Business Attorneys Are a Form of Indemnification

How many times do you agree to a company’s terms of service or sign an agreement without actually reading what you’re signing? While you may be willing to simply click the button and agree to the terms of service to create your account with Amazon and watch that movie you’re anxious to stream, the same attitude can cost your business more than you could imagine.

One of the most important aspects of owning your own business is protecting yourself from damages caused by other people. An experienced business attorney can help you protect your business and assets, creating a shield through carefully constructed language.

Let’s say you own a hotel and you’re having a contractor come in to do some work on the lobby and the contractor’s ladder falls, taking out a chandelier and injuring a guest. The contractor would be responsible for the damages, right?

That all depends on what kind of indemnification clause you agreed to in the contract you signed. I don't know how many times I have had clients come to me with contracts they’d signed without reading or understanding them, leaving them open to significant loss caused by the negligible hands of others.

In the hotel example, let’s say the contractor’s contract indemnified him, his employees and his company so that any damage done by his crew was the responsibility of the hotel. A contract constructed this way basically gave the contractor a get out jail free card with the hotel. The hotel would not only be responsible for the damages but liable for any civil suit brought by the guest. Without proper indemnification, you can be liable not only for the damage caused by the contractor, but also medical bills and other provisions if anyone is injured.

Properly constructed contracts that provide clearly spelled out indemnification protect you and your business from other people's mistakes. I recently negotiated a very favorable contract for a company that leases trucks for film productions. The contract is worded in such a way that if anything happens to that vehicle that is not the sole fault of my client, the film company pays 100 percent of the damages.

Should the film company that negotiated the lease with my client have negotiated for better terms? Yes. Did they? No. I was able to get a very positive provision in my client’s contract that shields his company from risk. Indemnification and contract negotiation require the skill of an experienced attorney. It's important as a business owner to make sure your rights and interests are properly represented and protected.

The law is a complex animal, and too often people try to take on legal contracts and negotiations themselves without the help of lawyers. This leaves them open to costly mistakes and manipulation by others who have the legal knowledge. Indemnification is only one aspect of contract negotiation, but it is an important one. Think twice before creating a contract yourself (or signing one you don’t understand), because it could lead to significant costs down the line.

Your Legal Entity Is the Life Jacket of Your Business

Living in the Seattle area, it’s probably not too surprising to discover that I have a boat. I love owning a boat, but one thing about living on the Sound that I’ve learned is that there’s a lot of prep that has to be done before the boat gets launched. The same thing is true about launching a business.

There’s more to consider when launching a new business than what the name should be, and a lot of the decisions you make about the business should be made before you start. One of the most critical decisions you’ll make about your business is what kind of legal entity to create. It can be very confusing. Many calls I receive for help are from people who are half-way through trying to set up their business using an online service like LegalZoom and they suddenly realize just how complicated the matter can be.

Everything from how you handle banking to how you are taxed will be affected by the type of entity you create, so choosing the right type for you and your business is crucial. In the coming months, we’ll explore the advantages and disadvantages of different types of legal business entities in more detail.

Business Types

There are several different options you have when forming your business. Which you choose depends entirely on the needs of you as a person, the needs of the business, and the number of people involved in the ownership of the company. There is inherent risk in operating a business, but choosing the right entity formation can help minimize your risk.

Sole Proprietorship. A sole proprietorship is the simplest and the least costly to create. However, it does not offer any protection for personal assets against risk. Basically, the individual is simply operating under his or her own name or using a business name for doing business by filing a DBA form with their county clerk. The individual owns and operates the firm, assumes all the debt and liability of the firm, and files taxes using his or her own social security number at the end of the year.

Partnerships. A partnership is similar to a sole proprietorship. It is easy to form, with minimal start up costs. The only difference is that two or more people come together to form the business and agree to work together as co-owners of the business, usually under a partnership agreement or contract.

Limited Liability Corporations. Limited liability corporations (LLC) have become the most popular form of business entity, combining the strength of a partnership with the protection of a corporation without assuming the corporate tax structure. The terms of an LLC as an entity are governed by state statute, so laws will vary from state to state.

C Corporation. A C corporation is so named because it is governed by subchapter C in the IRS code governing corporations. A C Corporation files taxes as an entity and must have shareholders who elect a board of directors to make business decisions. The risks associated with a C Corporation are minimal compared to the other forms of business, but the costs associated with start up can be quite high.

S Corporation. To overcome the singular disadvantage of a C Corporation, in which both the corporate entity and the individuals who share in its profits are taxed on the same income, an S Corporation can be organized. The organizational structure of an S corporation is similar to that of a C Corporation, but in an S Corporation, the members can elect to be taxed individually for the profits generated by the business rather than be required to pay corporate taxes. The S Corp—as well as the Limited Liability Entity—has the added benefit of providing the owners savings on Self Employment Tax.

The forgoing information should be considered informational only and not construed as legal advice. Before selecting a business entity, a person should consult an attorney in his or her jurisdiction.