Nine Essential Contracts Every Business Needs

June 17, 2021by Brian Walsh

In the excitement and industry required to start a new business, owners can overlook the importance of legal documents that protect the tangible and intangible assets of the enterprise. Properly drawn contracts eliminate confusion and misunderstandings between parties and shield management and owners from liability. Unfortunately, many do not understand the risks associated with all business operations until it is too late.

Most people fail to recognize the extent that Federal and State laws affect each business’s day-to-day operations … until they run afoul of regulations or a party to a lawsuit for thousands of dollars. According to the Small Business Administration, one-third to one-half of small businesses are defendants each year. The plaintiffs are a combination of customers, employees, and vendors.

The SBA notes that “litigation causes not just financial loss, but also substantial emotional hardship, and often changes the tone of the business. “Ironically, many potential litigations can be avoided by the application of informed legal advice in the initial drafting of company agreements, contracts, and policies.

The BasicLegal Documents
Every Business Should Have

The following list is not intended to be exclusive, but representative of the basic legal documents every business needs to protect themselves and their stakeholders.
  1. Sales Contract. A sales contract, aka “bill of sale,” documents the terms of an exchange of money for a product. The contract protects both parties and establishes the conditions of the transaction. The contract language can be a separately identified document (either custom or mass designed), an order form, or an invoice. The contract typically covers the identities of the parties, payment terms, warranty terms, disclaimers, liability limitations, and remedies in the event of a breach.
  2. Service Contract. An agreement to provide a service, whether once or serially, is like the sales contract: a detailed description of the service(s) provided, the conditions and terms of the service, warranties, limitations, and other qualifications.
  3. Indemnity Agreement. Essentially “hold harmless” agreements, this contract can apply to customers, vendors, employees, contractors, and others doing business with a company. The 2nd party agrees that they will not take legal action against the company if certain specified events occur. For example, physicians and hospitals often require indemnification agreements from patients before operation. Similarly, a seller of a potentially dangerous tool or a contractor doing work that might damage a facility might use indemnity agreements.
  4. Employment Contract and Offer Letter. Companies seeking to secure the services of skilled individuals often use employment agreements (as a separate document or an accepted offer letter) setting out titles, duties, compensation, including bonus conditions), place of employment, and other details. A contract may contain specific restrictive covenants, e.g., non-competes and confidentiality clauses to protect proprietary or competitive information. Employment discrimination and wrongful terminations are the basis for a significant number of small business lawsuits each year.
  5. Independent Contractor Agreement. Companies often utilize independent workers for short-term projects, unique expertise, or temporary help for employee absences. Companies are not responsible for collecting or paying a contractor’s employment taxes, enrollment in company benefits such as health or retirement plans, or any requirements or conditions outside the agreement. Contractor agreements typically include non-disclosure and indemnification clauses. Due to recent misuse of the contractor status, the Federal Government aggressively searches for misclassification of employees as independent contractors with stiff penalties for those found guilty.
  6. Employee Handbook and Policies. Most employees are not parties to unique contracts specifying the terms of their employment. Instead, the company-developed handbook defines the relationship between employer and employee. Topics generally covered in the document are payroll information (excluding specific personal wage rates and salaries), conditions of employment (the rules and regulation of employees on the premises or performing company work), benefits and any restrictions or limitations on their receipt, and a commitment to follow all Federal labor laws and policies. In addition, policies regarding anti-discrimination and anti-harassment with defined remedies are essential.
  7. Confidentiality or Non-Disclosure Agreement (NDA). Most businesses have various proprietary or confidential information intended to be private or restricted. For example, this information can include customer lists, financial documents, competitive strategies, or research before copyright or patent protection. Signatories to confidentiality agreements are restricted from disclosing private information to third parties or use the information beyond specific reasons.
  8. Purchase Orders and Vendor Agreements. Standard documents that become legal agreements with signatures of the parties establish the conditions and rights of a company acquiring goods or services from vendors. Their use is critical for proper accounting controls. In addition to the name and address of the parties, the document describes the quantity and quality of goods purchased, delivery requirements, and payment terms.
  9. Website Privacy and Terms of Use. According to the FBI, cybercrime – the theft of confidential information or money by unauthorized use of a computer or network – “threatens the public’s safety and our national and economic security.” For example, crooks steal personal, financial, and medical information by hacking company online accounts and exposing the owners of the accounts to negative publicity, regulatory action, and lawsuits from the company customer. The Privacy Policy details the scope and use of customers’ personal information; Terms of Use define the relationship and conditions for the receipt and protection of private information.

The DIYBlessing and
Curse of the Internet

Knowledge is only a Google search away. Easy access to data and information have reduced years of study and experience down to just a few mouse clicks.

Tasks previously requiring unique expertise and careful applications are truncated, homogenized, and commercialized. Computer programs, sometimes augmented with artificial intelligence (AI), calculate income taxes, diagnose disease, and produce pages of legal jargon as if happiness and success are a matter of selecting the suitable decision matrix.

That blessing may also be a curse. Unfortunately, many people just print off the first contract, agreement or policy they think sounds good. That is a really risky decision.

The bottom line is you are making an uninformed decision. Legal documents provided online can be so overly broad or so poorly written that they don’t comply with Florida law and could be unenforceable. The document could unintentionally waive certain rights or create an unknown obligation.  Moreover. key provisions protecting you could be left out.

The bottom line is that you simply don’t know.

One Size Does Not Fit All

We live in a world that devalues and replaces actual, experience-based knowledge for superficial analysis and easy application. Many business owners seek to save on legal expenses and search online for prepackaged solutions to their needs.

At least a dozen companies offer preformatted, fill-in-the-blank legal forms and documents. For example, one site provides (Articles of Incorporation) to W (Website Terms and Conditions) coverage with instructions to “Answer a few simple questions” and “print and download immediately.” They claim the process “takes just 5 minutes.”

A cookie-cutter approach to legal documents to protect a business from legal risk may save money in the short term but exposes the company to unique risks long term.

Business owners forget that any product or service offered indiscriminately to everyone must be generic to appeal to the greatest number of potential customers. Yet few businesses are alike, being more than simple carbon copies of other companies. The rewards and risks associated with every business are unique.

Even those who market the same product differ by the customers they attract, the skills and engagement of their employees, and the issues that confront them. Many laws affecting businesses vary by location. California, for example, has almost 400,000 regulations, while Idaho has less than 40,000.

An act considered legal in a low regulation state might subject a company to significant penalties in a high regulation state. Failure to recognize the variations can be costly. Unfortunately, the business owner typically discovers the holes in their legal protections too late, i.e., remembering to close the stall door when the horse is gone.

About Using Boilerplate Clauses

The slang term for standard provisions or language in a legal document is “boilerplate.” The clauses typically appear at the end of a contract under the heading “General Provisions” or “Miscellaneous.” Clients occasionally complain of its use because they consider boilerplate less valid than an original document by their attorney.

Alternatively, those who rely on online preformatted forms boast that their cheaper online versions of legal agreements have the same language as a custom agreement prepared uniquely by an attorney. However, they misunderstand the purpose of boilerplate clauses and their application.

Boilerplate language in a legal document can be valuable and is often critical in resolving a dispute. The definitions and applications of individual words and phrases found in boilerplate have been litigated and decided in lawsuits over many decades, eliminating misinterpretations or misunderstanding their meaning.

The correct use of boilerplate clauses depends on the skill of the attorney preparing or reviewing the contract. Knowing when to include or amend a specific clause is crucial to an agreement that serves its intent.

Final Thoughts

Legal contracts are indispensable in the modern business world that extends across state boundaries and country borders. They function as legal “stakes in the ground,” signifying to all the scope and limits of an agreement.

The best contracts are indisputable and essential to the smooth functioning of commerce, giving their makers peace of mind, protecting the parties involved, and defining a resolution process.

Prepackaged legal documents have a place but are not substitutes for competent legal advice. Operating without legal documents is foolhardy. Working with a poorly drawn, inappropriate, or irrelevant form goes beyond foolish to dangerous. 

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