Understanding The Different Types of Business Contracts
Are you planning on starting your own business? If so, then you’re well aware of the fact that there are countless decisions to make, papers to sign, and bills to pay. Juggling all of these vital aspects of creating a business can prove tricky, particularly when it comes to arranging the various business contracts. When handled correctly, such legal agreements can help pave the way for a smooth growth process; however, if their importance is disregarded, your business could be vulnerable to devastating liability.
Before the doors open, every business will have dozens of contracts in place to ensure that they’re covered. From employee hiring to partnership agreements, these contracts help you handle hiccups or problems that might arise, legally bind two or more parties, and ensure that your business is abiding by the law. As you already know, there are a lot of legal requirements for starting a small business. So, if you want to be properly covered, your contracts need to be well thought out and drafted. That’s where our professional legal advice comes into play.
Below, we’ll discuss and review several types of business contracts that you need to be aware of. By being properly informed on the different contracts available, you’ll be able to ask the right questions to your business attorney when getting started.
Benefits of Business Contracts
Contracts are one of the best ways to bring clarity and structure to your operation. They allow you to specify and make note of important agreements, terms, or actions. Before we dive into specific business contract examples, you should be aware of their general advantages:
- Avoid misunderstandings – When you enter a business venture with another party, you want everything clearly stated in writing. The problem is that different parties may have diverting expectations, goals, timeframes, and obligations. A formal written agreement allows each party to paint a clear picture of the terms and conditions of the partnership, as well as expectations. This helps to forge lasting work arrangements built on mutual trust and understanding.
- Create binding agreements – Once signed, a contract is a legally binding resolution that acknowledges both parties agreed to everything therein. If one party is derelict in their duties and fails to uphold their part of the bargain, they’re in breach of their contract, which could result in firing, legal action, or the dissolution of the partnership.
- Evidence of details – The phrase “The devil is in the details” is especially pertinent for start-ups. Contracts are proof of the details that you have agreed upon with another party. This fully fleshed agreement can bind the following parties:
- Owner(s) with investors
- Owner(s) with employees
- Owner(s) with third parties
Whether there are services rendered, payment obligations, or duties to be performed, all of that will be stated clearly in your various contracts.
- Describes responsibility – Contracts use clear language to highlight what each party is responsible for and the expected timeframe of action. Typically, one party gives either a good or service in exchange for money. Contracts will contain sections or clauses that describe how or why the business relationships could be legally terminated or altered. Further, parts can add indemnity clauses which highlight what actions parties aren’t accountable for.
- Provide a sense of security – A written contract can help both parties feel secure about their arrangement since both parties know exactly what they’re signing up for. Important points that will be covered may include:
- Their role and its requirements
- Possible violations of the contract
- Wages and benefits
- Duties and responsibilities
- Schedules and timelines
Written contracts provide protection on the off chance that the other party breaches their agreement.
- Assured confidentiality – Non-disclosure or confidentiality agreements safeguard your business’ sensitive information. Any party that signs an NDA is legally required to keep their in-house knowledge a secret or else be held liable for violations of confidentiality.
- Prevent litigation – If you don’t have a contract in place, you’re vulnerable to litigation, whether honest or malicious. If either party violates an agreement within the contract, the written agreement will be used as the framework of reference for determining fault. Having a clear and precise contract in place can help avoid being dragged into an expensive litigation process.
- Serve as a record of an agreement – Your contract is often the sole source of proof that you have for entering into a business arrangement either with workers, other parties, or other businesses. Typically, it will state details regarding:
- The agreeing parties
- The services or goods rendered
- The payments required
- The dates of work and expected completion
Understanding The Different Types of Business Contracts
For the purpose of clarity, we can broadly divide small business contracts into one of three categories:
- General business contracts
- Employment contracts
- Sales-related contracts
General Business Contracts
General businesses contracts cover a wide array of topics related to starting and running a business. Business contract examples include:
- Partnership Agreement – A contract between partners in a business which outlines terms and conditions relating to the work relationship between the partners. Details include:
- Ownership shares
- Profit distributions
- Detail of powers, roles, duties, and titles
- Partnership term length
- Ways to terminate the partnership
- Ways one partner can buyout the other of shares
Before you ever begin a business, you need a clear picture of how the business will operate and who has command of it. Your partnership agreement helps you avoid or deal with tax issues, legal issues, state laws, changes to the business, or disputes.
- Nondisclosure Agreement (NDA) – NDAs are legal contracts between two or more parties that denotes the formation of a confidential relationship. This ensures that parties can safely share information without fear of that information being leaked to the general public or to competitors. NDAs go into effect during an employee’s employment and continues on for a stated time period following the termination of employment. These contracts also safeguard proprietary information or company strategies from being sold by a disgruntled employee.
- Indemnity Agreement – Also known as a Hold Harmless Agreement, No Fault Agreement, or Release of Liability. These types of contracts state that the indemnifier (person using the product or service) agrees to not hold the indemnitee (party providing the good or service) accountable for any burden, loss, or damage.
Liability waivers such as this are commonly used for possibly dangerous activities like skydiving, rock climbing, bungee diving, etc. Essentially, the indemnity agreement states that you acknowledge the risks of the activity and by signing, you won’t sue the company if you’re befall harm during the activity.
- Franchise Agreement – A legally binding agreement that overviews the franchisor’s terms and conditions for another party to become a franchisee. Typically, it’ll include stipulations such as:
- Overview of the relationship
- Duration of the franchise agreement
- Initial fees
- Continual fees
- Assigned territory
- Franchise site location and development
- Initial training and support
- Ongoing training and support
- Use of IP
- Insurance requirements
- Record keeping info
- Settlement Agreement – A binding contract that resolves legal disputes without the need for court proceedings. Usually, this agreement involves the following:
- Offer that one party promises to upkeep
- Acceptance of the terms of the offer by the aggrieved party
- Valid consideration by both sides
- Mutual assent by both parties
Often, it’s far less expensive and time consuming to settle out of court than to go through a grueling multi-year process.
- Assignment of Contract – There are times when a business, in the midst of a contract, may have to step away or outsource that work. An assignment of contract legally transfers obligations from one party to another, so long as the party being serviced agrees to this change. So, if a cleaning service agreed to clean your building on a weekly basis, they may (with your permission) enlist another cleaning service to handle the work and responsibility on their behalf.
- Purchase and Sale of Business Agreement – If you wish to purchase or sell a business, this contract acts as the deed of sale wherein both parties agree to the following stipulations:
- Sale of the business – Seller and buyer agree to the purchase.
- Consideration – The price which both parties agree to.
- Allocation of purchase price – How payment will be allocated to various facets of the business.
- Terms of payment – The sum of the purchase price.
- Adjustments at closing – adjustments made to all operating expenses at time of closing.
- Assumption of liabilities – Buyer agrees to take on all liabilities related to the business.
- Binding effect – Both parties sign and agree to the purchase and sale.
Bringing in new employees opens up an entirely new can of worms in terms of liability issues. Therefore, it’s essential that you cover every aspect of your relationship with your employees in contracts (in order to give your business legal protection). The most common forms of employment contracts are:
- General Employment Contract – This contract outlines the relationship between the business owner and the employee. It will stipulate the following:
- Duration of contract
- Reasons for employment termination
Naturally, you’ll have to tailor this agreement to any other aspects related to your business or industry.
- Independent Contractor Agreement – Also known as a freelance contract agreement, these outline the scope of work, payments, and deliverables for a freelance worker. There are rather strict federal standards for distinguishing between an employee and an independent contractor. Since they’re not employees, you aren’t responsible for tax obligations. On the flip side, you can’t forbid them from taking on other clients or tell them how to go about their work. The two parties simply agree upon an assigned task and due date. Because the law is currently in flux when it comes to classifying workers as “employees” versus “independent contractors,” this is definitely an issue that requires you to get careful, up-to-date legal advice.
- Noncompete Agreement – Depending on your state, you may be legally allowed to compel employees to sign a noncompete agreement. These types of contracts state that once an employee leaves your company they aren’t allowed to go and work for a competitor for a set amount of time. Typically, this can only be enforced in limited capacity, so it’s best to have a detailed contract that clearly states:
- Time span of no compete – Anything longer than a year or two likely won’t hold up in court.
- Area – Must be limited to a geographical region.
- Competition – Must clearly outline a short list of direct competitors.
Sales-related business contracts typically stipulate how goods, services, and property can be sold, purchased, or transferred. Common contracts include:
- Bill of Sale (BOS) – Acts as the legal agreement which states that two parties have agreed on the terms of a sale of property or service. It’s also proof that the seller has indeed transferred the rights to the assets as outlined in the BOS.
- Bill of Lading (BOL) – Legal document required between two parties shipping freight. The BOL acts as a receipt for freight services, giving the carrier and the driver all the surrounding details for processing and invoicing.
- Purchase Order – A business owner commits to buying an item or man items at a specific price. It then details expected delivery and payment terms.
- Statement of Work – Typically between third-party contractors, this agreement dictates everything from the scope of work, deadline, to the nuances within a given job. It should include the agreed upon pricing, expectations, and it should safeguard each party should something go wrong.
- Warranty – A written guarantee issued by the seller of a good or service promising to repair or replace necessary parts within a given time constraint.
Protecting Your Business
The above are but a few of the essential business contracts you’ll encounter throughout the course of starting and operating a business. Each one consists of several pages of details and legal imperatives that must be considered. For that reason, it’s essential that you hire a seasoned small business lawyer with years of experience in contract law.
At Briggs Law Corporation, we’ve spent more than 20 years helping our clients hash out the details of their business contracts. Under our business law guidance, they’ve not only managed to safely navigate the often-treacherous climate of the corporate world but have also thrived throughout the process. Whether you’re a small or big business, it’s essential that you’re protected from liability. We want to provide you with any legal advice you need to run a successful business. Reach out today and we’ll begin laying the foundation for a protected, prosperous, and healthy future.
“This blog article is for informational purposes only, and is not a substitute for client- and fact-specific legal advice from a qualified attorney.”
Investopedia. Non Disclosure Agreement (NDA). https://www.investopedia.com/terms/n/nda.asp
Lozano, A. Forbes. How Contracts Can Protect You And Your Business. https://www.forbes.com/sites/yec/2018/08/07/how-contracts-can-protect-you-and-your-business/#2dd601eb5f1f
Faris, S. Small Business Chronicle. What is the Importance of Contracts to a Business? (2019). https://smallbusiness.chron.com/importance-contracts-business-906.html