Entering into contracts is one of the most important roles of a legal entity. When your company enters into a contract with another person or business, you put your counterpart on notice that the company, and not you personally, owns the obligations of the agreement. This is an important way for freelancers to manage the day-to-day risks of doing business, and is also an important way of maintaining the distinction between your business entity and yourself as the owner. This chapter offers a few steps a freelancer can take to ensure that business contracts are properly drafted.
At the most abstract level, a contract is an enforceable bargain between or among two or more people (including corporate “persons”) in which one or more person has made a promise to do or not to do something in exchange for consideration, and the parties have manifested their mutual assent.1 Consideration might be something with concrete value, like money, or something intangible, like an agreement to perform in-kind services.2 A contract needn’t be a formal document with ink signatures. It can be inferred from a collection of e-mails or, least desirably, simply a verbal agreement, provided that the key terms of the bargain between the parties can be determined. Among other things, this means that it is easy to form an enforceable contract that doesn’t binds your legal entity or include all the terms you’d like. There are some easy steps you can take to avoid these pitfalls.
Contracts are a key part of the corporate separateness idea that we looked at in Chapter 2. Once formed, the legal entity should “own” the business. That means, among other things, making sure that it is specifically named in any agreement relating to the business.
Formal Agreements
A formal, written contract can come in many different styles. It might be a preprinted form with blanks for the freelancer’s name, or it might be a Word document that a client asks you to mark up with the details of your business. In such cases, the important thing to remember is that the contract should be entered into using the business entity’s full legal name, not your own. A typical contract calls for names in two places: in the contract’s preamble, usually the first paragraph that describes the parties, and on the signature page. Also look out for sections in the middle of the contract that ask for your company’s notice address and other details.
Example Preamble
This Independent Contractor Services Agreement (this “Agreement”) is made between Big Spender Client Corporation, a Delaware corporation (“Client”) and ABC Freelancer LLC, a California limited liability company (“Contractor”), effective as of _____________, 2017.
On the signature page, the freelancer signs the contract on behalf of the LLC. The title the freelancer uses is determined in the company’s organizing documents. In this example, from the same contract as our example preamble, the owner of ABC Freelancer LLC has named herself the company’s president:
Notice that the freelancer’s personal name doesn’t appear except as an officer of the company. An incorrect formulation might have appeared in the preamble, putting just M. Freelancer’s name in the blank before the parenthetical with “Contractor” in it. It might also have appeared on the signature page, putting M. Freelancer’s name where the company’s name appears.
“Informal” Agreements
A contract can form without anyone signing a paper document. In the 47 states that have adopted the Uniform Electronic Transactions Act, an e-mail or other electronic format (such as a voice recording) can create a perfectly enforceable contract.3 Even an oral conversation can be enough to form a contract. Here the freelancer needs to be especially careful, because it can be easy to speak in personal terms (“I’ll do this for you.”) that can lead to personal liability unless the client knows that it is ultimately dealing with the legal entity, and not with the freelancer. It is always a good idea to negotiate the terms of a project and then summarize all of the terms in a proposal for the client to accept. Even if language implying personal obligation has been used to that point, asking the client to approve a final summary that puts the obligations squarely on the business entity can be enough to ensure that the business entity’s limited liability sticks.
Example Simple E-mail Proposal
Dear Client,
Thank you for engaging ABC Freelancer LLC to copyedit the manuscript of your novel, The Dullest Book Ever. Based on my review of the 50,000 word version you sent to me on April 5, we have agreed to a flat fee of $1,000 for one detailed pass through the draft. My review will be completed by May 15. Payment in full will be due within 30 days of delivery of the fully edited manuscript.
Sincerely,
M. Freelancer, President
ABC Freelancer LLC
When using this strategy, keep in mind that contracts can’t arise without both sides indicating agreement. It is not enough to send an e-mail like the example above; the client needs to acknowledge its acceptance of your terms. As my law school contracts professor liked to say, silence is not acceptance.
Contracts with Clients
In an ideal world, no freelance job should be started without having an agreement in writing setting out the obligations of both sides. This is true of small jobs as well as large ones.
Finding Work through Freelancing Websites
Freelance job sites such as UpWork.com or Freelancer.com typically dictate the terms that apply to jobs arranged through them. In these cases, a separate contract isn’t necessary, because the job market sites have already provided one. In fact, having a separate agreement usually violates the terms of use of such sites and can get you banned from using them. If you get work through these sites and plan to form a legal entity, be sure to find out if the sites you use will let you bind your legal entity. If you can’t put your legal entity on the hook your work will be as a sole proprietor. It is important to remember that revenue you generate outside of the umbrella of your legal entity gets treated separately from your company’s revenue for tax purposes.
The specific form a contract takes is not important so long as it reflects the terms of the deal and shows agreement by both sides. A contract need not be on paper with real signatures; an e-mail exchange setting out the parameters of the job can suffice. A common freelance practice is to prepare a proposal, either in an e-mail or in a more formal document, and ask the client to approve it. When taking this route, it’s a good practice to not start work before the client has specifically indicated agreement with the terms you’ve provided. The last thing you want to do is spend 20 hours on a project only to have the client suddenly take issue with your fee structure.
Having a form of agreement on hand is a good idea. The specific kinds of issues that a contract should cover will vary by industry and can be influenced by state law. Generally speaking, a contract should reflect all the terms of the deal that you’ve discussed with the client, as well as any protective provisions you feel are appropriate for the job. Here are a few things that a contract should cover:
•The specific scope of the services you will provide.
•Pricing and payment terms, including how long the client will have to pay after receiving the invoice and how you handle late payments.
•All important deadlines and provision for how deadlines get changed, such as acceptable notice periods.
•Provision for termination, which might include a “kill fee” owed to you for work you have already completed.
Some freelancers may want to include other language in their standard contracts. A photographer might ask for permission to include images from a client’s shoot on the photographer’s website. Many photographers also specifically retain copyright in the photos they shoot. An editor might want to emphasize that the client bears ultimate responsibility for the work.
Clients may ask for specific terms, too. They may even have a form of agreement that they use with independent contractors. Don’t sign or agree to any contract without reading it. If there are terms you don’t understand, ask the client to explain them. Be especially aware if the client’s form agreement imposes special obligations upon you, such as:
•Confidentiality obligations (a.k.a. nondisclosure agreements).
•Restrictions against trading the client’s stock, if the client is a public company. Pay special attention to the scope of these clauses, because they can apply to your close family members as well.
•Assignments of intellectual property rights in the work, especially if you are not willing to make such assignments without extra compensation.
•Restrictions against working for a client’s competitors, sometimes referred to as noncompetition clauses.
Always make sure you know the exact scope of your obligations under these kinds of restrictions. For example, if a noncompetition clause doesn’t specify exactly who you can’t do business with, it is essential to demand clearer language that provides you with the necessary information so you can comply. Also, restrictions like these often come with their own timeframes, usually lasting a while after your work for the client is finished. If you intend to agree, for example, to keep your work for the client confidential, you need to take that obligation seriously and keep track of when it expires. It is a good idea to put final deadlines on your calendar.
Negotiation is almost always an option. If a client offers a form contract with terms that you find unacceptable, it rarely hurts to push back. Marking up the contract to strike out the specific language you don’t like is the best way to approach this. The worst that can happen is the client rejects your changes. In some cases, very small business clients may refuse to negotiate because they don’t want to pay their lawyer to review your changes. Some clients, like many government agencies, are prohibited from deviating from their standard contracts. If the client won’t budge, then you will have to decide if agreeing to the contract is worth the risk.
Contracts with the Owner
Many freelancers will have business-related contracts that are the freelancer’s personal obligation. Cell phone services and home Internet connections typically straddle work and personal lives. Even if the freelancer is treating these sorts of agreements as 100 percent business expenses, the obligation to pay their bills will rest with the freelancer personally unless the business assumes them or, more likely, enters into a separate contract of its own. Ordinarily it isn’t necessary to go that far, and for a small freelance business it usually isn’t practical anyway.
The freelancer may still prefer to be reimbursed for expenses related to these personal contracts, by having the business pay them. Depending on how the legal entity is structured, the freelancer can get into trouble doing this the wrong way. Just having the company pay the bill can create two problems. First, it intermingles personal and business assets by using company funds to pay a personal obligation. Second, if the company is tax-regarded it can create taxable income for the freelancer, because the company is essentially assuming the freelancer’s debt.
These are steps you can take to avoid these problems:
•Pay personal obligations with personal funds (your own credit card or checking account, not the company’s).
•Routinely document expenses by gathering together copies of bills and evidence that they were paid. Keep these “expense reports” well organized.
•Once the expenses are properly documented, the company can reimburse the freelancer from the company’s account.
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1 RESTATEMENT (SECOND) OF CONTRACTS §§ 1, 2, 17 (AM. LAW. INST. 1932).
2 Id. at § 79.
3 Every state other than Illinois, New York, and Washington has adopted a version of the Uniform Electronic Transactions Act. National Conference of Commissioners on Uniform State Laws. 1999. Uniform Electronic Transactions Act. www.uniformlaws.org.