Business Contracts: How to Write a Contract and When SMBs Need One
If you are a business owner, you have a vested interest in understanding contracts.
If you have not yet dealt with the responsibilities of a contract, you will before too long. You may even have to write one yourself! If so, it’s best if you know a little bit about the process
Are you protecting your company legally? Make sure you cover your bases. Here’s how to write a contract and when you absolutely need to write one.
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Why Are Contracts Important?
Contracts are an inevitable aspect of doing business in America. Whether you are bringing on paid help or making major purchases, written agreements help clarify the terms of an exchange.
You can find contracts permeating all aspects of business, including:
- Selling goods or services, such as cars, real estate, or significant purchase orders for supplies.
- Partnering with another individual or business entity for a joint venture.
- Long-term contracts for hired help, which may require a non-disclosure agreement or non-compete agreements.
Contracts are present when a company hires regular employees. A contract’s terms often dictate where employees can or cannot work after they’ve left a company. If an employee signs a non-compete clause, she may not be able to work in the industry for several years after she resigns, if ever!
Contracts even come into play in your personal life. Every time you rent an apartment, apply for a credit card, or sign up for any number of online services, you’re dealing with contracts. Those “terms and conditions” you see when you’re about to pay for your weekly beer cozy subscription service? Yep, that’s a contract!
So, why are contracts necessary? If you’re thinking about learning how to write up a contract, it’s important to remember the many benefits you gain from having an agreement in writing.
1. A Contract Brings Clarity
The whole point of a contract is to bring clarity to an exchange. The number one most toxic element that can enter any contract agreement is ambiguity. Lawsuits often happen because the terms of a contract may have been unclear to one or both of the parties involved.
Clarity does not automatically bestow itself on any contract just because you write it. Poorly-written contracts happen every day. However, what a contract does is provide the framework for a fair and equitable exchange, so long as it’s well-written.
2. A Contract Can Prevent Litigation
A well-crafted contract can prevent litigation if one party feels he has been aggrieved. Often, he may not have read or understood a contract, or he may have willfully ignored certain conditions, and feel he has a right to sue. Clear agreements can prevent a lawsuit by having laid out all the terms in advance.
3. A Contract Can Protect Your Ass(ets)
A contract constructed the right way (ideally with the help of an attorney) can protect assets, such as intellectual property or other forms of real assets like land or buildings. Non-disclosure agreements (NDA) are an example of asset protection a contract can provide.
For example, if you are an inventor and you want to share your idea with an engineer or investor, an NDA can ensure that you have recourse if someone steals your idea.
While there is a slew of reasons contracts should matter to you, likely, you are already in the know on how crucial these powerful business tools are. But how do you go about crafting an effective business contract?
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How to Write a Contract: The Basics
Before you venture into the great unknown of how to write a contract agreement, it’s important to highlight a couple of points.
First thing’s first, you can’t write a contract for illegal activity. As silly as it seems to have to say it: illegal activity does not fall within the realm of a legal, binding agreement. If you’re reading this, it’s highly probable that this first fact is a non-issue for you!
Secondly, keep the writing simple. Even though a written contract may be legally binding, it does not have consist of legalese. You’re probably not a lawyer anyway, so it’s best to steer clear of highly legal terms you may not fully understand.
Luckily, there are plenty of online resources for contract templates and tips. With a little help, you can prepare your own professionally-written contract for any situation.
You can modify and adapt most templates. However, if you decide that your needs require you to “DIY” a contract, here are the most critical elements to include:
Yes, it’s essential to be considerate when doing business, but that’s not the kind of consideration we’re talking about here.
Legally speaking, “consideration” names what you’re exchanging. Usually, it’s money.
Consideration can also include non-monetary transactions. So if you’re trading something for something else–whether it’s the latest and trendiest cryptocurrency or that goat in your backyard–you need a contract.
Consideration is the opposite of a gift, so it requires an outline so that both parties understand their rights and responsibilities. Without consideration, one party may be operating under an illusion as to what they’re owed (or what they’re on the hook for). Consideration can play a vital role in a contract dispute, especially when it comes to something like employee benefits and compensation, for example.
A contract should also include how a party gets paid. Again, the more detailed, the better. So, if you plan on transferring money every pay period via direct deposit, or if you plan on a series of payments through PayPal or Escrow, put in writing precisely how the transaction will take place.
2) Significant Details
As odd as it is to say, put the correct details on the contract. Critical details include the exact dates of the contract (when it is to start and expire), the exact names of each party, and the contract’s purpose.
Believe it or not, a contract dispute can ride on these types of details. For example, if you are working as an independent contractor, you may have understood your work term to end on a different date than the party who hired you. Such a delta in understanding could lead to the contractor feeling robbed of pay, or a company feeling robbed of a skilled worker it needs to complete a project.
Again, the golden rule when it comes to contract is, the less ambiguity, the better!
Clarity wins the day, so if you can prove that the contract spelled out the terms clearly, then you will likely be successful in any court battle where details are in dispute.
3) Clear Contract Terms
Terms are where most contract disputes arise. What exactly are you responsible for? Thanks to consideration, we know money may be involved, but what types of services or goods is the other party expecting?
Is a contract laborer violating terms by consistently not showing up on time, or turning in substandard work? If the contract outlines the details of each party’s responsibility, then at least there is an objective measure of expectations. If push comes to shove and one party takes legal action, then it helps if the terms are clearly stated.
4) Termination and Remedies
With any contract, it is critical to state how the involved parties can go about terminating the agreement.
Do both parties need to agree to end the relationship, or can a contract terminate by the power of one side alone? Often, contracts dictate that, when one party violates the terms, the agreement can end.
Will there be a penalty if one party chooses to break the contract, as in an early rental termination? Does ending a contract mean that you cannot later take someone to court for damages?
A contract should state if it allows any type of resolution measures, or “remedies.” A contract allowing certain forms of remedy over others can prove a considerable factor when it comes to employment dispute resolutions.
5) Other Factors
State laws often factor in when it comes to contract terms. If you want to understand how to write a contract agreement, you need to be aware of your state’s laws.
For example, if you are in California, don’t expect to have to be able to hire someone as a contractor just because you need short term work. Recent California laws have shifted contract workers to employees, complete with benefits. Not even the rideshare behemoths like Uber and Lyft were exempt.
Confidentiality also plays an essential role in your contract. Consider the privacy of both parties, especially when dealing with sensitive issues like intellectual property.
You May Need Help
The best line of defense when you’re dealing with a contract agreement is to hire a lawyer. As with anything business-related, hedge your liabilities as much as possible.
Even if you still want to figure out how to write a contract, you should at least have a lawyer to look at it. Small business often DIY these types of procedures, but the least you can do is have some expert eyes on hand to make sure everything is correct.
Your business is your livelihood, and a bad contract is not worth the risk!
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