By Dawn Witzke
Do you dream of filing for bankruptcy? Or of having your bank accounts frozen and then drained of every cent?
Maybe you’d like to live in a cardboard condo under a bridge somewhere?
If you’re not taking action to protect yourself and your freelance writing business, those scenarios are exactly what could await you if you get sued and lose.
I know, you don’t want to hear it. I understand. Writing should be all rainbows and sunshine. However, freelance writing is a business. And like any business, it has risks.
There are crazy people out there who are just looking to cause trouble, and an unprotected writer is an easy mark.
So before you run across one of the many sue-happy crazy people, take these three steps to cover your…um… assets.
Step 1: Avoid a lawsuit
Sounds easy enough, doesn’t it?
It can be if you follow a few general practices. There is still that chance some nut will sue you, but their chances of winning will be greatly reduced.
- Always work with a contract: Contracts are simply verbal or written agreements that detail the obligations of each party. A contract does not need to be a formal document drawn up by an attorney. It can be a handwritten note or an email. Having a written document is protection against misunderstandings about the project, deadlines and payment.
- Communicate, communicate, communicate: You can derail potential issues in advance by keeping an open line of communication with clients. Mistakes or miscommunications can be corrected before they become a problem. If a client turns out to be a nut after you’ve already accepted the assignment, put all communications in writing. Those emails or letters will provide support if you land in court.
- Be ethical: This shouldn’t need saying, but some people try to take short cuts in this area. Don’t lie to clients and don’t try to cheat them. Don’t make stuff up or rely on a quick Google search when you’re writing an article — find an expert and quote them. Be upfront and honest when you make a mistake. It is far better to try and renegotiate the terms of a contract than it is to breach the contract, then try to smooth it over after the fact.
Step 2: Limit your liability
The most secure way to protect yourself is to put a legal barrier between your personal assets and your business assets by creating an LLC or corporation.This barrier protects your personal assets from creditors in the case of a lawsuit or business failure.
Work with your accountant or lawyer to determine which entity will work best for your situation.
Remember, for the legal protections to work as intended, you must fulfill the obligations under your state’s laws for whichever entity you set up.
- Sole proprietorship: The sole proprietorship is the most common business entity used by freelancers. It is easy to set up and all income is reported on the owner’s individual tax return. The downside is that it offers no liability protection at all. As a sole proprietor your personal assets, including your house, your car and the priceless heirloom you inherited from grandma are at risk if you are sued. It doesn’t stop with just your assets, either. If you’re married, your spouse’s assets and income are in jeopardy as well. Avoiding lawsuits and covering yourself with insurance, however, can minimize the financial risks of operating as a sole proprietor.
- LLC: A limited liability company is a non-corporate entity that has some of the advantages of a corporation, including creating a shield between your personal assets and any business lawsuit. It also offers flow-through tax benefits (you only pay tax once on business income, on your personal tax return). Single member LLCs are simple to set up and don’t require a separate tax return for the business. However, the member has to pay self-employment taxes like with a sole proprietorship.
- Corporation: A corporation is a legally separate entity from the shareholders with the same liability protection as an LLC. However, setting up a corporation is more complicated, and there are strict rules of governance for this business form.
Step 3: CYA with insurance
A few dollars spent now on insurance can save you a lot of time, money and vodka if you get sued because you made a mistake or you couldn’t fulfill your contract. Insurance takes away some of the financial risks of doing business.
There are three types of insurance that every freelance writer needs: liability, property and medical.
- Liability: Liability insurance covers you against legal action related to your work. If you make a mistake that causes damage to your client, the insurance company, rather than you, foots the bill. Having this insurance can mean the difference between keeping your business open and filling for bankruptcy protection.
- Property: You may be thinking that you don’t need property insurance for your business because you work out of your home and already have homeowners insurance. In some cases, homeowners insurance won’t cover business assets that are stolen or damaged. Check with your insurance provider to find out if you need an additional rider to protect your computer and other equipment used in your business.
- Medical: You might be wondering, “What does medical insurance have to do with my business?” Research shows that people without medical insurance wait longer to go the doctor when ill. An illness could put you out of commission for days or weeks or permanently. Illness results in lost productivity, which is money out of your pocket. It can also set you up for a breach of contract suit. If you’re in the U.S. and have low income, check your state insurance pool — you may qualify for subsidized coverage.
I know — it’s not as sexy as landing the next big client. But a few prudent business moves can lay the foundation for a more secure, successful freelance writing business for years to come.
Are you protected from business mistakes? Tell us your situation in the comments.
Dawn Witzke is a legal and business writer based in Iowa.