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Contracts are important when operating a small business and they are one of the leading reasons small business owners end up in court. Yep, you will find yourself in a legal mess because either:
- You rush into signing a contract too quickly without really understanding how the terms apply to you; or
- You simply fail to get a contract in place.
Contracts can never be overrated in business no matter how small the business is. A contract is a binding agreement between two or more parties that is enforceable by law. If it’s not in writing, it’s usually not legally enforceable. Once a written contract is signed, both parties must abide by the terms, which is why it is essential for business owners to understand the legal consequences.
Elements of a Contract
Visualize a contract as pieces of a puzzle that include:
- An offer.
- Acceptance of the offer.
- Consideration means the parties are giving and getting something. For
example, paying money in exchange for services.
- Creation of a legal intention by both parties. There is a presumption that
commercial agreements are intended to create a legally enforceable contract
and that social and domestic agreements are not.
- The capacity of both parties to enter into a contract. Persons of inadequate
mental capacity cannot fully appreciate the extent and nature of their actions
and are consequently in no position to enter into a contractual relationship.
Benefits of Well-Written Contract
Thankfully, today contracts are now easier to read and understand, unlike the days when a lawyer was paid by the word. These “wordy” contracts contained convoluted language handed down from one transaction to the next through untold generations of lawyers which is known as “legalese.” Wordy contracts can be a minefield for ambiguity and incomprehensible provisions. A well-written contract should:
- Define its terms
- Eliminate ambiguities
- Minimize “Legalese”
- Plan for “what if” contingencies
- Use short sentences
- Avoid passive voice
- Address all issues
- Avoid repetition
- Be consistent in form and substance
- Use simple sentence structure
- Be tailored to the type of business, business operations, and to the individuals involved
And finally, don’t zone out on the fine print. Every contract contains “boilerplate” terms that usually appear at the end of the agreement. Never underestimate boilerplate provisions, and always check them carefully. Boilerplate provisions usually include:
- Rules on how the agreement will be interpreted
- What law will govern the subject matter of the contract
- Whether the business contract can be assigned
- What happens to the entire agreement if its provisions are found to be invalid by a court
- Whether third parties are deemed to be third-party beneficiaries of the agreement
Remember that every clause in a contract may be negotiated – even the boilerplate provisions.
One of the many reasons why your contract should be drafted by an attorney and not downloaded from an online resource is to avoid the danger posed by terms that are not applicable to you or your business. Online forms are risky, and the terms included will not apply in every circumstance which will set you up to fail when the deal falls apart. Litigation is time consuming and expensive, and your business relationships may be irretrievably damaged if litigation is necessary to resolve a dispute over the meaning of ambiguous and inapplicable terms.
Common Types of Contracts for Small Businesses
As a business owner, it’s important to understand which types of contracts are appropriate for your business. Here are some contracts that may apply to your business:
The key benefits of a Client Services Agreement are the terms that protect you and your clients mutually to:
- Avoid any misunderstanding about scope of work
- Eliminate concerns about any variables that change, i.e., pricing, change orders, etc.
- Avoid unpleasant situations after project completion.
- Protect your company from liabilities and risks that lead to a lawsuit.
The key benefits of an Employment Agreement are the elements that protect you both that:
- Allows for a high level of specificity regarding the details of the employment.
- Creates an enhanced degree of organization and structure in the work relationship.
- Allows you to discipline or fire an employee that is not meeting the standards.
- Clauses that prevent employees from disclosing your trade secrets or client lists.
- Prevents former employees from competing with your company.
Independent Contractor Agreement
The key benefits of the terms for an Independent Contractor Agreement that provide mutual protection:
- Allows for a high level of specificity regarding the details of the relationship.
- Allows either party to terminate the relationship.
- Includes clauses that prevents disclosing of your trade secrets or client lists.
- Prevents him or her from competing with your company.
- Defines liability, licensing requirements and responsibility
Waiver and Release Agreement
The key benefits of a Waiver Release Agreement are the elements that protect you and your clients mutually that:
- Warns participants of inherent risks to the activity
- Eliminates concerns about any variables that change, i.e., pricing, expectations, etc.
- Reduces the risk that arises from ordinary negligence
- Protects your company from liabilities and risks (known and unknown) that lead to a lawsuit.
Business Purchase Agreement
In the event that you are interested in purchasing a business, or in the alternative, if you own a business and wish to sell it to an interested buyer, this agreement is the most important document for the transfer to happen legally and smoothly. The agreement itself incorporates the terms of the deal, what is both included and excluded in the deal itself, as well as any discretionary provisions and guarantees. The following are examples of such terms:
Restrictive Clauses. The Agreement may incorporate prohibitive statements or guarantees such as: Covenant not to compete; Non-solicitation; Confidentiality; &Non-disclosure.
Assumed Liabilities or Not. When a purchaser buys a business from the seller, the purchaser may or may not take on responsibility for the business’s liabilities.
Sale of Assets or Interests. The seller consents to offer and exchange, and the purchaser consents to purchase the business assets or the interests.
Deliveries at Closing. The purchaser should pay the seller the agreed upon amount stated in the agreement. The seller should convey to the purchaser a Bill of Sale, exchanging title to the seller.
Representations. The seller agrees that he or she is the true owner of the business and currently has marketable title to all of the assets of the business; the seller has not entered into any other contracts relating to the business; there are no judgments, liens, or any other pending legal actions against the business; and that the business is solvent.
An operating agreement is a key document that describes the operations of an LLC and sets out all the terms and conditions agreed to by the members. Each operating agreement for an LLC is different, because the people and circumstances are different. Some key elements include terms that:
- Protects the owners in a variety of legal situations
- Avoids legal hassles by deciding ahead of time what happens in differing scenarios
- Lessens anxiety if a catastrophic event occurs in the business
- Deals with uncertainties when relationships change over time
Website Terms and Conditions
- Banning user abuse
- Protecting ownership rights in your content
- Limiting liability
- Controlling the governing law
Confidentiality and Non-Disclosure Agreements
Nearly all businesses have valuable confidential information and it’s a principal asset. Companies share, receive, and exchange confidential information in connection with commercial transactions, relationships, and other parties in the ordinary course of business. Here are some practical considerations for the overall protection of a company’s confidential information.
- Treat your company’s portfolio of confidential information as a valuable business asset.
- Implement and adhere to company-wide information and data security policies, systems, and procedures.
- Comply with contractual obligations governing others’ confidential information.
- Protect certain confidential information as trade secrets.
- Comply with privacy and data protection laws and regulations.
- Carefully structure the terms. Consider the type of transaction or relationship. The form, structure, and substantive details should be tailored to specific circumstances.
- Enter into a confidentiality agreement as early as possible. Decide whether to use a free-standing confidentiality agreement or clauses in a principal transaction document or term sheet. In some cases, such as an informal co-marketing arrangement, a general confidentiality agreement might be the sole contract that defines the parties’ relationship.
Businesses typically need a variety of contracts with customers, partners, and others with which they conduct business. Don’t put off getting a contract in place, meet with a small business attorney with contract experience who can break down the terms, help you make the best decision, and avoid costly mistakes.