What to Know and Other Legal Tips
Contractors come in many varieties. Some are general contractors; others have a specialty. Whatever the nature of the business, most everyone can agree that Tim “the toolman” Taylor remains an inspiration – especially for those of us who know laws better than tools.
One of the best episodes of Home Improvement features Tim’s son Randy joking that “My dad’s been in the hospital so much they gave him a preferred customer card.” Tim cleverly responds, “Yeah, one more head injury and we win a trip to Hawaii.”
Besides the hilarity of Tim constantly injuring himself, there is something close to home about the banter. Contractors deal with dangerous situations and sometimes injuries, hopefully ones not requiring high dollar lawyering. Fortunately, there are ways to mitigate risk.
This article reviews legal tips contractors should employ when drafting contracts and setting up a business plan. Nothing beats hiring a good lawyer, but these tips, along with using well-crafted templates like those found on draftedlegal.com, will save you time and money.
Licensing, Certifications, and Insurance
First things, first: become licensed and get some insurance.
Becoming a contractor requires hard work, experience, and meeting the qualifications. It is crucial the necessary requirements are met. Once they are, make sure you work with a trusted insurance agent to ensure your insurance covers your work. Licenses and certifications will be required for most insurance, so button it up. This is not the place to cut corners. If you cannot procure insurance, re-evaluate your plans because it might not be such a swell idea to proceed without it.
If you decide to proceed with a job for which you are unqualified and you are uninsured, you will end up paying the price. Regulatory agencies do not let people slide by without meeting all requirements. The fines, lawsuits, government oversight will shut you down, fine you, and you could end up in a costly and protracted lawsuit. It’s always best to follow state regulations and buy good insurance.
LLC and Entity Formation
Proper entity formation is crucial to long term success and risk management. Contractors who fail to set up a proper business form are essentially operating as sole proprietors, which begs disaster. Sole proprietors don’t have liability protection, don’t have tax options, and may not have the ability to raise capital or borrow money. The big thing, however, is the lack of liability protection.
LLCs work beautifully for most contractors in most states. If you have a local lawyer or Certified Public Account tell you otherwise for some particular reason, follow his or her advice. Otherwise, you should feel pretty good about using an LLC.
To obtain an LLC, most business owners use a lawyer or similar service, but you can do it yourself. It requires filling out the appropriate forms, paying a fee, and setting up a registered agent. Note, filing an LLC is done through your state. When you set up an LLC, you should also secure a federal tax identification number through the IRS.
But wait, there’s more…Once you have registered with the state, you’ll need a local business license as well. It’s typically an easy process – fill out a form, pay a fee, and drop it in the mail or pay online. If you don’t do it, the city or county may shut you down and charge you fees.
Contracts for Contractors
You promise to build, and the client promises to pay. Within that arrangement, the elements of contract law are met – meeting of the minds, offer and acceptance, and the promise of consideration. More specifically, a contract is defined as “An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” (Blacks Law Dictionary, 1996). Technically, a contract can be scribbled on a napkin over coffee one morning, but if you’re serious about your business, you’ll take the time to draft a well-written agreement.
The most important aspect of crafting a good contact is nailing the terms of payment and scope of work (excuse the pun). The clearer, the better. There should be no ambiguity with regard to payment, price, and the timing of payment. Likewise, the scope of the project and a detailed description of the work to be performed should be clearly stated. Neither have to be long or confusing, but they should be clear. For example, “You pay 50% upfront and 50% on completion in exchange for XYZ Contractors performing the following: building a screened porch in accordance with the plans, according to these dimensions, using this flooring, this screening, this wood, at this time, for this price.”
In addition to defining the project and payment terms, contracts should include other provisions such as waivers, handling of employees and subcontractors, provisions for resolving disputes, penalties for breach of contract, and indemnification terms.
Contracts, by the way, are not just between the contractor and the client. There are agreements with subcontractors, suppliers, banks, website designers, employees, and others. The basic tenants appl in each instance.
If you want to buy the agreements you need, click here.
Employees v. Independent Contractors
What’s an employee? It should be easy to understand who qualifies as an employee, but it’s not. Lots of ink has been spilled trying to easily distinguish an employee and an independent contractor.
Just because you call a worker an “independent contract” does not mean they meet the legal definition of independent contractor. Contractors and the construction business thrive off independent contractors, but the distinction between independent contractor and employee is not always obvious.
What is obvious is the host of reasons employers, especially contractors, want to label workers as independent contractors. You avoid employment taxes, insurance, responsibility, and many other advantages. Here’s the catch: the IRS, all layers of government, and lawyers know the tricks. Accordingly, you must know the rules and follow them or you risk running afoul and suffering penalties.
The South Carolina Supreme Court weighed in on the issue in Nelson v. Yellow Cab. Applying a four-point test, the Court stated the issue of whether or not a worker is an employee hinges on “a right to control the method and manner in which” a worker operates. Essentially, if an employer exercises the requisite degree of control over a worker, the worker is deemed an employee. Right of control means you are the workers sole source of income, you own the equipment or means of transportation, or that the worker reports to you. If he or she looks like an employee, acts like an employee, and is paid like an employee, chances are he or she is an employee.
Contractors might not think much about intellectual property rights, but it could be important, especially if you want to grow or sell your company. Intellectual property includes trademarks, copyrights, and patent rights (and trade secrets and others. ) Black’s Law Dictionary defines intellectual property as “A commercially valuable product of the human intellect, in a concrete or abstract form.” The most important intellectual property consideration for contractors is trademarks.
A trademark is a sign, design, or expression that identifies products or services from a particular source. A registered trademarks symbol is ®. The last thing you want to do is spend years using a name, slogan, logo, or symbol then get a nasty cease and desist letter from another company’s lawyer. Trademark infringement is something most companies take seriously, and they will go to great lengths to protect their registered mark.
First, determine if your company name, logo, or slogan is available. If it is, then apply to register it before someone else does – the cost will be around $1,000, but it’s worth it. To do this, visit the United States Patent and Trademark Office website.
Trademark registration ensures you are protecting your brand and have the tools to fight back if someone tries to steal your name, logo, or slogan.
Defamation comes with almost any business and contractors are not immune from it. Defamation is more than talking smack about another person. It’s about harming another person. To put a legal definition on it, the tort of defamation occurs when an individual harms the reputation of another by publishing false statements to a third party. Black’s Law Dictionary (8th Ed. 2004). Generally, the defamatory language must either lower the esteem of the defamed party in the community or deter others from dealing with the defamed party. Restatement (Second) of Torts § 559 (1977). When a cause of action for defamation prevails, the plaintiff is permitted to recover money damages for harm to his reputation. Erickson v. Jones Street Publishers, LLC., 368 S.C. 444, 464-465 (2006); Holtzsheiter v. Thomas Newspaper, Inc., 332 S.C. 502, 508 (1998).
In order to maintain a cause of action for defamation in most states (though they are all different), the Plaintiff must prove: 1) a false and defamatory statement concerning another; 2) an unprivileged publication to a third party; 3) fault on the part of the publisher; and 4) either actionability of the statement irrespective of a special harm or the existence of special harm caused by the publication. Holtzsheiter, 332 S.C. at 505-06; Restatement (Second) of Torts § 558. Defamation takes two forms: Libel and Slander. Libel consists of a publication in written or printed form, while Slander consists of spoken defamatory statements. Erickson, 368 S.C. at 464-65; Holtzsheiter, 332 S.C. at 508; Restatement (Second) of Torts § 568.
There are certain maxims worth noting: 1) don’t defame others, 2) if someone defames you, send a letter immediately, and 3) contact a lawyer should you have an issue. The most obvious problem these days is online. Often, ignoring it and moving on works, but sometimes people just don’t stop or truly harm your business interest – you’ll know it. That’s when you need to have an attorney help.
Partnerships Agreements and Operating Agreements
If you decide to operate your business with anyone else, then you are business partners, which means you need an agreement between the partners. Sometimes, one person puts in money and the other operates the business. Other companies might have three friends each putting in an equal share of money and doing an equal share of work. Any number of situations, partnerships, and arrangements are possible for small businesses.
One thing is certain, you need an agreement between partners. If your business is an LLC, this agreement is called an operating agreement. If you use a partnership, it’s called a partnership agreement (though most people call all agreements between partners, partnership agreements). And if you use a corporate structure, you have bylaws.
Here are some of the things your partnership / operating agreement need to include:
- Define who makes decisions
- Detail who owns what
- Capital contributions should be clearly stated, as well as future expectations
- Salaries and distributions should be well defined
- State specifically what happens when a partner leaves or dies
While there is no way to predict the challenges you may face as a contractor, there is a way to reduce the frequency of problems with partners. Make a plan and stick to it, reduce it to writing, and provide copies to all partners. Too often good companies fall apart from the inside out because of partnership disputes, which is something you may be able to avoid.
The 10 Mistakes to Avoid
Below is a checklist of mistakes to avoid. If you do nothing else, avoid these mistakes. Many of the ideas proffered above are contained in the following list with the addition of some seemingly obvious tips.
- Selecting the wrong form of business
- Poorly drafted Partnership Agreement
- Handshake deals
- Ignoring Intellectual Property protection
- Failing to pay taxes, timely
- Poorly documenting employee files
- Using a dated or terribly drafted handbook
- Confusing Independent Contractors and Employees
- Failing to respond to threatening letters
- Bad hiring and slow firing
Keep yourself protected with these tips and you may avoid needing a lawyer for many years. At some point you’ll run into someone wanting to make trouble and you will need to lawyer-up, but if you do these things you reduce your risk and maximize your business potential.