Legal contracts are important in protecting business interests. The success of a business depends on how best it protects its interests in relation to it customers, employees, founders and other parties. Many entrepreneurs fall into the trap of doing business with customers on the basis of trust. A handshake usually seals the deal. Formalities such as contracts are frowned upon because they slow down the business process. Putting business deals in writing and having the proper documentation gives your business legal protection in the event of claims in the future.
The types of contracts that a small business or startup needs will vary depending on the nature of the business. A lawyer can help you draft some of these contracts. Below are some common contracts/agreements that a small business needs.
Partnership Agreement/Shareholders’ Agreements
In my previous post here, I introduced the shareholders’ agreement and why it is important for a startup. A shareholders’ agreement is similar to a partnership agreement. Shareholders’ agreements are usually used where the business structure is a limited liability company. A partnership agreement will be used in a general unincorporated partnership or in an incorporated limited liability partnership. My post on the types of legal structures discusses the different structures and highlights the common features of general partnerships and limited liability partnerships.
Generally a partnership or shareholders agreement lays down what each founder brings to the table in terms of cash contribution, labour, property, customers etc. It should indicate who among the founders will work the business full-time or part-time and who is a silent partner. The agreement will also state how profits will be shared and who gets paid what salary. Decision making should also be included in the agreement to avoid any potential disagreements among the founders. Finally the agreement should contain provisions on what happens to ownership interests for example in cases where a founder dies, retires, goes bankrupt or exits.
Non-Disclosure Agreements (NDAs) are also known as confidentiality agreements. Any business that shares its proprietary or confidential information with a third party or a person outside the business should have a NDA.. Business proprietary or confidential information includes business plans, financial accounts, intellectual property etc.
There are three types of NDAs and their usage will depend on the nature of the disclosure and the party making the disclosure. The first one is a mutual NDA. This is used where each party is disclosing confidential information to each other. The rights and obligations of both parties in the agreement are mutual in order to create a balanced view. The second type is the pro-discloser NDA. This is used where one party is disclosing confidential information to the other. It is drafted in favour of the party disclosing the information. The last one is the pro-recipient NDA. This is drafted in favour of the party receiving the confidential information.
Client and sales contracts are important because they set out terms of business between your business and customers. A client contract will be ideal if your business provides services. It will set you the specific services being provided, cost, commencement and completion date and payment terms. A well drafted client contract will specifically set out what the client will receive which helps avoid disputes. A business can have a lawyer draft a master client agreement which can be amended for every new client.
A sales contract on the other hand will be ideal where the business sells goods. This can be signed when customers buy goods from your physical store or it can be part of the terms and conditions on your website if your business sells good online. The sales contract should be specific and indicate what products are for sale and their prices. The contract should also indicate the returns and refunds policy if your business has any. In some countries, the law requires a seller to give certain warranties and guaranties as to the quality of the goods being sold. You should consult a lawyer in your country on this to make sure you are not in breach of the law.
Letter of Offer & Employment Contract
The success of any business depends on the team working for the business. Hiring the right way is therefore important to ensure that employees understand their obligations. Having an employment contract sets out the business owners’ expectations and avoids conflicts between the employer and employees.
Employment laws vary from country to country but general contract law principles apply. A contract is legally enforceable if it has the following elements: an offer; acceptance; consideration; and intention to create legal relations. The letter of offer is usually the first document to be signed by the employee and signifies the offer and acceptance elements of the contract. The employment contract will set out the employee’s obligations like duties to be performed, working hours, work place policies etc. The employment contract will also lay down the employer’s obligations like paying the employee a salary and providing a safe working environment among others.
Independent Contractors Agreement
Sometimes startups and small businesses do not have resources to have full time employees and resort to using independent contractors. These contractors may bring in certain expertise that the business does not have. In such cases, it is prudent to have an independent contractors agreement signed to clearly define the relationship between the contractor and the business. The agreement should be clear on each party’s obligations. For example it should be understood that the independent contractor is responsible for their taxes. The agreement should also be clear that the independent contractor is not an employee of the business and should not hold out himself as such.
If you require any of these legal contracts drafted, you should get in touch with a qualified lawyer who will understand your business needs and prepare contracts which protect you and your business. Having good legal documents helps avoid disputes and litigation which is expensive and time consuming. Such disputes distract entrepreneurs from growing their businesses.
By Bryan Yusuf
Bryan is the Managing Partner at Bryan Yusuf & Associates Advocates. He is an experienced corporate commercial lawyer with expertise in general commercial and corporate matters, banking and finance, real estate and intellectual property. Bryan is passionate about startups and small businesses and provides them with consultancy and legal services. If you are looking for legal advice or services for your startup or business, just get in touch.