A contract is a legally binding agreement between two parties. There are many reasons why a small business owner would enter into a contract. Contracts are commonly made between small business owners and landlords, customers, vendors, clients, employees, and independent contractors.
Contracts are typically written documents, but in some cases, they may be verbal (also called an “oral contract”). Because contracts are legally binding documents, they offer small business owners guarantees and protections that can help to prevent costly business losses.
There are many situations when a small business owner should have an agreement in the form of a written contract. These situations include when:
- Leasing commercial office space;
- Hiring independent contractors to perform specified tasks, such as building a website for the small business or designing a logo;
- Hiring an outside company to routinely provide office supplies, perform cleaning or maintenance, or provide technical assistance with phone and computer systems;
- Leasing office equipment;
- Hiring employees that may need to sign covenants not to compete or non-disclosure agreements to protect the business owner’s assets and business secrets;
- Entering into an agreement to provide services or goods to a customer; and
- Hiring a marketing company for promotional purposes or engaging in business advertising.
Small business contracts will be either in the name of the small business itself or the name of the small business owner personally.
As a small business owner, you may, unfortunately, encounter situations where you think that a breach of contract has been committed by the other party. In some cases, an employee, independent contractor, or service provider may fail to uphold their promises to you and your business. While this can be a frustrating situation to find yourself in, there may be compensation available to you to cover your damages.
Common examples of breached small business contracts include:
- An employee who took trade secrets or sensitive, confidential information relating to the business in violation of a non-disclosure or non-compete agreement;
- An office supply company that failed to make an agreed-upon delivery;
- An independent contractor hired to build a company website that did not complete the task; and
- A customer or client that signed an agreement but never paid for the services or goods provided by the small business.
In these situations, as a small business owner, you may be able to recover damages resulting from your lost income and lost profits or any payments that were made to the party that breached the contract. The amount of damages that you may be able to recover for your breach of contract claim can vary by state and the specific facts of each case.
Some small business contracts will include a specific term in the contract called a liquidated damages clause. This type of clause outlines the details of what happens when an agreement is breached. Liquidated damages clauses will typically include details of payments that must be made if the promises of the contract go unfulfilled.
Many small businesses have more than one owner. If you are thinking of starting a small business with another person or bringing on another person as a co-owner, you may want to consider having a partnership agreement. A partnership agreement will outline the ownership, financial, and management responsibilities and the fiduciary duties of both of the partners.
Typically, these agreements will also specify how much each partner will get paid. These contracts help to protect both partners and the business itself, from an event where one of the partners does not fulfill their obligations under the agreement. The terms required to be included in a partnership agreement vary by state.
Most small business contracts, including leases and independent contractor agreements, are written documents. Some contracts may be verbal or implied and still be legally binding. Not all contracts have to be in writing to be legally enforceable. However, it’s usually in a small business owner’s best interest to have written documentation of all of their small business agreements, because verbal contracts are more difficult to prove in the event of a breach.
As a small business owner, you may be able to draft and negotiate the terms of your small business contracts on your own. However, commercial leases, and contracts with employees and independent contractors can have complicated terms that need to be drafted properly and in accordance with your state’s laws.
If you are thinking of creating a contract for your small business, or if you feel that you’ve been the victim of a breached contract, you should consider contacting a business lawyer for help.