5 Pitfalls to Avoid in Your Business Contracts
Running a business and being our own bosses has it's obvious perks, joys, and wonderful aspects to it, but it also comes with some confusing, less fun aspects. We've invited attorney Annette Stepanian here to share some insight with you on a very important part of our businesses: contracts! She's giving you 5 pitfalls to avoid when drafting you next contract, but first let's learn a little about her!
1. Name, school you went to, business and how did you fall into helping creative business with the legal side of their business?
My name is Annette Stepanian and I'm an attorney for creative entrepreneurs. I graduated magna cum laude from the University of Southern California with degrees in Business Administration (emphasizing in Leadership Studies) and Political Science. Upon graduation, I moved straight on to law school, ultimately landing my dream job at a national law firm in San Francisco where I practiced litigation for over five years. Although I love the intellectual challenges of the law, my life started to feel a bit, well, beige. I longed for more art and color in my life. So I took a leap of faith and started my own jewelry line - Confetti by Annette. As I grew my jewelry line I came into contact with more and more small business owners - photographers, graphic designers, or consultants, for instance. What I discovered were creative entrepreneurs flying by the seat of their pants when it came to understanding the law. Peers came to me seeking out legal advice about starting or running their own business. I saw an opportunity to merge my legal education with the creative community. Through one-on-one consulting, speaking at workshops, and easily understandable guides and templates, I now work with creative entrepreneurs to help equip them with the legal knowledge they need to confidently grow their business.
3. What hobbies do you have and what do you do in your spare time?
I am an avid reader and am happiest when I'm at a coffee shop digging into a new page-turner. I also recently got into hand lettering, which I find incredibly relaxing. My husband and I also love to travel and are always looking for new stamps to add to our passport.
4. What are a few common misconceptions about owning your own small business?
Misconception #1: You have to form an LLC or Corporation right away. Although the pros to forming an LLC or corporation include protecting your personal assets and other tax benefits, they can be costly to set up and to maintain. Depending on the line of business you are going into, your potential exposure to risk, your future plans for the company, and your personal assets, you may consider operating as a sole proprietor, at least initially.
Misconception #2: You don't need a contract. Granted there are select circumstances in which a contract is required to be in writing, in my book, running a business without a contract is a big no-no. Not only do contracts help clarify expectations between you and a client, but they also help cover your booty in the event there is ever a misunderstanding or disagreement with your client.
Misconception #3: Confusing copyrights with trademarks. I see a lot of confusion amongst creative business owners about the differences between copyrights and trademarks. Sometimes people use these terms interchangeably, however they are their own distinct set of laws and apply to different types of works. A copyright is a form of protection given to the author of published or unpublished “original works of authorship.” The copyright gives the owner of a creative work the right to keep others from the unauthorized use of the work. Whereas the purpose of a trademark, is to prevent customer confusion about products or services in the marketplace. It is also designed to prevent dilution of the goodwill of a brand. Trademarks protect the expression used to identify and distinguish a product or service in the marketplace, such as names, logos, slogans, and other commercial signifiers. Click here To learn more about the differences between the two.
I review a lot of contracts! More than I’d like to admit to. Here are some common and easy to fix issues I see in most small business contracts.
Parties to the Contract are Identified Incorrectly
A common error is to use the name of a person representing a party rather than the proper name of the party. For example, if your business is an LLC and enters into a contract with a client, make sure the contract identifies the LLC as a party, not you personally. If you sign a contract in your individual capacity, rather than as the authorized representative of the entity, you are personally liable under the contract.
The Parties to the Contract Don’t have the Required Authority
Under the law, if a party is under the age of 18 or not mentally competent, then they do not have the authority to enter into a contract. Also, someone who lacks authority to act on behalf of someone else may not be able to legally bind that other person or company. So make sure that the person who is signing a contract on behalf of an organization or entity has the authority to do so.
The Rights & Obligations of the Parties Under the Contract are Unclear
Pay close attention to what each party is agreeing to do and what rights they have or are giving up as a result of the contract. Carefully read the entire contract because rights and responsibilities are typically stated throughout the agreement. In many contracts, you’ll find what is called an Integration or Entire Agreement Clause, which states that the contract is the complete agreement between the parties. Whatever is in the contract constitutes the agreement between the parties, regardless of what else was discussed.
Not Identifying the Conditions Under Which the Contract Can be Terminated
Does the contract allow the parties to terminate the contract at any time, or does it require that the terminating party notify the other party in advance of its decision to terminate the contract? Does the contract terminate on a specific date or upon the occurrence of a specific event? Upon termination, do the parties have specific obligation they need to uphold? Know under what circumstances you or your client can terminate the contract.
Not Thinking Through How Disputes Will be Resolved
Although we’d all prefer not to think about it – disputes happen. That’s why it’s important to understand the manner in which conflicts will be resolved. Mediation, litigation, or arbitration are three common dispute resolution options, each with their own pros and cons. Make sure you think through each of the options and select one that best fits your business. Learn more about the various dispute resolution options here. Want more tips? Click here to get your free contract review checklist with additional issues to address before you send out your next contract.
© 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 www.annettestepanian.com.
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.