Contracts Small Business Owners Should Know

white and black board
by Advice Chaser
by Advice Chaser

If you own a small business, you probably deal with contracts all the time. Purchase contracts, employment contracts, partnership contracts—they’re essential to businesses of almost any size. A contract describes the obligations each party takes on in a legally-binding way. Getting important agreements in writing protects both you and everyone you do business with.

contract inside a folder with a flag labeled "sign here"

Contracts That Establish Your Business

If you want to be a sole proprietor, you don’t need a contract to start your business. However, if you want to go into business with someone else, you should draft a partnership contract before taking any further steps. Even if your prospective business partner has been your friend for life, there’s no guarantee you two are picturing the same thing when you imagine how your business will go. By hashing out the details first, you ensure everyone is on the same page.

Your partnership contract should include:

  • How much capital each member will invest in the business
  • Each member’s ownership share
  • How you will make decisions together
  • What assets will belong to the partnership
  • Each member’s expected duties within the company
  • How the partnership will be dissolved if you part ways

Nobody goes into a business partnership assuming it will be full of conflict and eventually break up. But these things do happen, and you will protect both your finances and your personal relationship with clear expectations of how you will manage these problems.

This contract isn’t sufficient to start your business. You may also have other documents to file, such as articles of incorporation and an operating agreement, depending on your business structure. But signing this contract first ensures that your partnership can move forward on the other steps.

Employment Contracts

Once you hire employees, you’ll need to have an employment contract for them to sign. While it isn’t legally required to put employment agreements in writing, it’s essential for practical reasons. With the terms of employment clearly in writing, there will be no confusion later about what each of you agreed to do. And, in case of later disagreements, you have their signature showing they read and consented to your terms.

An employment contract should include a description of the work they will do, the wage they will receive, and a list of benefits. You will also want to specify how the contract will end, from at-will employment to a list of reasons why the employee might be terminated. If there are any necessary nondisclosures, you should include those as well.

You can use a similar contract for freelancers and contractors. In this case, you will describe the project they will do, the fees involved, and the date you will pay them. Some contractors have their own contracts they prefer to use. In that case, read it carefully and negotiate about any disagreements before signing.

Contracts for Sales or Services

You also may need to use contracts with vendors or clients. Whether you need to purchase something from another company or you will sell to someone else, this often takes place with a contract.

When you sell an item at your store, the product and the money change hands at the same time, so no contract is needed. But if you make a large order with a supplier, the terms may allow you to pay later or for subsequent deliveries to happen at future dates. In that case, you need to get in writing what your obligations are and when you will fulfill them. The contract will specify what goods will be delivered, when they will be delivered, what payment method will be used, and when that payment is due. It should also say what happens if one party fails to deliver what they promised.

In some cases, this document is less formal: either a purchase order from the buyer to the seller or an invoice from the seller to the buyer. The important thing is that all the necessary information shows up in writing. A handshake agreement cannot be enforced later.

A similar agreement is used when you sell or buy a service. It’s important to include a specific description of the service in question and whether the buyer can refuse to pay if the service doesn’t meet their expectations. If the service is the production of intellectual property, like graphic design or written content, the contract should include who owns the rights to the finished product.

How to Get Contracts for Your Business

Drafting a contract yourself can be difficult and may not end up covering all the legal necessities. That’s why many business owners choose to hire a lawyer to draft their contracts. Another option is to find “boilerplate” contracts and customize them for your needs.

If you’re not sure what you will need, your business financial advisor can direct you to the right resources. To meet the right advisor for your business, contact us today.

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