It might be tempting to seal a deal with a handshake. After all, formalities just slow things down and, as a small business owner, you’ve got countless other things to do with your time. However, when you make a contract, proper documentation will give you and your business solid legal protection should the need arise.
While specific business needs vary, below are three common legal contracts you should draw up for your business.
Make a Contract: 3 Contract Agreements You Should Have
1. Partnership Agreement
If you’re starting or running a business with someone else, you need some kind of agreement in writing. Even if your business partner is your spouse, best friend or sibling, having some kind of partnership agreement in place from the start can be a helpful to figure out the inevitable issues that come up during the course of running a business.
The partnership agreement should contain the following:
- Define who contributes what: Discuss what you and your partner will be bringing to the table in terms of labor, time, cash, property, customers, etc. Who plans on working on the business full-time, part-time or just acting as a silent partner?
- Define who gets paid what: Outline how profits will be distributed. Will each partner be paid a salary for his or her role in the business? How much? What about any extra profits for the year?
- Define how decisions get made: What type of decisions require unanimous votes, and what type of daily decisions can be made by a single partner? Discuss these matters upfront and decide what decision-making structure will let your business run the most effectively while making sure that no one feels left behind.
- Define what happens to ownership interests: Decide what happens if/when someone dies, retires, goes bankrupt or just wants out. Maybe add in a non-compete clause to protect against a partner leaving, taking your customers and setting up a competing business.
An Internet search for “partner agreement template” will turn up numerous partnership contracts you can use.
Remember that while you may think you’re on the exact same page as your partner(s) today, situations can easily change over the course of a few years. A few conversations and a little administrative work to make a contract at the start can save you major headaches and potential legal battles down the road.
2. Non-Disclosure Agreement (NDA)/Confidentiality Agreement
Whenever you’ll be sharing your company’s proprietary information with somebody, you should ask them to sign a non-disclosure agreement (NDA). Your company’s proprietary info can be anything from the code written for a mobile app product, your business plan, marketing plan, forecasts or financial numbers, as well as your client and customer list.
For example, if you partner with a vendor or freelancer for a marketing project, you should draw up an NDA to make sure your customer list is protected.
You can find a sample NDA template from SCORE. As with any template you download from the Internet, you should have it reviewed by your attorney prior to use.
3. Independent Contractor Agreements
For many small businesses, outsourcing to independent contractors is a great way to get some added help, fill a specific need or bring in specific expertise. It’s a flexible arrangement, and you don’t have to pay workers’ compensation, payroll taxes or employee benefits for contractors and freelancers. However, be aware that the IRS is now on the lookout for employers who misclassify their workers as independent contractors to avoid paying payroll taxes, etc.
For this reason, it’s smart to make a contract. Create an independent contractor agreement that explicitly defines the relationship between you and the worker. Make it clear that you intend the worker to be an independent contractor who is responsible for his or her own taxes. In addition, the agreement should not exert much control over how work will get done. Don’t set specific hours for when they need to work, or where.
While having this agreement isn’t going to protect you 100 percent from an IRS audit or misclassification ruling, it does provide evidence that you intended to hire an independent contractor.
For these three contracts, as with any legal formality, it’s always best to invest a little time. Make a contract and get it squared away upfront, rather than waiting until you actually need the contract. By then, it’s typically too late. Talk to an attorney if you have any questions at all or just want a professional set of eyes to review a contract. Your business is worth it.
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