Liability: how to limit yours / Part II: A business entity protects mainly against breach of contract disagreements

The information in this article cannot take the place of personalized legal advice from your own lawyer. NASW accepts no responsibility for decisions made by any person on the basis of the content of this article.

Setting up a business entity such as a limited liability company (LLC) or a corporation sets up a division between you acting as a person and you acting as your business for contractual agreements. It also provides some legal framework for arguing that your money and your business' money are two separate things (this is, of course, only if you are very diligent in keeping those accounts and transactions separate and have all the proper documentation).

As Anthony Elia, an attorney who specializes in contract law for writers and others, explains, the protection that a business entity affords you is mostly in the realm of "breach of contract" disagreements, those conflicts that arise between you and one of your writing clients (publisher, editor, etc.) about whether you have fulfilled the terms of the contract. Entering into the contract as a business entity, rather than as your personal self, limits what they could sue for. In other words, they cannot get Kendall Powell's personal house in the Hamptons for breach of a contract signed with Kendall Powell, President, Kendall Powell SciWriting, LLC.

However, Elia says, you must be very careful that the language of the contract makes it clear that it is a contract between the publisher and Kendall Powell SciWriting, LLC.

He notes, "In order to be protected, it is vital that the language of the contract clearly and unambiguously states that contract is between the business and the other party. For one thing, this means that you must execute a contract in your official capacity, as a representative of the business with your title (e.g., President). Second, the introductory language in the contract must also identify the business — not you — as the contracting party. Note that people may object to entering into a contract with your corporation rather than you personally and may ask that you add a signature in your personal capacity under the corporate signature block. If you agree, you will receive no protection from the business entity for a breach of the contract."

Setting up an LLC in my state of Colorado was very simple. It cost me $50 (a state fee) and literally consisted of me filling out two online forms to get my Articles of Organization for my business and to get from the IRS an Employer Identification Number (EIN) for tax purposes attached to my LLC's name. Setting up an LLC does not have to change your tax status, as you can set it up to "pass through" and file your taxes as you did before as an individual sole proprietor. The Articles of Organization allow you to set up separate LLC bank accounts. Setting up a corporation is more involved and has some definite tax implications. Both Elia and I strongly recommend that you contact a certified tax professional when setting up a business entity. Also, state laws and fees vary greatly; Elia says it costs $1,200 to set up an LLC in New York state because of an advertising requirement!

Setting up a business entity really only offers protection in the case of breach of contract. It does not protect you from things that involve torts (i.e., "wrongs") that you commit, such as libel, copyright infringement, or other things that depend on personal choices that you have made. Elia likens it to driving a car for a pizza delivery company. If you are at fault for hitting a pedestrian while working for the company, you are still personally liable for the bad decision that led to that accident. The pizza company usually indemnifies and defends the driver, but that doesn't mean that the driver is not responsible to the pedestrian. So where your company has no assets to bail you out, you are left vulnerable when you personally commit an act that causes legal damage. You cannot separate yourself from the business in terms of this type of liability.

My thanks to Anthony Elia for his time and help in creating this article. He can be reached at:

The Law Office of Anthony N. Elia, P.C.
185 Prospect Park SW, #607
Brooklyn, New York 11218
ph: (718) 854-2361
fax: (718) 854-1025
www.anelaw.com

Kendall Powell is a freelance science writer who writes for Nature, the Los Angeles Times, and Howard Hughes Medical Institute, among others. She lives in Lafayette, Colorado, with her husband, daughter, and two Labradors. She can be reached at Kendall2@nasw.org.