legal action without the effort and compliance work involved in registering a full corporation.
A business attorney can help you form a company at state level and advise you regarding any local registration requirements with municipal or county authorities.
Company Bylaws/Operating Agreement
For some entity types, such as LLCs, a freelancer should file an operating agreement and other formation documents to properly register the company to operate. If freelancers are advised to form more complex organizations, such as a C corp, they will need to file company bylaws. Both the operating agreement and bylaws outline a company’s structure, ownership and decision-making policies.
These documents not only meet legal compliance demands from state agencies, but also enable you to decide from the onset, and not in the heat of the moment, how you’ll make key decisions and resolve any conflicts that arise in running the business.
Master Services Agreement/Statement of Work
As with more formal employment arrangements, freelancers need a good set of contract templates to govern client relationships. These templates should include a Master Services Agreement—for customers with more complex, ongoing relationships—and a Statement of Work to govern individual projects inclusive of and exclusive of having a Master Services Agreement in place.
While the Master Services Agreement outlines the type of work you’ll be doing, as well as conditions under which it will be performed (when you’d like to be paid, non-disclosure agreements, and other aspects of the document meant to protect your legal interests, such as method of dispute settlement), the Statement of Work is much more granular in its protections at the project level, covering the following areas:
- Scope of the project
- Important deadlines
- How and when payments are made
- Who retains ownership of the finished product
- What marks the successful completion of the project (or, how will the project end if one party needs to cancel early)
With your contracts, you’ll want to use plain language and be detail-oriented. Each agreement should lay out expectations clearly in an effort to avoid conflict. However, if conflict does arise, which it sometimes does, each agreement should also clearly identify how those conflicts will be resolved.
Many freelancers encounter non-disclosure or confidentiality agreements, especially when there’s a chance they may come in contact with a client’s intellectual property, whether it’s trademarked, copyrighted, patented or a trade secret. In addition, freelancers also need to protect their own methods and processes to ensure they aren’t cut out by a client looking to take the freelancer’s work in-house.
Also, you may find yourself hiring out work as your business grows, and you’ll want to bind your counterparties to the same confidentiality and non-disclosure standards to which you’re held.
Independent Contractor Agreement
Finally, you should always have a well written Independent Contractor Agreement on-hand to protect your interest when entering into an independent contractor relationship as opposed to that of an employee. These agreements, much like your Master Services Agreement with a client, will articulate your business arrangement as a contractor.
An Independent Contractor Agreement outlines the nature of your work, amount and terms of payment and other issues similar to client contracts, such as ownership of the final product, deadline expectations and more.
At the Forrest Firm, we believe in the power of small business to change careers, change lives and change communities. If you’re a freelancer and would like help navigating the world of corporate formation and formalized contracts that will offer you the right balance of risk management and business development, contact us for a consultation today.