What are the essential contracts I need for my business? [Updated 2021]
Catheriine O’Connell Law
It might be tempting to seal a deal with a new client with a handshake or if you are in Japan, with a bow and a “yorokshiku onegaishimasu”. After all, formalities just slow things down. Right? And as a business owner, you have countless other things to do with your time. Right? Well, I do know one or two business operators who have been in business a number of years who told me they have not signed contracts and nothing has ever gone wrong with contracts they made with the shake of a hand, a fist bump or a bow. That’s super good news for them but their experience is probably more an exception to the norm..
In my 24+ years as a lawyer and now that I run my own law firm business, I am a business owner just like you so I too need to be sure about the manner in which I make agreements with my clients (so they pay me!) and suppliers of services I outsource (so that they deliver the service on time and in the manner we agreed upon). So more than ever I understand the resistance there is to get decent contracts in place, and how busy a business owner is at just getting on and working to make revenue.
But cutting corners and not doing things properly in the first stages - or as I call it: “Not Getting your Legal Ducks Lined Up!” at the front end, can lead to problems and heartache, and expending more money to fix things, (if they are fixable) down the track.
I’d much rather help out clients spend a bit more time to “get their legal ducks lined up” nice and tightly at the start, than to be the ambulance helping at the bottom of the cliff when the legal ducks, fall off the cliff and need to be revived!
One of the most common questions I hear from business owners who have the goal of scaling their business is:
“OK I understand I have to “get my legal ducks lined up”, but what kind of legal agreements do I actually need?”
Often this is a question from business owners who may have launched their start up business without any contracts in place for the reasons I mentioned above, or perhaps they have borrowed a “contract template” from their friends or they may have even patched together clauses from various “templates” off Dr. Google (i.e. the internet).
Swiping contracts off the internet is never a wise choice as these may simply not be suitable for the the country and circumstances in which you are doing business.
As a business grows its customers and the supply chain expands, business owners find that they need a suite of solid agreements to match the maturity of their business and expectations of their customers and suppliers. Business owners also increasingly find that the bigger they grow in business. the more important it becomes that their contract looks aesthetically professional and the quality of its contents are top class.
What happens is they realise finally that their contracts actually become an extension of their brand (see more on this via my blog: What Does My Contract Branding Say Bout Me? [Updated 2020].
While specific business needs vary and you should always obtain legal advice on your specific business industry/sector, I am going to introduce the six most essential contracts (documents) you need for your business. I provide legal advice to many B2B clients who have been running their business for more than a year, so I will use contracts that a B2B business needs, as the example.
The first agreement is a Client or Customer Service Agreement (“Service Agreement”).
This contract governs the commercial relationship between you and your client for the sale of your services.
For example, if you are a service provider - an executive coach, a corporate trainer, an IT services provider, a marketing consultant, or whatever wonderful thing you do as your passion - this is an important contract that sets out the following things. This not exhaustive but just some of the key items are:
the scope and nature of your services and what your clients can expect to receive from you for the money they pay you
clarifies what you won’t be doing for them (carve outs)
sets out milestones for what services the client expects you to provide by a certain date, or occurance of an event, and
states when the contract will end, what the ongoing obligations may be (such as keeping certain things confidential for a period of time).
The second agreement you need is a Customer and Vendor/Supplier Agreement.
This type of contract is especially necessary for business owners who sell products (e.g., small café owner, hair salon owner) as opposed to being a service provider. When you are growing your business, customers are a very important source of revenue and you need your suppliers/vendors of components/ingredients/raw materials so that you can make the products to fulfill your customers’ orders. Every time you make a sale, the contract will have framed the relationship you have with your customer providing both of you with legal protections.
For example, the owner of a bakery business will usually include a clause in the agreement with the supplier of cake/bread ingredients to the bakery, that orders will be honored and delivery will be at a certain time. There would usually be protection for the bakery owner if the order is not delivered on time, or is insufficient in number or the quality of the ingredients are not up to scratch.
It’s important for a business owner to discuss with their legal advisor about the various scenarios that might come up which would upset the daily business, and make sure these concerns are covered in the agreement. Business owners who have failed to do this at the outset often find themselves on my law firm doorstep in need of urgent advice to rectify situations where they didn’t consider these things beofre drafting their supplier/vendor and customer agreements. It’s harder to fix what is broken than to make sure from the get-go that the contract covers all the potential problems.
Considering the scenarios in advance allows you to do your best to ensure that your supplier reliably supplies you with the ingredients you need to run your business smoothly. Ultimately this contractual certainty allows you to meet your promises with your customers - for example, to ensure that the birthday cake they ordered and paid for, is ready on the day they pick it up.
Terms such as indemnification and limitations of liability need to be included as well and carefully framed so that they make sense from both a legal and practical business perspective.
The third contract you need is an Independent Contractor Agreement
For many small businesses, outsourcing to independent contractors is a great way to get some added help in the business (e.g. all of the book-keeping and invoice work), or to fulfill a specific task (e.g. prepare a marketing flyer), or bring in specific expertise (e.g. IT expert to set up cyber-security). This is especially the case for B2B businesses who find that they cannot do all aspects of the business and are so busy they start dropping the ball or more often they need a contractor for a good reason which is to partner and collaborate with as the business scales and they want to expand their offerings.
In many cases, business owners are not ready or willing to hire a full tiime employee, or the extent of the work may not reach to one full headcount. So hiring an independent contractor is a solution many business owners use.
Indeed in my own business I have several independent contractors working for me who provide legal translation, administrative and operational support etc. They are all under a variety of independent contracting.
Other kinds of independent contracts you will need contracts for are people who design your website, manage your various databases, undertake accounting or other professional services or those who help you out on a certain project, such as delivering part of a group coaching session where they have a specialist focus area.
I recommend that every business owner has a template independent contractor agreement.
Even if you are not ready to hire a contractor it is good to have a template up your sleeve because when a person comes along who you would like to hire as an independent contractor, they can slip through your fingers if you don’t have the paperwork ready to hand to them promptly.
I recommend an independent contractor agreement that has a body of standard conditions, and a separate exhibit/appendix/Statement of Work (let’s call all of these “SOW”) at the back that sets out the parameters of the working relationship for the specific project you hire the person for. That way if you hire them again for another project you only need to prepare another SOW for each future engagement instead of preparing a whole new agreement. SOW’s set typically set out the specific duties, timing of delivery of services, fees to be paid, tax, payment schedule, and other details for the specific engagement.
The difference between “Independent Contractor” and “employee” is critical
Note: Be aware that labor authorities and tax agencies are typically on the lookout for business owners who misclassify their workers as “independent contractors” often by mistake but sometimes more deliberate to avoid paying benefits or other payments normally required to be paid to employees. So business owners need to be careful how they classify an “independent contractor” and avoid treating independent contractors like an employee in day-to-day practice. Naturally, you cannot simply mask what is really an employer-employee relationship by merely referring to the person as an independent contractor under an agreement of the same name.
The test comes down to one of “substance over form”. That means the question is “What is the reality of the working relationship rather than how it is captured under the paperwork?” The independent contractor agreement will explicitly define the relationship and make it clear that you intend the person to be responsible for his or her own taxes and other items. Conversely as a business owner, if you are controlling the person’s hours, job duties, and giving them space and equipment you will need to check with a labor lawyer what you really have an employer-employee relationship. The penalties can be stiff for incorrect classification, including paying back pay/taxes, benefits, vacation/sick leave, and stronger sanctions.
The fourth agreement that you need to have in place is a Non-Disclosure Agreement (NDA) or Confidentiality Agreement.
An NDA protects your business information which should remain private, such as customer lists, new product pricing, financial records and intellectual property.
An NDA is generally seen as your first line of defense in protecting this information.
This legal document creates a confidential relationship between you and any contractors, employees, and other business partners who might get a behind-the-scenes peek at your operations.
The provisions of an NDA can be included in your Services Agreement or Independent Contractor Agreement as a confidentiality clause, or included by way of reference to the separate NDA.
The fifth document you need is an Online Privacy Policy.
If you gather information from your customers/clients or website visitors (e.g., email addresses, credit card information) or if you are running Google or other analytics in the background collecting such information, you are legally required to upload a Privacy Policy that outlines how this information will be collected, how it will be used (and not used), and how it will be stored and protected.
Finally, the sixth kind of agreement you should have for your business is an Online Terms of Use.
Any business with a website should upload their Terms of Use to their website.
The Terms of Use has to benefit of limiting your liability in cases where there are errors in your own website content, or the information contained in any hyperlinks from your website.
Furthermore, your Terms of Use should let visitors know what they can/cannot do on your site, particularly where you allow visitors to your website to comment on your business blogs or share their own personal content or comments.
Some additional legal documents to consider adding to your portfolio
If you have read this far then as a bonus I am adding some additional pieces of information about some extra documents to think about putting in place, especially if you contemplating expanding your business with another person or want to hire employees:
If you are thinking about collaborating in business with a co-owner you need an agreement such as an Operating Agreement, Shareholders’ Agreement, Founders Agreement or a Partnership Agreement. All of these serve a similar function which is to ensure that there is alignment between co-founders at the front end, about how to run the business and share in revenue, so that all the business partners can set to focusing on building the day-to-day running of the business. Founding documents include provisions relating to ownership percentages, capital contributions, salaries, distributions etc. Importantly they also include what will happen to the business if one of the co-founders wants to sell their shares or all of the the co-founders decide to part ways – in this way it is almost like having a prenuptial agreement between co-founders.
Some other agreements that business owners like to have in place are a Memorandum of Understanding (MOU) and employee documents. An MOU falls somewhere between a formal contract and the handshake/bow mentioned at the top of this post but it is a contract none the less (unless depending on the facts, it is stated as “non-binding.”) The MOU is often put in place before a formal contract is created. It can document any important conversations you have with suppliers, potential partners and others intended to be involved in the business. The MOU can lay out the terms of a project or relationship in writing. It can set out the discussionds at a meeting and outcomes provisionally agreed upon. With an MOU, you can state that the “MOU is subject to formal written agreement and not legally binding”.
Naturally, if you are hiring employees you need to have an Employment Agreement or an Offer Letter and a set of Work Rules. These documents set the various obligations and expectations in the employer/employee relationship. Some documentation is standard and available from Government websites and others should be drafted by an experienced employment law attorney before they are given to an employee to review and sign.
Putting it all together:
By taking the time to think about the various elements in each document, - getting your Legal Ducks Lined Up! - a business owner sets up a proper sturdy foundation for their business. The agreements and legal documents outlined above are a really great place to start to ensure you are protected in operating your business. Be sure to put these agreements in place early to mitigate any future legal risk.
**Disclaimer: The contents are for educational and informational purposes only and do not create an attorney-client relationship. If you have specific questions make sure you contact a lawyer for advice.
To map out the essential legal documents and contracts for your business, contact me at catherine@catherineoconnelllaw.com.