Setting Up Your Basic Contracts

Now that you’ve laid down the basic foundation for your business and reviewed your needs, it’s time to put your plan into motion. But before you go out and start setting up relationships with clients, vendors, and employees, you need to Set up Your Basic Contracts.

“But before you go out and start setting up relationships with clients, vendors, and employees, you need to Set up Your Basic Contracts.” 

WHAT IS A CONTRACT?

First off, what is a contract? A contract is just an exchange of promises between two parties.

If you’re not sure if you need a contract, think about if you are exchanging promises. Are you promising to provide them with something and are they promising something in return. If so, you probably need a contract.

An example would be a contract with a client if you are a service provider. In that relationship, you are promising to provide a service and your client is promising to pay you for that service.

Why are contracts important?

A contract is important because miscommunication can happen so easily. In most states, oral contracts are binding. However, anytime you’re exchange promises with another party in your business, it is prudent to get it in writing. Putting your promise in writing (in a contract) will reduce or eliminate miscommunications. Contracts should create clear outlines of what is expected from both parties.

In addition to miscommunication, people sometimes break promises. Contracts give you a way to enforce a broken promise. For instance, if you provide a service and your client doesn’t pay you, you can pursue legal actions to collect on that payment. Having a contract in place will make the legal process much simpler.

Human relations and business relations rely on a certain amount of trust. Contracts help protect you if that trust is misplaced.

TYPES OF CONTRACTS FOR SMALL BUSINESSES

Now that you understand what a contract is and why they are important, let’s talk about the basic types of contracts your business might need. But first, please note that basic contracts can be industry-specific, so make sure to do your homework and consult a licensed professional in your state.

To figure out what types of contracts you need, we suggest you go back and review the section on Defining Your “Who.”

In that section, we spend a lot of time discussing business partners. If you are going into business with a partner, it is imperative that you have a contract. Many partnerships exist with unspoken agreements or handshake agreements, get those agreements in writing to make them more enforceable.

In that section on Defining Your “Who,” we also talked about who is going to work for your business. In some instances, it might make sense to have contracts with your employers. It’s also important to have contracts with your independent contractors. Other parties that work for your business include vendors. When working with established vendors, they usually have standard contracts for all of their partners.

And as we mentioned before when talking about providing a service for your clients, you may also need contracts with your customers. Again, the type and substance of that contract will vary greatly depending on what type of business you are in.

Another very common type of contract is an insurance policy. An insurance policy is a contract between you and the insurance company. You are promising to pay your premium and the insurance company is promising to pay out a claim for a covered loss.

The last really common type of contract that we will highlight for you is a lease. Commercial leases can be extremely complicated and they are often written by the landlord, not by the tenant. Since they are usually drafted by the landlord, they often heavily favored the landlord rather than the tenant.

HOW TO SET UP YOUR BASIC CONTRACTS

In many cases, the other party will provide contracts and ask you to agree to the terms outlined in that contract. Such is the case with vendors, landlords, and insurance companies. If you are presented with a contract, it is your responsibility to review it, understand it, and negotiate (if needed).

In other cases, you will have to provide the contract. This is very common if you are hiring independent contracts or bringing on clients.

How do you draft your own contracts?

There are some online resources, like LegalZoom and Rocket Lawyer, where you can download basic boilerplate contracts. That is usually the cheapest way to create a contract without having to handwrite it yourself from scratch (which we don’t recommend). The problem with online boilerplate contracts is they are not specific to your business. We’ve talked about this a lot in this checklist, but to reiterate: every business is different. That means the needs of every business are different. A boilerplate contract might not cover everything you need, leaving you legally exposed.

You can also hire an attorney to draft your contracts for you. This can get expensive, so we recommend that you discuss your budget with your attorney before starting. Alternatively, you can seek out a flat-fee law firm with transparent pricing.

REVIEWING YOUR CONTRACTS

If you already have a contract, whether you downloaded it from a legal website, wrote it yourself, or it was presented to you by a landlord or a vendor, you can ask an attorney to review it.

One important thing to note, even if you have a lawyer write or review your contracts, it’s still your responsibility to read and understand what’s in the contract. The lawyer can highlight legal issues for you, but a contract is ultimately a business decision. You, as the business owner, are the one exchanging promises in the contract. So you need to make sure that you’re ok with all of the promises that are exchanged in that contract.