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.
Contract Photo via Shutterstock
Great points Nellie. I would add that these documents don’t have to be pages and pages long. Short and direct is sufficient in most cases.
Robert: thanks for ready the post and you are so on the money with this and make a great point. As long as you have all your ducks covered, a short to the page doc is all you will need for any of these agreements.
Thanks for bringing it up, Nellie!
I especially love what you wrote about misclassifying workers. As the chick who created the Virtual Assistance industry, I’ve been preaching and teaching this for 16+ years. Thank you for lending your voice to this important issue.
In my experience, it’s really critical to have any contracts reviewed by legal counsel (unless the biz owner is an attorney, too). Using what’s been created for someone else doesn’t necessarily mean it will be, in the same way, protective of the new business wanting to use it. And cobbling agreements together (rampant with small businesses) to create one whole that the biz owner thinks says what s/he wants it to say is incredibly fraught and unwise–at least without a competent review.
This goes double, btw, for anyone being asked to *sign* an agreement. 🙂
Thank You for reading the post and glad I was able to help and you added points are truly appreciated!
Is an income only partner also an employee? Or can they be an independent contractor?
Hi Mary – I would need to get more specific info from you as to what type of an entity you are conducting the business under to be able to answer your question.
This is a a good point. One thing that I noticed is that many consultants who are joining a direct sales company fail to look at their independent consultant agreement. This is a the contract that they are signing when joining their company.
Often they get caught later violating a clause that was clearly stated. Direct sellers, read your agreements!
Speaking as a former CPA I would never advise a client to use a partnership to operate a business. Too risky IMO. You can’t be sure all partners pull their weight. One partner can be left holding the can. I’ve had to pull the damaged partner out of the fire too often. Better to use a company to limit liabillity. Or a trust for flexibility. And some liability limitation. All this is even more important today when the Internet fosters business arrangements that involve multiple countries and legal jurisdictions. Just my opinion
Thank you so much for reading my post and I completely agree with you re considering opting for an LLC or an S Corp vs a partnership, however my post was written as guidance in providing the small business with this info since some still operate the business as a partnership and if they do, they need to make sure they have an agreement in place.
Luc, Linh Vu
Many thanks for your post and I learn a lots from your information. Its could help me to setting up our new small business with my good friends and we all be save and will works together under agreement with out nobody getting hurt later on.
Looking forward to hear more from your suggetions
Luc Linh Vu
Hie Nellie, thanks for your advice for partners agreement.As a partner of 51% against 49% I have it as an important to stay with an agreement because I am much contributing to everything intames running the company.the partner of 51% is working but I am assuming one day in future will be a conflict.so with signed agreement it’s gonna asist.Now the help I need is,which agreement can we use and which things to put in this agreement. Thanks for your advice. I felt strong when I red your article.
Thoughtful suggestions ! I am thankful for the details ! Does someone know where my assistant could get access to a sample IRS 1098 form to work with ?
I love this work of article…and I am really educating myself on this one!
Currently intending to establish independent contractual agreement with someone who will be basically working as a General Manager to my company who has the know-how-skills, marketing, sales etc and most importantly commitment. On the other hand, there is another potential silent / dormant investor who would like to partake a small portion of business activities like marketing sales etc…
In terms on profit split…could you please advise how to go about this? The silent investor will surely earn his returns on profits gained base on amount invested… What about the Contracted General Manager?? Are they also subjected to a percentage of the business??
Kinda confused..please help.
Thanking you in advance.
A friend of mine recently opened his construction business. Where can he get the contracts with all the agreements for the clients so he doesn’t get in trouble in case a client wants to complain about something. Or what kind of legal documents he needs to get to protect his business. Thank you.
Thanks so much for reading and commenting. Generally speaking, LLCs and Corporations require certain things in order to be compliant. Additionally, any licenses or permits that may be required generally depend on the location of the business as well as the type of business. To find out exactly what may be required for this business, please give Amanda a call at (888) 449-2638 ext 105 and she would be more than happy to assist. Thanks again and we look forward to hearing from you!
Just in a business with my best friend, but I need a contract signed so we know what each of us are doing, and ofcourse the monetary funds involved.
Can you please recommend someone.
Thanks so much for reaching out to us in regards to this inquiry. Are you looking for an Operating Agreement or Bylaws? If this is what you are looking for, we would be more than happy to help. Please feel free to give Amanda Nunez a call in our office at (888) 449-2638 ext 111 and she can answer any general questions as well as direct you to the right product or service that we offer that can help you! Thanks again and we look forward to hearing from you!
If I had a business, I would agree with you that all of these contracts. That and since I am not that experienced with any of this, I would probably also see about hiring a lawyer to help me out. That way, I could be sure that I’d be signing something that would help my business out.