A small business can have hundreds or even thousands of transactions in a month. How do you know when you need a written contract?
Avoid Oral Agreements
It's a common situation for small business owners: a client or customer asks you to do something, and you say, ’Sure, I can do that.’ Business owners make these sorts of handshake deals all the time, but it's a risky practice because the parties may have different understandings about what was agreed to. And if there's a dispute, there's no written evidence to back up your claim.
At the same time, a formal contract sometimes feels too formal and complex for the situation. There are several ways to deal with this problem:
- Send the client or customer a letter agreement. This is simply a letter describing what was agreed to. Ask the client to sign the letter and return it to you before you start work.
- Send the client an email confirming the terms of your agreement, and ask the client to confirm that they received the email and agree to the terms.
- Use a form for estimates. Fill it out and give it to the client at the time you make a proposal. If they agree to the terms, have them sign the estimate form.
Always Include the Basic Information
A contract should, at a minimum, contain:
- The names of the parties to the contract
- The date the contract takes effect, and the end date, if there is one
- The things that each party to the contract agree to do, and when they will do them
- The signatures of the parties
Keep in mind, however, that the more specific you are about the terms of the agreement, the less likely that there will be differences in interpretation later.
Consider Using Terms and Conditions
A standard set of terms and conditions can help you avoid misunderstandings with clients and customers. Terms and conditions are simply your standard policies. For example, if you sell items over the internet, your terms and conditions might include such things as your returns policy. If you perform a service, your terms and conditions might include payment procedures and procedures for acceptance of work. Terms and conditions can also incorporate the type of ’boilerplate’ language that is typically found at the end of formal contracts.
If you have a set of terms and conditions, you can attach them to letter agreements, emails and estimate forms, noting that by agreeing to your terms, your client or customer is also agreeing to your standard terms and conditions. It's a wise idea to have your terms and conditions written or reviewed by a business lawyer.
Hire a Lawyer
A contract can seem simple and straightforward, and small business owners on a budget may be tempted to write their own contracts or find a form in a book. While this may save money in the short run, a do–it–yourself contract may be unclear, overlook important terms or contain things that are not in your best interest. If a dispute arises, you may end up paying far more in legal fees than you would have paid to get a solid contract in the first place. Here are some instances where you should consider getting advice from a lawyer:
- When you are setting up your business. Have a lawyer advise you on the types of contracts you may need to protect yourself. These might include employment–related agreements or agreements with vendors, clients or customers. Have your lawyer prepare a standard contract, letter agreement and/or terms and conditions that you can use for all your routine transactions.
- When you have a large, unusual or complex transaction. This might include such things as leasing office space, developing a new product for another company, or agreeing to do a large amount of work over a long period of time. A lawyer can help you negotiate a favorable deal, can draft a contract, or can explain the meaning and consequences of a contract prepared by someone else.
- When you've been in business for a while. Businesses grow and change over time, and business owners should periodically have a lawyer reevaluate their contracts to make sure they adequately protect your business.
Some Common Types of Business Contracts
There are many different types of business contracts, but most fall into one of these categories:
- Employment–related agreements. These might include employment contracts with employees, nondisclosure or confidentiality agreements, non–compete agreements or agreements with independent contractors or subcontractors.
- Leases. These might include leases for office space, storage space, vehicles or equipment.
- Loans. You may have a small business loan or a mortgage, or you may have purchased equipment on credit. Your loan documents are contracts.
- Vendor contracts. You may have contracts with people who provide a product or service for your business.
- Customer or client contracts. You may have contracts with the people who purchase your products or services.
- Intellectual property agreements. You may have specific agreements relating to copyrights or patents, particularly if you are in engineering or a creative field.