Hey there, welcome to another episode of the podcast! In this episode, I had the pleasure of interviewing Braden Drake, a small business and tax attorney who specializes in helping online business owners with legal and tax issues.
We dive deep into the layers of protection that online business owners need to consider, from getting started to scaling up. Braden shares her expertise on the importance of insurance, contracts, LLC formation, and paying quarterly taxes.
In this episode, you'll learn:
- The importance of having insurance for your online business, and the different types of insurance you should consider
- How to properly structure your business as an LLC, and the benefits of doing so
- The benefits of filing taxes as an S Corp, and how it can save you money
- The importance of having contracts in place with clients and contractors, and what to include in those contracts
- How to properly classify workers as employees or contractors, and the legal implications of misclassification
Braden also shares some great resources for online business owners, including her Contract Club, podcast, book, and website where you can learn more about legal and tax issues.
If you're an online business owner, this episode is a must-listen! Tune in to learn how to protect your business and stay on the right side of the law.
Links & Resources:
- The Art of Online Business website
- DM me on Instagram
- Visit my YouTube channel
- The Art of Online Business clips on YouTube
- Full episodes of The Art of Online Business Podcast on YouTube
- The Art of Online Business Podcast website
- Check out my Accelerator coaching program
Braden Drake's Links:
- Visit Braden's website
- Visit Braden's LinkedIn
- Follow Braden on Facebook
- Follow Braden on Instagram
- Follow Braden on TikTok
- Follow Braden on Pinterest
Please support the podcast by giving an honest Rating/Review for the show on iTunes!
So I've kind of come up with this concept, I call it the layers of protection for your business. So I talk about how layers of protection are like layers of clothing. Like if you are a naturally cold person, which, and this analogy would be like a risk averse person, you're gonna want more layers. If you have employees, you want more layers, really anything that opens you up to more risk. So I also like to talk about the stages of business, right? So as you progress through the stages, you're gonna need more layers. But stage one business owners, I consider these folks like zero to 30 K in revenue. It's like pretty arbitrary, but I say the essential, essential layers are contracts and insurance. Like always start there. And that's like, those are the two things that everyone needs to have for sure.
Hey, hey, what's up my friend? Welcome to today's episode of the podcast Rick Year. And we're gonna be talking about the legal side of running an online business. This is a topic that we haven't covered in quite some time here. And let's face it, the legal side, the tax side is never really a fun topic to talk about. I don't think. You might be like, oh my God, I love talking about this stuff. But unfortunately it's a topic that so many of us don't look at when we are running our online business until it's too late. Until we need something or something happens, God forbid, that you know, we need some sort of legal protection or, or what have you. And so I wanted to bring my guest on today, Braden Drake, to share with you what he likes to call the layers of legal protection for each stage of an online business.
And we're gonna talk about, you know, the basic stuff that you really need to be thinking about in terms of your business from a legal perspective, contracts, liability, insurance, LLCs, trademarks, copyrights, and your ip, all that different stuff. We don't go super, super deep on any one thing because I wanted to make sure that we covered sort of, well what I just mentioned, depending on what stage you're at in your business, what types of things that you do you need to be thinking about in terms of, you know, the legal side and getting legal protection for your online business. And Braden is a small business and tax attorney and he helps online business owners like us get our legal and tax stuff in line and make it legit for us. He does it through one-on-one services, online courses. He has a book, he's got a podcast and he also has a, what he calls the contract club.
Now check this out, the tagline of it, all the contracts that you need, all in one place, all for one price. Just pay the cover and you're in for life. And check this out, it's $30 and you get all the contract templates that you need. And so I am an affiliate for it. I'll give you the link here. It's just very simple. Rick mulready.com/braden, B R A D E n, Rick mul.com/braden. And it'll take you over there 30 bucks to get access to all contract templates. And he's got videos there walking you through on how to use them and so forth. So definitely check that out. Really good conversation with Braden Drake. So without further ado, let's go hang out and talk some legal side of running your online business. Braden, welcome to the podcast. How you doing today? Hi,
Yeah, thanks for having me. It's good to have
You. We haven't talked to the law , the legal side of online business here in a very long time. And I just love to get different perspectives on how we as online business owners really should be thinking. Mm-hmm. about the legal side, because I think this is one of those things, and you obviously can, I'm sure speak to this until, you know, forever. This is one of those topics that we don't normally pay any attention to until we need it Uhhuh . And it's almost like too late at that point. Yeah, right. Yeah.
So yeah, I mean it's kinda, it's kinda like healthcare in that way, right? Like yeah, totally prevention, yeah, like prevention is always gonna be the best. But if you, you know, if you wait until you're really sick, then it's gonna be more expensive and it's gonna be more stressful and more all of that.
Yeah. So what is your background? I mean, and you really specialize in online business, right?
Yeah, for the most part. I, I kind of have my toes in a few different niches, but as far as the industries I serve, I really started out working with creative, I, I call them creative based service providers. Mm-hmm. . So I'm probably most well known in the wedding industry actually with photographers. But I also work with a lot of interior designers. But being that I'm also a course creator, I've gotten pretty well known in the online space as well. So I would consider online business owners, creatives. So it all kind of fits. Totally.
Yeah. It's kind of like one of those all encompassing terms that we, that you know, the bro the umbrella that we fall under. Now, one thing I do want to talk about today, we won't start off this with this, but you know, as a course creator, my understanding is that you have a, we'll call it a small offer that just crushes it
Yeah, it does extremely well. So I want to, I do want to talk about that here. You know, a as we get into this conversation here, there's a lot of different levels of business that that listen to the show here. Primarily they're more established online businesses. But one thing I do want to talk about is sort of the, when people are early stage in their online business and then as people progress through, as the business grows, they're building, you know, bringing team on and so forth. What are some of the, like the, the legal elements I guess we'll call it, that we need to be thinking about as online business owners from sort of getting started with the business all the way through as we're scaling up into, you know, seven figures? Multiple seven figures?
Sure. So I, I've kind of come up with this concept, I call it the layers of protection for your business. So I talk about how layers of protection are like layers of clothing. Like if you are a naturally cold person, which in this analogy would be like a risk averse person, you're gonna want more layers. If you have employees, you want more layers, really anything that opens you up to more risk. So I also like to talk about the stages of business, right? So as you progress through the stages, you're gonna need more layers. But stage one business owners, I consider these folks like zero to 30 K in revenue. It's like pretty arbitrary, but I say the essential essential layers are contracts and insurance. Like always start there. And that's like, those are the two things that everyone needs to have for sure.
When you say insurance, this is something that is so seldom talked about, Uhhuh , tell us more about that.
Yeah, so it is, it is actually very topical for me cause I just interviewed an insurance agent on my podcast yesterday and it's like a lot like what I do, not that sexy of this topic, but I'll give you like a quick case study just to put this in perspective, right? So I have a client right now in the law firm and she's been hit with a potential $50,000 lawsuit for a copyright violation. Personally, I think it's kind of bogus. We won't go into details cuz confidentiality and all that. Sure. But at the end of the day, like I argue with the other person's attorney, they're both online business owners, I argue with the other person's attorney for a few emails, they're clearly not budging. And I'm like, okay, well we're gonna turn this over to my client's insurance because my client has really good professional liability, general liability insurance. So now her insurance is gonna pay for their own attorneys to fight this claim. Mm-hmm and a lot of online business owners we think about like slip and falls and physical businesses. We don't think about the potential risk we have, but sure it's huge and insurance is one of the most like cost effective investments you can make. So
I mean can we go to like our normal insurance agent that we have for like our house or car or whatever?
Yeah, possibly. Like my worker's comp is through my estate farm guy, but then when I needed malpractice insurance he had to send me somewhere else. Legal malpractice is a little bit more involved. Sure. And like run to the middle general liability. But yeah, for the most part they'll be able to help you. If not, then they can refer you to someone. But if that doesn't work, I always just recommend talking to your peers post on a Facebook group post on Instagram. Yeah. Like who has an insurance agent that really understands your business Because especially when it comes to this online stuff, they're gonna be like online courses, like through university, what are you talking about? Right? No. So you wanna find someone who, who gets it?
Is there a normal sort of coverage level that we should be looking at?
Yeah. I don't know. And I know
You're not insurance agent, but
Yeah. Yeah, that'd be a great question for the insurance broker as far as like kind of the policy cap to look for. Yeah. But it's gonna vary and, and that's gonna vary a lot also based on the size of your business and also what you're helping people with. So if you have a $50,000 offer for million dollar businesses, you're probably gonna want more insurance than if you have a $200 offer for brand new businesses on. Sure, sure.
Okay. So what would be sort of like the next layer, you know, of legal protection beyond that sort of arbitrary 30 K?
Yeah, so from there I say 30 K. Cause I think that's the point at which a lot of people have validated their businesses. Mm-hmm . So it's just, I, if you're not totally sure if you're in it for the long haul, like we don't wanna invest in a lot of stuff, but why don't you like know that you're in IT LLC or just business entities in general? And, and the story I always like to give for this is because it can be a little bit of a slippery slope to think about it just in terms of revenue. But I always say the point of an LLC is to protect your personal assets, right? If you ever get sued cuz it separates you from the business. So like Rick, I would ask you if you're Bill Gates and you just like decide tomorrow that you're gonna start a base jumping company, but it's not gonna make any money. Like are you gonna want an L L C?
Nope. Would you?
I would say yeah. Yes. Right. So kind of
Obviously legal is not my specialty, right?
Right. But like if you're at Bill Gates, the point is like your company might not be making money, but that's a business. Oh right,
Yes. Yes. And you already have a lot of assets. Sure, sure.
So you would want it. And then we always wanna plan for the future. So I think a lot of people also will say like, well I don't really have that many assets now. And it's like, okay, well if someone sues you and they get a judgment against you, they'll have years and years to enforce that. So are you planning on not having assets forever? Like you wanna think about your future self as well?
How does the L L C protect you? Like Yeah, so it's so on the surface I get it, but like how did it actually protect you?
So it's the last, it's basically the last layer of defense. So like I talk about in my courses and in my book I write about how an L forming an L L C is kind of like the process of mitosis and myosis, if you know what I'm talking about. Yeah. I don't really remember which one is which, it doesn't matter. But the whole point is that a, a cell can split into two, right? Mm-hmm , like I think we all know that at a base level. So when you form an L L C, your business separates from yourself, it becomes its own entity, its own person. That's why contracts need to be signed by the L L C. Your bank account needs to be owned by the L L C. So if someone sues your business, they're suing the L L C, they're not suing you. So this is why I say contracts and insurance are the first layers of protection. Mm-hmm. , because your contract is gonna determine what you're liable for. Your insurance is gonna defend you and hopefully pay out the claim. But if both of those kind of fall through, then the L L C is what kind of shields your personal assets from the lawsuit. So then someone can't put a lien on your bank account or they can't come after your personal 401k or your house or your car, all that kind of
Stuff. Gotcha. Okay. That makes sense. Now with the contracts, you know, there's ones that most of us think about, you know, like uh, independent CONT contractor agreement or contract mm-hmm. or something like that, which we'll talk about in a little bit here. What other types of contracts are we, should we be thinking about?
And you do sell those contracts by the way?
Yes. Yeah. So that's my low ticket offer I'm assuming you were referring to earlier. Yes, yes. So yeah, we sell those in a program called the contract Club tagline, all the contracts you need all in one place, all for one price, just pay the cover and you're in for life. My copywriter wrote that, I can't take credit, but it's $30 and it has dozens and dozens of templates in it. So that's kind of our, what are the ascension? The ascension model people call that. That's like our attraction offer.
How are you making money? .
I mean we Dori we do right? Because right. I, you know, basically what happens is like Rick, if you hired me and you said, Hey Braden, I really need like a new contractor agreement for my Facebook ad person. And I'm like, okay great. So I write it, you pay me to write it and then what I'll do is I'll templatize it. So I'll take all the personal stuff out of it, make it more general and then I put it in the contract club and everyone benefits. But I've also been doing this for five years. So I already had a lot of templates for me, when I say the offer is like killing it, we've sold like 1200 and about the year and three months that we've had it. So last year I made $30,000 on it. And for perspective, my business grossed 170 K. So like percentage-wise it was like a, a pretty good chunk of our revenue.
So I just wonder, , just wanna repeat what this, this offer is for 30 bucks, you get all the templates, uh, Uhhuh, , Uhhuh, I mean all like, I mean just that, that are in this,
That are in the club. Right? In the club. So like yesterday someone posted on my Facebook group and was like, I need an affiliate agreement like Braden, can you draft one? And I'm like, well if you already have the contract club that's in there, because we wrote one for someone last year and now, so we have affiliate terms, we even have like a very basic licensing agreement for course graders the wanna license their content to other people and we'll continue to grow it. But obviously it's meant to give you a pretty simple solution for fairly general purposes. But anytime you're gonna, you know, if someone's gonna buy a license off you for like a hundred grand, go hire an attorney. Right,
Right, right. Well before we even go any further, what is the link for that? Because people listening right now are like, you know, pulling over their card and like wanna go? Sure, sure. Wanna go join it? Well
I was gonna say, Rick, we probably should have talked about this before we hit record, but we do have an affiliate program if you wanna share an affiliate link and Okay. 50% affiliate commissions. But I share that as well on this podcast because I know a lot of your listeners could be potentially great affiliates for me. So you all can reach out to me if you wanna promote it. What we do is a lot of course creators will either buy access to the club for all of their students and market it as a bonus for their launches or they just promote it inside their programs with their affiliate link. But if people just go to my website, which is not avg, so short for average, not AVG law.com, they can find it.
Okay. Not avg law.com. Okay, cool. Yeah. So all right, so we got contracts, we have our insurance, the business entity, L L C, what would be sort of the next layer if you will?
Sure. So I'm gonna, I'm gonna take a step back because we didn't mention this earlier, but I feel like we're covering a lot of ground here. So it's worth worth
Mentioning. I'm actually, I'm also a tax attorney, so I'm a master's degree in tax law. So we do tax returns and bookkeeping in my company as well. So I kind of cheat and add in this extra layer, which is pay your taxes specifically pay quarterly taxes. Yep. So I would call that an essential, we could get into that, we could keep it more legal as well. But that is absolutely essential because we don't want to get hate mail from the i r s. It's not fun.
So I mean , this is something that like why, I mean this is gonna sound super basic, Uhhuh , but why do we need to pay us fan taxes?
Because if we don't, we will end up paying penalties and interest most likely, right? Mm-hmm. , I think most of us, we understand the concept like time value of money. Inflation's worth more now than it will be later. Sure. Well the IRS thinks the same way and they also have stuff to pay for, right? They have war fight and they have like healthcare to pay for and whatever else Congress is passing right now, I don't even know. But they want their money now. But you know what I say is sending them, like sending them automated payments every time we get paid it, it's not really feasible. Yeah. So quarterly is kind of their compromise. I will tell everyone the penalty for not paying quarterly taxes ends up being about 4% of the tax owed. So if you owe 10 grand, you're looking at probably like a $400 penalty, which means a $10,400 tax bill lot lower than credit card interest and other things. Yeah. And also I have to note that you pay quarterly taxes on taxes owed. So if your business isn't profiting any money yet, you don't really need to worry about this. Gotcha. I always forget to mention that. Yeah. Yeah.
Okay, cool. So you're just like a jack of all trades when it comes to, you know, all the, all of the fun stuff that no one wants to think about when it comes to an online business. Yes.
I like to think so. There's a lot of what irritates me almost more than anything is the whole, like, do I ask my lawyer or do I ask my accountant and then the accountant is getting legal advice and the attorney's giving like bad tax advice. I'm like, we're just not gonna do that. We're gonna do all of those things. And then people, people come to us. That's the
Goal. So do I have to say this is not financial advice if I ask you about scor,
I mean blanket to the whole podcast episode. This is not legal advice, right. You know, but yeah, we, I love to talk about scor. We can get into scor.
So who should be thinking about, you know, so we established as an L c, that's our entity, but we file our taxes as an S corp. Can you kind of explain that? Yes,
Sure. Well you nailed it. Oh, this is, it's cuz this is another misconception. A lot of people don't understand that S-corps are not actually a type of entity, it's just a tax status. Mm-hmm . So you have to have an LLC or corporation first and then you fill out a form, send it to the irs, which says hey I want to take advantage of subchapter s of the tax code. That's when we would say that you have an S corp. So when should people do this? For me this is a stage three thing and I just define stage three as like starting at about 75 K in revenue. But really you want your profit to be around that amount of money for an S corp to make sense. Okay. We can like dig into the math if you want to.
No, we don't have to . Okay. But why is so, so why would this be beneficial?
Yeah, so it saves you self-employment taxes. So the way the S corp works is you have to put yourself on payroll like salary right? Through your payroll provider and your salary. I is considered earned income and we owe self-employment tax on earned income. So that's Medicare social security, it's a 15.3% tax. Mm-hmm now all the additional profit we make in our business. So think you have top line revenue minus business expenses, minus now your salary, whatever money is left over, we don't pay self-employment tax on. So you save 15.3% self-employment tax on that money. That's how the escorp saves the taxes.
Gotcha. Okay. So just to kind of recap that real quick. So if you're at roughly 70 K ish profit
your business entity is an L L C, it's probably a smart idea to file as an S corp, fill out the form submitted to the irs, then you're paying yourself salary through like we use Gusto in our business through whatever your payroll is and it's beneficial. Is it what's called like a pass through?
Yeah, yeah. So yeah, sole props, LLCs and S-corps are all passed throughs. But yeah cuz all the profit passes through to you under that hypothetical you gave, like let's say we did the research and we determined your salary should be like 55 K and your business profited 75, so you have $55,000 salary and then your leftover profit is 20,000. So the difference between the profit and the salary. So you're saving 15 point percent tax on that 28,000, which is a $3,000 tax savings.
So one question that does come up is how much should I pay myself
if I'm filing as an S corp?
Yeah. So, so the trick is we paid double taxes essentially on our salary. So we want our salary to be low, right? Yeah. So the IRS of course is not just gonna let us like set our salary as low as possible. That's why they call it a reasonable salary. Yep. And we have to base that we're, we're supposed to base it off of, you know, what would someone with your expertise in your industry providing your services with your same amount of experience in your geographic area make that's one factor. You can also look at it as like how much would I have to pay someone a salary to, to basically replace me in the business. Mm-hmm. if I wanted to retire but still own the company. But we also have this really fun approach called the mini hats approach, which looks at like all the hats that you wear in your business. So the example I always give is on paper, a tax attorney in California is gonna make a lot of money, but I swear 50% of my job is like social media management. Mm-hmm. . So I, I gotta factor that in into my salary calculation. Gotcha.
I like that. Mm-hmm. . Okay. So that's sort of, you said you mentioned kind of like the third layer if you will. Yeah. Is there another layer after that?
Yeah, so other things, so stage two was was the, like the whole L L C business entity thing. Mm-hmm . And then stage three we look at S CORs. This is also when we like to start to get really into intellectual property and, and again I think a lot of these stages are arbitrary because trademark can be a great idea before you even launch your business. But for most of it, once we get to this close to the six figure mark, it's where we've begun to really establish ourselves in the industry, our programs, our business names, our podcast names have some name recognition and then if we haven't already, it's probably pretty smart to invest in a trademark if it makes sense.
Better to go, I mean I know you're gonna be biased here, better to go through a, an attorney to file a trademark or just do it like online.
Yeah. Go through an attorney send me money . No, you know, there are several areas that I think you totally can diy but a trademark for me is on the, pretty much the bottom of that list. Mm-hmm. reason being is that a trademarks are similar to LLCs and that it's pretty easy just to go to the website and do the application and submit it. But the thing about a trademark is you can, so I'm gonna, I'm gonna give you an example. So one of my programs is called Profit Rx and we have this concept in trademark law saying that the name cannot just be descriptive of the thing that you do. So if when I submit my trademark application, I say the purpose of profit RX is to help people create profitable businesses. Mm-hmm. , they're gonna say, well the term profit just describes what it is that you do.
So you have to disclaim that. And now my trademark becomes weaker. Mm-hmm. , well I made that mistake because it was the first trademark I'd ever filed. Now I actually like do them for clients that I've studied. And so if you unintentionally make that mistake filing your own trademark, it could be denied. Or now you have to come pay me to fix your application, which is gonna take me 10 hours because I have to write a legal be brief as opposed to the two hours it would've taken me to file your application to begin with. Mm
Gotcha. Okay. That makes sense. So what, what about like course content? Mm-hmm. What about, cuz I've actually, you know, just recently when we're recording this episode, I have spoke to a few students actually who have run into this where, you know, they've had either former employees mm-hmm. , you know, or they're contractors, but they, this person basically just left
Ripped off the content. Yep.
And CR and created their own stuff.
Uhhuh, , Uhhuh,
Um, and then I've had other instances where people are just taking like word for word, you know, different blog posts or, or what have you. What can we do to protect ourselves and that like we're, and do we need to go through an attorney to be doing things like that?
No. So this is, this is actually a good example. Cause copyright is is kind of like the, the twin sister to trademark. Mm-hmm . So trademark protects brand identifier. So generally names and logos, copyright, protects, works of authorship so that your content copyrights are actually a lot easier to file on your own. They're a lot less complicated cuz you basically are just gonna upload your contents like a p d, you're gonna explain what it is. Mm-hmm and then it's pretty much protected and I think it's, I think it's like $50 like through, through the websites. So Okay. Copyright everything, but yeah you register the copyright and then that gives you additional protections. To me the most important one is that you can only really seek legal fees if you have a registered copyright. And also having a registered copyright makes it so that you don't have to prove actual damages. So actual damages would mean like Rick, if someone, if someone ripped off your course Yeah. They took all your content but they don't really have any audience. Like no one's really buying it in absence of having a registered copyright, you'd have to say well they sold like five of this program at X dollars and if they hadn't sold it at half the price ripping off my content, those people would've bought it from me. So I lost out on that money. Oh okay.
Yeah. So you don't have to do all that and but the main thing is, is a lot of the times the harm is really not that great but you wanna like, you wanna, you know like nix that pretty quick. Yeah. So if you send a threatening email to the other person, it's actually like, well I'm gonna sue you for $2,000 but it's gonna cost me $10,000 to pay my attorney. So Right. Knock it off now or you're gonna have to reimburse me for all that cost.
Gotcha. Okay. So you said copyright everything, like if we have an online course or we are creating, does it mean like let's just say we have a membership mm-hmm Hmm and we're creating new content every single month. Yeah. You're not saying like copyright each new piece of content each month are you or are you?
Yeah, I mean you technically would need to if you want. The vast majority of people are not copywriting anything. So you know, just I'm telling everyone best practice what you should do. Right? Yeah sure. That's ideally what you should do. Now if you, if you have thousands of students, you honestly I think you could probably pay someone like a support staff person to do your copyrights for you as part of your monthly workflow. Cause it's gonna cost you a few hundred bucks. You know, if your membership's making you multiple five figures. Yeah. It's well worth the investment. Sure. Otherwise if you're creating like a big signature course, you can submit all of your material at once for one copyright and then I might not like worry about, you know, some of the like smaller stuff that you're doing. Gotcha.
Okay. Okay. So we got S corp got ip mm-hmm at this level.
Is there another level?
Yeah. So that, that's most of it, right? Like again, I, I mentioned that I talk about tax, like tax stuff as well. So I say once, don't you get to stage four, it's probably time to like outsource your bookkeeping so it might not be worth your time anymore. Sure. We get to some advanced legal considerations. Another saying, and I don't even know if I, I should probably determine what stage this goes into. Probably stage three cuz once would you agree that people start hiring probably like around that $70,000 mark mm-hmm. contractors. Yep. Employees once they get into the multiple six figures. So my soapbox thing most recently has been worker misclassification. Yeah. Are you familiar with this a B five law we have in California? Have you heard of it? I am.
Okay. So I talk a lot about that and that could be a pod, a whole different podcast. But essentially we, we don't get to decide whether someone has to like gets to be a contractor, right? Like you can sign a contract, we can say they're a contractor, they can say they wanna be one, we can sign a contract, doesn't matter if you get audited by the state, they would say, well the specific tasks you're having them do are employee tasks mm-hmm. . And so now we're gonna come after you for back payroll taxes. So that is a compliance area that I think we all need to be aware of because I foresee this being really big in the online business space as the auditors like start to crack down on it.
My understanding is that there's kind of like, what, what is the term? And no, nothing, you know, no judgment whatsoever. Kind of like an ambulance chaser attorney. Yeah. That there are these types of, of like lawyers and stuff who this is what they do.
The misclassification stuff.
For sure. That definitely hap, like I actually just joked, I was like joking with my team the other day. I was like, cuz I have, you know, clients who are hiring, you know, a few VAs and they're really worried. But then I have other clients who work for companies that have like teams of 40 people. Like I can make so much money if I just decided that I wanted to sue them. Right. . Right. Like I could, but most of the people are getting in trouble one of two ways. It's they're 10 99, they're contractors as they should, right? Mm-hmm . But then the state's gonna see, oh you know, this business owner sent these 10 90 nines. We're gonna look at this and see if we think these 10 99 contractors should have been employees and they're, they're gonna audit you. Mm-hmm , our governor signed over I think like 10 million into enforcement of this law. So they're just doing it to enforce the law. Mm-hmm , the other area is unemployment claims. So this was really big during covid. A lot of contractors were losing gigs just because like I mentioned, I work in the wedding industry, the weddings weren't happening. Mm-hmm , so then they were filing unemployment. Well unemployment is for people who were employees, not for people who are contractors. Yeah. So the contractors are basically stating, without really realizing it that they were employees and now the state is auditing the businesses for misclassification.
So the big reason, so all right, so before I go there, California is very strict.
Very strict. Yeah. Right.
Now one question I've always had, and I actually still have this question, does it do d to follow those rules if you will. So actually can you share what those rules are with everybody
First? Yeah, so we have, it's called the A B C test. And before all of the non Californian zone out, I'll mention that about 30 states use the same test. So pretty applicable across the board. Okay. And part A is like a control and direction thing. So you can't control everything they're doing. Part C is says that the person you're hiring must have their own established business doing the thing that they're, hi you're hiring them for. So if I'm gonna hire a podcast manager, they should have a business as a podcast manager in order to be a contractor. Part B is the trickiest part, which says that the thing that you're hiring them for must be outside the usual course of the hiring entity's business. So clear example of that would be when I hire a brand photographer or a website designer or an ads manager, I am, I'm a lawyer.
Those that's not part of my business. Mm-hmm. clear example of a contractor, if I hired another attorney to come help me, they are performing work. That's part of the usual course of my business. The sticky area. Rick I think is a lot of online business owners and course creators hire support people. So I have someone that I pay to manage all of our co-working calls. I have someone that I pay to handle of our, all of our billing issues. And while that's not legal work, I think it's definitely within the usual course of my business. Yeah. Therefore it fails at the A b, C test and I've made those people employees.
And you said these are the types of rules for like 30 states?
Yes. So yeah. Now the, the thing is most of the states just are not enforcing it as hard as our state. Right. So like it's one of those things where I, I could tell you like technically you need to hire them, but are you ever like gonna get in trouble for it? It's really hard for me to say. Sure.
Now is it the business if the business is based in that state, but the person that you were hiring is in another state, how does that work? Is it you have to follow the rules of the state where the business is or where the employee is? Or
Both? It's based on where the worker is located. Because like California wouldn't have jurisdiction over someone working for you remotely in Florida or in the Philippines. Yep. So we had a huge backlash in California. A lot of large companies, like we're talking to like Fortune 500 companies who pay, you know, consultants or contractors, they just put out blanket statements saying we're not hiring anyone from California anymore.
it is very strict .
Yeah. It's very, it's, yeah, it's very strict. Fun. A fun little side story for you. It's a short one. I had an argument on Twitter with the assemblywoman who wrote the law and I posted the screenshots in my blog post. So I can share that with everyone if they wanna read it. Cool. But my husband sent me a text the last time I was like at home visiting family and he's like, um, I'm at dinner right now with this Assemblywoman Gonzalez, do you have any messages you'd like for me to relay for you? And I was like, oh yes, let me get
As a matter of fact I do.
Yeah. So that, that was fun.
So what were you saying to to, to them?
Yeah, so I was just sharing some examples. Right. So I actually just helped a photographer who got audited by the E D D. So the, the problem is, is the way that they think, they think that they think the law works in such a way that in their mind there's like these large companies that are hiring all of these poor photographers as contractors and taking advantage of them. Mm-hmm. . And I'm like, no, no, no, no, no. We're talking about a wedding photographer who has their own business and they grow $70,000. So after expenses and taxes they're taking home like 30 k. Yeah. And their best friend is in the exact same position with their own wedding business and they're contracting with each other to have two photographers on the wedding day. It's very normal. Yeah. That fails the ABC test. And so then we look at all these exceptions under the law and they didn't apply because for example, one of these exceptions is a business to business exception.
But one of the requirements is that the person you're hiring is providing services directly to you, not to your client. Hmm. And so I'm in this Twitter argument, I'm like, well what does that mean exactly? And now we know from this audit the auditor said, well the second photographer is providing services to the client because the camera's literally pointed at the client and we're like, okay, but the other business hired them and they're giving the photos to the other business. So you see how this is a train wreck? Yeah. And then I gave the example of like, well a hair and makeup artist is literally doing hair and makeup on the bridal party. So that fails, but then like a wedding planning assistant could pass because they're never directly communicating with the client. It is a really poorly written law basically. And that's what I was arguing with her about.
And again, just to reiterate, these types of laws and rules are not just for California. So Yeah. If you are not in California, check with your, you know, your state employment Yeah. Rules. Now you mentioned like virtual assistants or anything like that. A lot of people have OBMs on their teams. Mm-hmm. , same sort of thing.
Yeah. Probably if, if your state follows a similar test, or I should say if the state where your O B M lives follows a similar test, then they probably would need to be employees as well. Other states that don't use this test, they use, it's something as lawyers call a totality of the circumstances test, but they just like look at a lot of factors. How much control do you have? Do they make their own hours? And it's like a compare and contrast kind of game. But those tests are easier to pass cuz there's like a lot more subjectivity to them.
Gotcha. Okay. Okay. So is there anything that we haven't talked about that we definitely should cover? Oh, I'm
Sure there are some things, but those are, we covered all the broad categories that, that I like to hit on. I, my hope is that your audience isn't like totally overwhelmed and scared and think that they're like, you know, facing multiple lawsuits. Sure. But I think we've given everyone like a really good broad overview. Yeah.
And, and I think, you know, we've covered a lot of things they just mentioned, like I think one of the big takeaways here is for you all listening is like don't wait until like we just started the conversation out. Don't wait until something happens to be looking into these things. So do it preemptively before you need, oh I should probably file, I should probably create, you know, my entity as an lll C or you should probably have, you know, insurance or contracts in place before you need them.
Bingo. Yeah, yeah, yeah. Do it now and you'll be set later on. It's part of the investment into your business. So
You've got a book, you've got a podcast. Mm-hmm , you've got your the website Uhhuh . Where can people continue to learn more from you, connect with you, read the book, et cetera.
Yeah. So tune in to swear warning for everyone, the Unfuck Your Biz with Braden podcast. So that's you in. And then the F word with an asterisks. That's where you'll find me book is the same title. But if you go over to my website, not a v G law, you can learn more about the contract club. My signature program, which is a group, like a group program and course. And then also we do one-on-one legal and tax services there.
Awesome. I'll link everything up that we're talking about here. You all in the show notes for today's episode over at my website, rick mulready.com. Just look for the podcast section. You'll see this episode right there. Braden, thanks so much. I think this is, like I mentioned, we haven't talked about the, you know, the legal side of running an online business for quite some time and I think it's always a good idea to be keeping up with this. So thanks for coming on and sharing your expertise.
Yeah, thanks for having me. My pleasure.
All right. Hope you got a ton outta that episode here with Braden. Again, I'll link all the links out that we talked about here in the show notes over on my website, rick mulready.com that we chatted about here today. And also, if you wanna check out his contract club, it's $30 and you get access to all the different contract templates and stuff like that that you need for your online business, just go to rick mulready.com/braden and that is an affiliate link and you can join the contract club for $38 and that's all you pay if you haven't already. It is still really super helpful for the podcast here to number one, subscribe to the podcast. So if you're listening on Apple Podcast, make sure you hit subscribe or follow on platforms like Spotify or wherever you're listening. And then also if you could leave a quick rating and review for the show over on Apple Podcast takes like 10 seconds to do that. So thanks in advance for doing that. And thank you as always my friend for tuning in today, coming to hang out with me. Hope you enjoyed it. Until next time, be well and I'll chat with you soon.