Ask The Experts: LLC Formation, Contract Templates

Monday, April 01, 2013

Q: We operate a fast-growing tutoring business with more than 20 tutors. Although we are still small, we’ve decided to form an LLC. This is an exciting time in our business, and we want to make the best choices regarding structure and entity. Does the NASE offer a step-by-step guide to help small-business owners make these difficult and important decisions?

A: A great resource for you is the NASE Startup Kit, which includes a summary discussion of each entity form. The Startup Kit is free for NASE Members and can

be downloaded from the website.

As you might guess, each entity form has pros and cons. The most effective entity form for your particular situation will depend on your specific facts and circumstances. My recommendation is to review the Startup Kit for its general discussion as a starting point.

Keith Hall, NASE Tax Expert

 

Q: I’m looking for a template for a contract. I work as an independent, 1099 contractor for a non-profit organization and need to create a contract for the work, compensation, reimbursement of expenses, etc.

A: As you might imagine, there are contract templates all over the Internet. I don’t have anything better. How can I say that? Anything I have may or may not fit your situation.

Let me instead give you some thought on what you need to include. First, you want language that will clearly set out what your responsibilities are and what the other party must do as a result. Since you are an independent contractor, the other party will not want to be so controlling and detailed that they make you an employee (which would cost them money).

Some key items to consider: When are you paid? How are expenses handled? What happens if either party wants out—how much notice do you get? Who provides the tools or computers? What is the term of the contract? What if something goes wrong? Do they defend you in a lawsuit? Are you included on their liability policy? Are they asking you to indemnify them if you make a mistake? Is there any guarantee? What happens if they don’t assign you the work? What if an “act of God” such as a storm makes the work impossible to do?

Most of the boilerplate you see in form contracts addresses these issues. The key is to understand what you are putting in the contract. If you are investing in equipment, I would be more careful about the term and perhaps seek some part of it in guaranteed payments. Also, as you evaluate the arrangement, if you are doing work only for the other party and no other clients, and your work is not overly specialized, evaluate if you are giving up too much by not being an employee. In short, after you describe the work, term, payment of expenses and payment for your work, think through the scenarios of what might go wrong and look at some of the phrases in existing contracts to come up with something. If you have a major investment, then having a lawyer at least review your work makes sense.

Rather than choosing the first form that pops up in your search results, make sure you understand the contract. It’s better to be simple and understandable than have something that looks official but is not what you want to agree to.

Mike Beene, NASE Legal Expert 

 

Get More Answers

The NASE’s small-business experts are here to help you understand the ins and outs of operating a successful small business. And access to these professionals is free with your NASE Membership!

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