Real Housewives star Bethenny Frankel has lost millions because she could not read a contract. And it was something seemingly simple–checking off a box. Frankel had to decided how she wanted to be paid, either as a LLC or an S corp. She checked S corp. “And it ended up costing me millions of dollars,” she says. This experience made her realize that because she could not afford an attorney at that time, she needed to learn how to read her own contracts.
By the way, an LLC is similar to a corporation regarding limited liability, a partnership regarding the flexibility of dividing profit among the owners. It can be treated as a partnership or as a corporation for federal income tax purposes. An S corporation meanwhile is a special type of corporation created through an IRS tax election. Most experts recommend small businesses go the LLC route because it’s easier and cheaper, among other pluses.
You can avoid some of the same mistakes Frankel made if you too can not afford a lawyer. But beware reading contracts aren’t easy. Do some research. And always read the fine print.
“Look specifically at the clauses regarding the obligations of the parties. Look at who is required to do what (often at the beginning of the agreement). Make sure it makes sense and passes the smell test,” says attorney Deborah Sweeney, CEO of MyCorporation. Make sure you understand your own responsibilities. “Does the explanation adequately describe what you anticipate offering to the other party? Is the description of the other party’s responsibilities what you discussed?” suggests Sweeney.
The contract should also include an end date, so look at the termination clause. “How long is the contract in place for? When it ends, are there any ongoing responsibilities?” asks Sweeney.
It’s a good idea to bone up on legal terms. “Many contracts have very routine language for clauses, so if you pull up some samples (just type in the title of the contract and many samples will come up on Google), you can compare the standard language,” explains Sweeney.
There should also be a section in the contract about “dispute ‘provisions.” What happens when there is a dispute under the contract? “Every contract should have a series of provisions that will clearly state what happens if there is a dispute,” explains Mark A. Bross, attorney & counselor at law and owner of Bross Law, LLC. “The provisions can differ from contract to contract but should include: Choice of Law (what state’s law applies to the contract); Choice of Forum/Arbitration Provision (specifies where a lawsuit needs to be brought in the case of a dispute); Limitation of Liability/Remedies (limits the liability of one or both parties and specifies what damages can be recovered in a lawsuit).”
If you just can’t make heads or tails of parts of the contract, try a free attorney help site. Bross suggests Avvo.com, Lawyers.com, and Justia.com. Bross points out, “Attorneys will answer the questions for free and often you can get multiple answers which will provide confirmation regarding the answer. These can be pretty useful and you can get some good advice.”
