Five Contracts Every Small Business Should Have

“We talked about it” isn't much protection when a business relationship goes sideways. As a small business owner, you depend on relationships. However, to really protect your business, you need your agreements to be legally enforceable. Small business contracts put expectations in writing before a misunderstanding turns into a costly dispute. While every business has different needs, there are a few agreements that should be on every owner's radar.

Key Takeaways

• Contracts are essential for businesses from formation, to operation, to closure.
• Well-written contracts protect the business while working with clients, employees, vendors, and independent contractors.
• Confidentiality agreements and NDAs protect proprietary information.
• Each business is unique, so a business may need additional contract types.

1. Business Formation or Partnership Agreement

It’s not uncommon for a business to start informally. Someone has a great idea, it becomes a hobby or side hustle. Before you know it, the idea has grown into a full-fledged business. A business owner may trust and depend on their friends and family to help them grow. However, at some point, the business needs to be formalized. A business formation or partnership agreement becomes essential.

California laws recognize several types of business formations. These include sole proprietorship, general partnership, limited partnership, limited liability partnership, limited liability company, C corporation, and S corporation. Working with a business attorney can help owners decide which type is best for their venture.

The formation, partnership, or operating agreement can cover vital aspects of the business. Common terms include ownership percentages, each individual’s role and responsibilities, voting authority, profit distribution, debt liability, and buyout procedures.

2. Customer or Client Service Agreements

A business can’t survive without customers or clients. However, depending on the type of business, written client agreements may be particularly important. A written agreement can define exactly what the business is agreeing to do and what the client is expected to provide in return.

A business contract can address:

• Scope of services
• Deliverables
• Project deadlines or timelines
• Payment amounts and schedules
• Late-payment provisions
• Cancellation or termination
• Dispute resolution
• Limits on liability where appropriate

Notably, vague agreements leave room for interpretation by the parties. This can create confusion and potential for conflict when the terms are interpreted differently. Phrasing like “handle a marketing project” or “complete renovation work” can mean very different things. A lawyer can assist with these transactions by drafting precise language for client agreements.

3. Employment Agreements

Eventually, a business owner will need to hire employees. This creates a new set of responsibilities. You need to establish what the employee will do, how they will be paid, and what is expected of them while they work for your company. An employment agreement may also address benefits, confidentiality, ownership of intellectual property, termination, and other terms of the employment relationship.

California businesses should be particularly careful when preparing employment-related contracts to avoid pitfalls. Noncompete agreements are a good example. California generally prohibits contracts that restrain someone from engaging in a lawful profession, trade, or business. A template may look official, but that doesn't mean it is appropriate for your business. Having an attorney prepare or review your employee agreements can help you avoid using unenforceable or problematic provisions.

4. Independent Contractor Agreements

Sometimes it makes more business sense to hire a contractor, freelancer, or vendor rather than employees. These professionals have the experience to provide a needed service, but are not needed full-time. Contracts are essential for ensuring both parties know what is expected of them. The agreement can include the specific service to be performed, payment terms, deadlines, and expected deliverables. It’s also essential to address who owns the finished work product.

California has specific laws governing worker classification. Simply calling someone an independent contractor in an agreement doesn’t necessarily make them one. A business lawyer can ensure a business doesn’t accidentally misclassify an employee as an independent contractor.

5. Confidentiality Agreements and NDAs

It’s often proprietary information that makes a business competitive. Protecting that information becomes vital to ensure the business maintains its industry advantage. A confidentiality or nondisclosure agreement can help protect trade secrets, customer information, business plans, product designs, or proprietary processes. There may be internally developed software or intellectual property. Even marketing materials and creative works need to be protected. An agreement protects sensitive information when working with employees, contractors, consultants, or potential business partners.

Other Contracts Your Business May Need

Every business is different, so contracting needs will also vary. Depending on the type of business and the industry it operates in, there may be several other additional contractual needs. Working with a skilled business attorney can provide valuable legal guidance. Other contracts your business may need can include:

• Commercial leases
• Vendor or supplier agreements
• Purchase and sale agreements
• Website terms of use
• Privacy policies
• Licensing agreements
• Franchise agreements
• Loan or financing agreements

Being proactive and having agreements in place can help avoid complicated legal problems later.

Don't Wait for a Dispute to Review Your Contracts

Well-written contracts help set clear expectations and hold everyone accountable. Taking the time to put terms into writing formalizes an agreement or relationship. It also helps to resolve issues when things don’t go as expected. White and Bright, LLP works with California businesses on the contracts they rely on every day. Contact us today to discuss your business's contract needs.