Quick Contract Tips #2: What are the essential legal documents & contracts you need for your maturing business?
It might be tempting to seal a deal with a new client with a handshake or in Japan, with a bow and a “yorokshiku onegaishimasu”. After all, formalities just slow things down and, as a small, medium or maturing business owner, you’ve got 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 no signed contracts and nothing has ever gone wrong with their oral contracts. That’s super good news for them but their experience is probably exceptional.
In my 23+ years as a lawyer and now that I run my own law firm business, one of the most common questions I hear from maturing business owners who are ramping up their businesses is “What kind of legal agreements do I need?” Often this is a question from business owners who launch without any contracts in place, or they borrowed something from their friends or patched together clauses off various templates on the internet and now they are looking for a suite of solid agreements to match the maturity of their business and an extension of their brand (see my blog what your contact branding says about you
While specific business needs vary and you do need to obtain legal advice on your specific business industry/sector, I am going to introduce the six most common legal documents/contracts you should have drawn up for your business. I provide legal services to lots of B2B clients who have been running their business for more than a year, so I will use B2B businesses as examples.
The first agreement is a Client or Customer Service Agreement (“Service Agreement”). This contract governs the relationship between you and your client for the sale of your services. So say you are a service provider, e.g., 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 your service and what clients can expect from you; it clarifies fees, sets milestones for provision of your services and when and how the relationship will end.
The second kind of agreements you need in place are Customer and Vendor/Supplier Agreements. These are 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 the all-important source of revenue and you need suppliers/vendors of components/ingredients/raw materials so that you can make the products to fulfill customers’ demand. Every time you make a sale, the contract frames your relationship with your customer providing both of you with legal protections. For vendors/suppliers, a contract is your way to ensure that your needs are met, and ultimately those of your customers. Terms such as indemnification and limitations of liability need to be included and carefully framed to make sense legally and from a practical business perspective.
The third contract you need to have is an Independent Contractor Agreement***. For many small businesses, outsourcing to independent contractors is a great way to get some added help, fill a specific need or bring in specific expertise especially for B2B businesses who want to hire contractors to partner and collaborate with. This is especially so when you find the amount of work is beyond what you can capably do without dropping the ball, and though you may not want to do the work on your own you also are not ready to hire full-time or part-time staff. Independent contractors may be people who design your website, manage your various databases, undertake accounting or other professional services or help on a certain project.
I recommend that every business owner has a template independent contractor agreement, one with a single exhibit/appendix at the back that sets out the parameters of the working relationship that vary for each engagement i.e., the duties, timing, payment schedule, and other details for the specific engagement.
*** 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 you want to be careful how you classify an “independent contractor” and that you do not treat them like an employee in day-to-day practice. Naturally, you cannot simply “cover up” an employer-employee relationship merely by referring to them as an independent contractor under an agreement of the same name. The test comes down to one of “substance over form”. That means, what the reality of the working relationship is 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 so on.
The fourth agreement that you need to have is a Non-Disclosure Agreement (NDA) to protect business information that 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.)
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 maturing business with another person or want to hire staff. 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 serve a similar function which is to ensure that the ideas of the co-founders about how to run the business and share in revenue are set up at the front end on a solid base so that you and your business partner can focus on building the day-to-day 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 the co-founders decide to part ways – almost like having a prenuptial agreement.
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. It documents any important conversations you have with suppliers, potential partners and others intended to be involved in the business. The MOU lays out the terms of a project or relationship in writing. 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 reviewed by an experienced employment law attorney before given to an employee to sign.
Putting it all together:
By taking the time to think about the various elements in each document, you are setting the right foundation for your business. In general, the agreements and legal documents outlined above are a really great place to start to ensure you and your business are protected. 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 firstname.lastname@example.org.