What Every Freelancer Should Know About Liability

September 25, 2012

This is the second post in a series of legal articles written by FreshBooks customer and lawyer Nellie Akalp, who is the CEO of CorpNet.com – an online legal document filing service. 

Some businesses seem like naturally risky professions. If you run an in-home daycare center or a heli-skiing business, you’ve probably thought about liability issues. But what about professions like being a freelance social media community manager, app developer, graphic designer, or writer? It’s hard to imagine that sitting behind a computer at the local coffee house can put you in any danger of a lawsuit.

While managing a blog is exponentially less risky than running an amusement park, you still need to be aware of your personal liability. No matter your industry, things can happen.

Liability Scenarios To Consider

For example, a freelance writer might accidentally copy from an article he saw on the Web. An app developer could be sued for patent infringement. An unreasonable client may decide to sue you for breach of contract. Or a major client or advertiser might fail to pay you, so you can’t meet your own obligations.

Yes, these are all worst case scenarios – and there’s no reason to start panicking. There’s a slim chance your business will ever be sued or run into problems. However, as a freelancer or contractor, it’s your responsibility to protect yourself from these scenarios. Here’s what you need to know about minimizing your risk.

Separating Personal and Business Liability 

If your business does not have an official business structure, this means there’s no separation between your business and you. If you’re sued as a sole proprietor, you’re sued personally, putting all your personal assets at risk.

Even if you’re just starting out and don’t have many personal assets to worry about yet, you still should take note. In the U.S., creditor judgments can last up to 22 years. This means that if you’re sued today, your assets may be vulnerable for up to 22 years. A lot can happen in that time.

Formalize your business with an “Inc.” or “LLC”

There are some simple steps you can take to separate your personal and business finances and minimize your risk as much as possible. Both the LLC (Limited Liability Company, available in the U.S.) and Corporation business structures shield the owner’s personal assets from the liability of the company.

This means that once your business is incorporated (whether you form an LLC or Corporation), it now exists as its own business entity. As a result, the corporation or LLC is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from the business.

Unless your business is particularly complex or you’re dealing with millions of dollars upfront, you should be able to incorporate or form an LLC for your business online without needing to hire an attorney. If you’re a freelancer in the U.S., it’s typically better to incorporate in the state where you actually live or have a physical presence. In particular, the LLC is great option for the small business, since it protects the personal assets of the business owner without the paperwork and formalities of a corporation.

Know your personal liability

If you incorporate or form an LLC for your business, you are taking a critical first step to minimizing your personal liability. However, don’t assume that this step alone will unconditionally protect you from personal liability in all cases. Whether your business is a corporation or sole proprietorship, there are several circumstances where you can be personally liable, including:

  • You personally guarantee a loan for your business: This scenario is quite common as banks typically require a personal guarantee until your business builds its own business credit.
  • You commit a crime or operate your business illegally: This is pretty straightforward: a Corporation or LLC won’t protect you if you break the law.
  • Your actions injure someone: For this reason, many professionals (i.e. doctors, drivers) take out a professional liability insurance policy to protect against malpractice or negligence claims.
  • You do not operate your business as a separate entity: If you commingle your personal and business finances (i.e. you use the same bank account for both), your “corporate shield” can be pierced and your personal assets are vulnerable.

The bottom line is that no matter how small your business may be, you should take your business and personal liability seriously. Incorporating or forming an LLC can be an essential first step, followed by some common sense. Like so many other things in business matters, a few proactive steps can help you avoid stress and financial difficulties down the road.

about the author

This is a guest post for the FreshBooks blog. FreshBooks is the #1 accounting software in the cloud designed to make billing painless for small businesses and their teams. Today, over 10 million small businesses use FreshBooks to effortlessly send professional looking invoices, organize expenses and track their billable time.