10 Glaring Contract Red Flags You're Not Paying Attention To
A lawyer breaks it down.
Photo: Smith House Photography
Unless you’re a lawyer, navigating a contract is a veritable minefield. Reading the fine print can be daunting, to say the least, especially for content creators who are hustling for every dollar. That’s why we tapped Christopher Dischino, a lawyer who specializes in business law, intellectual property, and corporate transactions, to break down some of the most common mistakes for us.
“Drafting contracts for freelancers often requires a delicate balance of terms, which both protect you and your intellectual property but are not overly onerous to your client,” Dischino tells Create & Cultivate. “When we discuss creating standard form contracts for many of our freelance clients, we discuss not only how they operate but who they are doing business with.”
While it’s important to note that everyone’s particular business operations are unique, below are ten of the most important items Dischino takes into consideration when drafting contracts for freelancers.
Business or Personal
“In order to insulate yourself from personal liability, consider forming a small business corporation or limited liability company and signing all contracts in your company’s name as opposed to individually. Operating through a company may have tax benefits, asset protection benefits, and adds a flair of professionalism to your business.”
Work for Hire
“If you are being hired to create a project or product, it is important to understand who owns it upon completion. Specifically, you should discuss with your client the extent of ownership by both parties upon completion. The U.S. Copyright Act provides that, as an independent contractor, copyright to the work product you create belongs to the creator of the work, unless otherwise agreed in writing. While most clients will expect ownership to be transferred, pay particular attention to any references to “Work for Hire.” If your client expects to receive ownership of the work product, make sure that it is expressly conditioned on payment in full.”
Indemnification Clauses
“Liability is always a concern when completing a project or product for a client. Whenever you see an indemnification clause, read it carefully. Many agreements state that if the work product created infringes on the intellectual property rights of a third party, the party creating the work remains liable for any damages. Likewise, a freelancer should make sure they are indemnified by their client and held harmless if the client utilizes the work in a way, which creates liability due to their own negligence or willful misconduct.”
Choice of Law and Venue
“Almost all contracts will have a clause that establishes where legal proceedings take place, should a dispute arise, and the law that governs the dispute. Make sure that the contract is not governed by laws that you and your lawyer are unfamiliar with and doesn’t require you to show up to court in a faraway land, especially if the dispute is over non-payment.”
Payment Method and Schedule
“Payment terms are often the elephant in the room when negotiating a contract. All too often, individuals or companies neglect to set a payment and deliverable schedule which leads to controversies as time goes on. Moreover, always consider requesting an initial deposit to bill against. Many contracts now require clients to sign a credit card authorization.”
Force Majeure
“Force majeure, which means superior force in French, is often an important red flag to be attentive of when drafting a contract. A force majeure or “unavoidable circumstance” prevents one or both parties from fulfilling their obligations under the contract. In practice, most force majeure clauses do not excuse a party's non-performance entirely, but only suspend it for the duration of the event. For example, a freelance photographer who setups for a beach photoshoot only to find himself in middle of a hurricane, would benefit from a force majeure clause that excuses his non-performance of the contract due to a circumstance beyond his control.”
Expenses
“Who covers the expenses of creating a work and when will they be paid? It is important to differentiate between payment for your services or work and the added expenses that were necessary for the completion of a project or product. From the beginning, establish if hard costs are included within your fee (and if so, consider a larger upfront deposit) or if costs are up and above your fee (if this is the case, establish what costs must be approved or which are pre-approved). Finally, make sure to define if the expenses will be paid upfront or if you will be paying out-of-pocket and requesting reimbursement.”
Scope of Work
“When do you start and where do you finish? Often times, projects are taken on or products begin with no true direction or trajectory. This lack of organization and parameters may lead to situations where a client continues to request work beyond the scope of what was originally contemplated. It is important to set parameters regarding the project or product so that you comply with what is requested, but also so that you are properly compensated for your work. The more specific and objective the scope, the better.”
Revisions, Drafts and Changes
“Just as important as the scope of your work is the amount of times you will go back to the drawing board, make changes, edits and revisions. For the sake of compensation (and your sanity), it is important to agree upon the amount of changes a client is able to request prior to the start of your work and the rates (whether a flat fee or hourly) at which additional work is billed.”
Termination Clauses
“It is important to set out the exact reasons or basis for which your agreement can be terminated. Termination clauses should not only consist of the client’s basis to terminate you but also considerations for when you need to terminate your client. It’s especially important to make sure that your client cannot terminate you for any reason or no reason without compensating you in full for the work you completed.”
About the Expert: Christopher Dischino leads Dischino & Company, a Miami-based law firm that provides legal advice and strategic consulting for the modern business, the entrepreneur, the free-thinker and those looking for something outside the box. With a knack for the creative and an entrepreneurial attitude, Christopher specializes in business law, intellectual property, and corporate transactions, assisting private clients and corporate entities to establish and expand their businesses domestically and abroad.
DISCLAIMER: The materials contained in this article has been prepared for informational purposes only and are not intended to provide, and should not be relied on for, tax, legal or accounting advice.
This story was originally published on April 10, 2016, and has since been updated.
MORE ON THE BLOG
Professional Opinion: LLC vs. CORP
Having practiced law within the creative industries for a number of years, I’m rarely shocked when an individual tells me that they work free-lance and have been operating without a company. That being said, there’s never a better time than now to take action! If you are individual considering starting your own company or already have a business that you operate in your personal name, the single most important first step in building a foundation for your business is choosing the proper entity. Having a good attorney and and new, easy-to-use accounting software for small businesses, makes the entire process a cinch.
As you probably know, perhaps the most popular form of business entity today is the limited liability company. However, various alternatives exist that are all worth considering. Incorporating a business, whether in one form or another, is an effective way for entities to insulate owners from personal liability, facilitate management of the business, benefit from numerous tax advantages and even take on investors.
This article sets forth the basic considerations for limited liability companies and corporations, and provides some preliminary guidance to help you as you begin planning for the growth of your business.
The Corporation
The corporation is one of the oldest and most recognized form of legal entity. Most states have an abundance of well-established laws governing the formation of and operation of a corporation. Corporations are generally favored by investors and companies with a large number of shareholders. Corporations are allowed an unlimited number of shares, shareholders and can even create different classes of ownership or “stock”. Furthermore, growing companies looking to go public or take on significant angel or venture capital investors, owners should be aware that only corporations are eligible for initial public offerings.
Growing companies looking to go public or take on significant angel or venture capital investors, owners should be aware that only corporations are eligible for initial public offerings.
Corporations, like limited liability companies, are entities which separate from their owners. Owners or “stockholders” of a corporation are generally not liable for the debts and obligations of the corporation. The incorporation process begins with the filing of the entity’s Articles of Incorporation with the Secretary of State and requires registration in any state where it is conducting business. Following filing and registration, the Board of Directors must hold an Organizational Meeting where the Board will select officers, adopt bylaws, and conduct other appropriate business.
Most states do not have rules that require a minimum number of owners that a corporations must have, but rather a single person is capable of being the director, officer, and shareholder of the company. Corporations have a three-tiered management structure. Officers, who run the day to day operations of the company report to the Directors, who are responsible for overseeing the fundamental decisions. Directors act in the interest in of the stockholders in overseeing fundamental business decisions. Different classes of stock (i.e. common and preferred) and voting rights for each class, are generally set forth in the corporations Shareholder’s Agreement, Bylaws and Articles of Incorporation, to which all the shareholders are bound. It is important to note that all decision making between the directors, officers, and shareholders may be modified by a Shareholder’s Agreement. Shareholders’ Agreements can also provide for a number of other complex rights and restrictions on ownership of the Company, but we’ll save some of the more complex matters for another article.
Generally, we refer to plain, vanilla corporations as “C-Corp”. What many entrepreneurs don’t know is that corporations can elect taxation under Subchapter-S of the Internal Revenue Code (creating what’s called an “S-Corp”). A corporation that does not elect S-Corp status is taxed separately from its owners, typically between 20 and 40 percent on its net income, which takes into account state franchise taxes assessed to the corporation. When a corporation decides to issue dividends to its owners, each dividend is subject to taxation as well, which is why these entities are often referred to as “double-taxed.”
What many entrepreneurs don’t know is that corporations can elect taxation under Subchapter-S of the Internal Revenue Code (creating what’s called an “S-Corp”).
However, a corporation may avoid the “double-tax” by filing as an S corporation. Similar to partnerships, S corporations are pass-through entities that do not pay income taxes at the corporate level, but only at the individual owner’s level when income is allocated among owners. In order to qualify as an S corporation, there can be no more than 100 shareholders, all shareholders must be individuals and generally must be U.S. Citizens or Green Card holders.
The Limited Liability Company
In recent years, the development of the limited liability company (“LLC”) has changed how many business are structured. The LLC is a hybrid legal entity that adopts many of the features of the corporation as well as traditional rules regarding partnerships. The LLC is becoming increasingly popular because it offers limited liability to its members for all of the LLC’s obligations as well as tremendous flexibility in its ownership structure.
LLCs are formed by filing the Articles of Organization with the state in which the LLC does business, which include similar information to a corporation’s Articles of Incorporation. Due to the fact that the laws surrounding LLCs are not as developed as corporation rules, most states require that LLC’s have Operating Agreement. An Operating Agreement is signed by an LLC’s owners or “members”, is drafted to structure an LLC’s financial and functional decisions and provide rules and regulations governing the transfer of ownership, addition of new owners, tax rules and decision making authority. Additionally, the Operating Agreement outlines how profits and losses will be distributed and how and when meetings will take place, and govern succession planning, such as procedures agreed upon for buying out or transferring ownership interests when members leave the LLC. Unlike corporations, LLCs do not have a formal management structure and can tailor their Operating Agreements to fit the business’s organizational needs. An LLC can have different classes of members making the business form flexible in management, financing, and operational aspects. A properly tailored Operating Agreement can save a lot of headaches in the future.
What many people do not know, is that the LLC, unlike the corporation, is the most flexible entity for tax purposes and may elect to be taxed as a corporation, an S-Corp or as a partnership. By default, LLCs are taxed as a partnership (unless another election is made). Accordingly, all profits and losses of the partners in a partnership.
What many people do not know, is that the LLC, unlike the corporation, is the most flexible entity for tax purposes and may elect to be taxed as a corporation, an S-Corp or as a partnership.
In many states, owners of an LLC with more than one member are granted certain additional protections from creditors. Some states like Delaware, afford the same protection to single Member limited liability companies.
All in all, entity selection and tax election are issues that are unique to every business. These choices will not only help starting your business on the right foot, but will pave the way for future success. We always recommend speaking with an attorney to help guide you through the process. DiSchino & Company offers flat fee packages to help get your business off the ground. We specialize in corporate and intellectual property law and cater to companies of all shapes and sizes in the fashion, arts, design, hospitality, food and beverage and tech industries.
Christopher Dischino leads Dischino & Company, a Miami-based law firm that provides legal advice and strategic consulting for the modern business, the entrepreneur, the free-thinker and those looking for something outside the box. With a knack for the creative and an entrepreneurial attitude, Christopher specializes in business law, intellectual property and corporate transactions, assisting private clients and corporate entities to establish and expand their businesses domestically and abroad. His experience allows him to create value for his clients by using resourceful structuring techniques to help minimize unnecessary costs and risks. Get more info on Christopher and his law firm here.
Copyright Law 101
If you're a creative working in the digital space, it's highly likely that at some point in your career, you'll find yourself on at least one side of copyright law questions. Situation one: You regram a photo and tag the source, yet suddenly the owner is claiming copyright infringement and asking you to remove the post (or worse). Situation two: You spend hours/days/weeks working on something, only to see it pop up in other places without credit, or even credited to someone else. To find out what to do in these situations—and how to avoid them in the first place—we got Annette Stepanian, an attorney with a focus on helping creative entrepreneurs set a legal foundation for their business, to answer our copyright law questions.
If you're a creative working in the digital space, it's highly likely that at some point in your career, you'll find yourself on at least one side of copyright law questions. Situation one: You regram a photo and tag the source, yet suddenly the owner is claiming copyright infringement and asking you to remove the post (or worse). Situation two: You spend hours/days/weeks working on something, only to see it pop up in other places without credit, or even credited to someone else. To find out what to do in these situations—and how to avoid them in the first place—we got Annette Stepanian, an attorney with a focus on helping creative entrepreneurs set a legal foundation for their business, to answer our copyright law questions.
Q: Is a regram on Instagram considered copyright infringement?
The short answer to a very long explanation is “yes- a regram on Instagram could be considered copyright infringement.” But you might think, “I’m sharing someone’s photo as a compliment. I’m giving them more traffic and exposing them to my audience. Surely they won’t mind.” Sorry, but the law doesn’t care if you’re being nice. Under U.S. copyright laws, a copyright is a form of protection given to the author of published or unpublished “original works of authorship” which prevent the unauthorized use of another’s work. When you regram another’s copyrighted work without permission, you’re infringing on his/her copyright.
In fact, Instagram’s Community Guidelines caution: “[r]emember to post authentic content, and don’t post anything you’ve copied or collected from the Internet that you don’t have the right to post.” See Instagram’s . By using Instagram, you agree to its Terms of Use which specifically state that by using Instagram you are representing that the content you’re posting does not infringe on the copyright and other intellectual property rights of third party’s.
It’s a common misconception that linking to the source is enough to protect you from claims of copyright infringement.
tweet this
Q: Is a photo credit with a link to the source enough?
It’s a common misconception that linking to the source is enough to protect you from claims of copyright infringement. Giving credit and getting permission are two different things. Linking to the source is not enough because 1) the source you’re linking to may not be the one who owns the copyright and 2) linking does not mean that they have given you permission to use the photo.
Q: What do you do if you don't know the original source of a photograph?
For images, I recommend doing a reverse image search using Google Images or Tin Eye. With these online services, after you upload an image into their search bar, you’ll receive results of similar images available on the Internet. With a little investigation, you can probably locate a copyright notice on or near the image to identify the name of the copyright holder. You can also conduct a search of the Copyright Office catalogs or for a fee, have the Copyright Office conduct a search for you. Once you know who the copyright owner is, you can locate them and ask permission to use the image. Be prepared to let them know how you intend to use the image. Get their permission in writing and save it for your records.
Because copyrights are a bundle of rights that can be transferred or licensed to others for various uses, don’t assume that the photographer of the image is necessarily the copyright owner. For example, let’s say you’re writing an e-book and you want to use a specific photograph for the cover of your book. You may contact the photographer to find out that she sold her rights to the photo to someone else, who has the exclusive right to publish her photography.
If you can’t determine the copyright owner, cannot get permission, or don’t want to pay for a license to use the photograph, then it might be best to use a free image under a Creative Commons license or purchase stock photography. You may also want to limit your use to works that are in the public domain. The public domain consists of works that are not protected under copyright laws, meaning that anyone can use the work without obtaining permission from the author or their heirs.
Q: What is the potential recourse for posting an image that didn't belong to you?
If an owner of a copyrighted work learns that you are using their protected work without permission, the copyright owner has the right to take you to court and seek monetary damages as well as injunctive relief (i.e. get a court order preventing you from using the work). Whether someone will actually do so, is a different issue. However, it is always best to get permission from the copyright owner before using the work .
Q: How do you file for copyright on a blog, specifically? Do you have to file each post separately?
According to my conversations with representatives at the Copyright Office, you can register your blog as part of a compilation. That means that you don’t have to register each and every blog post separately. You can compile a series of blog posts together and register them as a group. Online content is still a rather new medium and the copyright laws haven’t caught up to reflect the world of online publishing. Before registering your blog posts, inquire about the registration requirements with the U.S. Copyright Office.
Fortunately, registering your copyright with the U.S. Copyright Office is rather simple and can be done online or with a paper application. You need to complete an application form, pay a filing fee, and submit a nonreturnable copy of the work being registered with the Copyright Office.
Note, however, that publishing a work, including a copyright notice such as (© 2015 Jane Doe) or registering a work with the Copyright Office are technically not required in order for your copyright to be valid. This is because copyright laws protect your work the moment it is created and fixed to a tangible form. Although the use of a copyright notice is no longer required, it is beneficial and easy enough to include one. A copyright notice informs others that the work is protected under copyright law and indicates the copyright owner and the year of first publication, thereby preventing an infringer from claiming that they didn’t know the work was copyrighted.
Registration is also not required, but recommended for a number of reasons. First, it creates a public record of your copyright. In the event there is ever a dispute about who owns the copyright, the registration can support your case. Second, U.S. copyrights must be registered before filing a case in court. If you register your copyright within five years of publication, the fact of registration establishes a presumption that the copyright is valid. Also if you want to claim statutory damages or you want a shot at attorney fees, registering the work prior to infringement is essential.
© 2015 Annette Stepanian
Annette Stepanian is an attorney and creative business owner who helps creative professionals and entrepreneurs lay a legal foundation for their business. To learn more, visit her website.
Disclaimer: This information is for educational and informational purposes only; it is not intended as and does not constitute legal advice and does not create an attorney-client relationship between you and the author. You should not act, or refrain from acting, on the basis of information provided here without first consulting legal counsel in your jurisdiction.