Legal

3 Contract Agreements Every Small Business Should Have

As a small business owner you have an endless number of responsibilities. Operations, budgeting, planning, accounting, marketing, employee management are time consuming activities that make it seem like there isn’t enough time in the day to accomplish everything. In an effort to save time, you may be tempted to take shortcuts, such as establishing an agreement with a new partner or vendor with a simple handshake. No matter how little time you have, never take legal shortcuts. Get everything in writing. In the long run, you’ll loose far less time and sleep when you take the time put agreements in writing. Agreements that are properly documented provide business owners with critical protection against liability in the event of conflict or misunderstanding.

A contract agreement must contain specific elements to make it valid under state and federal laws. The terms of a written agreement must be legally binding in order to be supported and enforced in a court of law. Some businesses have a lot of legal needs, others very few. However, every small business owner should make it a priority to obtain the following contract agreements.

1. Partnership Agreement

When a business is owned by two or more individuals, disagreements may occur. Even when business ownership is shared by by relatives or friends, a written agreement is needed to address issues that may, and often do, arrise. A partnership agreement is a contract that establishes the rights and responsibilities of each partner, including who is personally liable for the debts and obligations of the business.

Partnership agreements vary, but there are certain terms which should be included in all agreements. At minimum, a partnership agreement should define the percentage of ownership, length of the partnership, who has authority over certain decisions, distribution of profits, and what will happen if a partner is lost due to circumstances such as retirement or death.

A partnership agreement should define individual contribution, such as the amount of cash, property, time, or labor that will be contributed by each partner. The role of each owner must be well-defined, whether that role involves working full-time or serving as a silent partner.

A partnership agreement should outline how profits will be distributed. This outline should detail the salary or hourly wages that will be given to each partner, as well as what will be done with any additional profits each year.

In addition, the document must specify who is in charge of decision making. There are daily operating decisions that may be assigned to a single partner, while other types of decisions may require unanimous votes. The goal is to establish an inclusive decision-making structure that will allow the business to run smoothly.

A partnership agreement must also clearly define what happens to ownership interests when a partner is lost due to retirement, death, bankruptcy, or withdrawal. The agreement should include a non-compete clause, which will make it illegal for a partner to leave the company and set up a competing business.

Partnership agreements are not required by law, but are extremely important for establishing a company’s management structure and for quickly resolving internal disputes. These documents can be used to anticipate and address potential problems before they turn into damaging issues or major legal battles. Partnership agreement templates can be found online, and many are available for free. However, to ensure your partnership is structured correctly, it’s always wise to seek the advice of a competent legal professional.

2. Non-Disclosure Agreement (NDA)/Confidentiality Agreement

A non-disclosure agreement (NDA) is designed to protect a company’s sensitive and confidential information, such as business plans, trade secrets, or client lists. An NDA is typically a simple document that identifies which company material must be kept private. This agreement should also define any exclusions from confidentiality and include a statement of how sensitive information is to be used appropriately.

Employees, vendors, potential investors, or anyone who has access to confidential information should be asked to sign an NDA. For example, a professional who is hired to create a new marketing strategy may come across critical data such as a customer list that could be shared with a competitor. A confidentiality agreement will help to keep sensitive information from falling into the wrong hands.

It is important for small business owners to clearly define what information is meant to be kept confidential in order to maintain their competitive edge. There are many NDA templates available online that can be downloaded and personalized in a matter of minutes.

3. Independent Contractor Agreements

Many small business owners use independent contractors for temporary help or to fill a specific need. Self-employed workers can be hired with a flexible arrangement that involves very little legal or financial obligation. For example, independent contractors are excluded from medical and life insurance, company retirement plans, and other benefits that are given to full-time employees.

Small business owners can also save on payroll taxes by hiring self-employed workers, but it is important for employers to become familiar with all of the legal requirements related to independent contractors. To maintain a transparent relationship with self-employed individuals, and to remain in good standing with the IRS, business owners should create a well-defined independent contractor agreement. This can be used to clearly document which employees are considered independent contractors who are responsible for paying their own taxes. While having this agreement does not provide guaranteed protection from an IRS audit or a misclassification ruling, it does provide evidence of the intention to hire an independent contractor.

The independent contractor agreement does not need to set specific hours for when and where work will be done, but may be used to describe the final product or service itself, any specific deliverables, and an overall time frame. These details will help to clarify the expectations of the product or service that is provided by a self-employed worker. The document should also include the terms of payment and the agreed-upon pay rate, as well as conditions that allow the original scope of the work to be changed or for the contract to be terminated. By investing time in an independent contractor agreement, small business owners can avoid potential issues that may arise from missed deadlines or unacceptable work performance.

Contract agreements must be binding in order to have any real value, and this part of the law can be very complicated. For this reason, it is strongly recommended that small business owners invest in a competent attorney who can review the contract to confirm that it contains all of the elements necessary for legal protection. Investing the time and money to prepare and finalize written agreements can help small business owners avoid major problems and costs down the road.

Justin Cutler
Justin is the founder of J. Cutler Law and co-founder at Turbo Wills—a do-it-yourself Estate Planning website providing everything necessary to complete a legally enforceable Estate Plan entirely online. As a business more...
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