Are Your Contracts Good Enough to Protect Your Business?

Author: Rieva Lesonsky | May 27, 2015

Obtaining financing for your small business requires signing a lot of contracts. But this isn’t the only situation in which contracts are important for your business’ success. No matter how many times you have done business with a client, vendor or supplier, having the right contract in place is essential to protecting your interests.

Depending on your industry, stage of growth and the relationship you’re entering into, the kind of contract you need may differ. Typical contracts that most businesses need at some point include:

  • Sales or service contract The sales contract (for a product-oriented business) or service contract (for a service business) details the terms and conditions of each sale you make, including payment, taxes and fees, credit or payment terms, as well as any disclaimers, liability limitations and warranties. Depending on the complexity of the sale, you may want to include this information on every invoice or create a separate sales contract that you refer to on the invoice.
  • Employment agreement An employment agreement details the terms of employment at your business. These agreements are used to help protect your company in case an employee files a lawsuit.
  • Confidentiality or nondisclosure agreement (NDA) This type of agreement may be used when you’re revealing confidential information about your business to another person or entity. For instance, if you are considering entering into a business deal, or contacting an invention marketing company about an invention you have developed, you’d use this agreement specifying what information they can and cannot share to ensure the other party honors your confidences.

What should be in a contract? In general, you’ll want your contracts to be as detailed as possible in terms of covering any eventuality that might arise. It’s best to create a standard contract for each type of situation above, then modify it for particular cases. This way, you’re not constantly reinventing the wheel.

When creating a new contract, start by thinking about everything that is involved, what needs to be clarified and what could go wrong. (This is one situation where it helps to have a pessimist on hand.) Spell out who, what, where, why and how the sale or transaction will be handled. Then consider what you’ll do in case one party doesn’t meet their deadline, deliver as promised or fail to pay. Also, specify if, how and when the contract can be changed or what actions would void it altogether.

There are plenty of legal websites, including RocketLawyer, and, where you can find templates or examples of different types of contracts, either free or for a small fee. Looking at these will give you ideas for what you might want to include in your own contracts.

While writing your own contracts might seem like a hassle and you may prefer to let the other party take charge, in reality it’s better to be the one writing the contract. This way, you have more control and can ensure that your interests are protected. However, if the other party has a contract they want to use, don’t assume you can’t modify it. Have an attorney review it; then request the changes you’d like. In most cases, people are quite willing to compromise.

If the word “attorney” makes you grab for your wallet, know that you can keep costs down by using templates to create your own contracts, and then just pay your attorney for a quick review. I’ve learned the hard way that it’s worth the expense to make sure your contracts are done right.

Last, but not least, never sign a contract that you don’t understand—even if your attorney thinks it’s fine. Have him or her explain anything you aren’t clear on before you sign on the dotted line.

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