Papering Your Million Dollar Idea-Three Essential Contracts for Your Small Business

Do you have a unique business idea? Do you want to invest in yourself and be your own boss? Are you ready to turn that great idea into a small but growing business?

If so, you are not alone. According to the Small Business Administration, small businesses make up 99.7% of all U.S. businesses and 543,000 small businesses are started each month in the United States.

Before you decide to take the pledge, quit your day job, and become a business owner, you need to take certain steps to get your businesses started on the road for success.

Some of these are obvious, like running your great idea through a validation process, making a business plan, planning your finances, and picking a business name and location.

One critical and often overlooked part of the process for starting a small business is having in place well thought out and drafted contracts.

Standard Sales or Service Contract

No, you can’t rely on someone’s good word or that they’re your friend.

If you want to have ammunition in case there is a problem down the road, you need to have all of the key details in writing. At a minimum, your standard sales or service contract should include price, what is being delivered and when, payment terms (including late fees, interest, and collection costs for past due invoices), and what constitutes a breach of the agreement and each party’s remedies.

If you have taken the time to structure your business as a separate legal entity (and I hope you have), make sure you sign all contracts in the entity’s name and not your own name.

Independent Contractor Agreements

For most small businesses, outsourcing to an independent contractor is a great way when you need extra help. Unlike hiring an employee, it’s flexible, you don’t have to pay workers’ compensation, payroll taxes, or employee benefits.

However, it’s the IRS who decides whether or not someone is in fact an independent contractor. Just because you call a worker an independent contractor does not make it so. For more information about the differences between an employee and an independent contractor, check out the IRS’s website.

It’s smart to make a contract to define the relationship between you and your independent contractor. Make it clear that the independent contractor is responsible for her own taxes. The contract should not exert too much control over how the work is done or specify when she needs to work or where. While having this contract in place won’t protect you 100% in an IRS audit, it will give you evidence that you intended the worker to be an independent contractor.

You should also include a confidentiality provision in the contract to protect your business’s proprietary information like customer lists, business plan, marketing plan, and financials.

Management Agreement

If you are starting or running a business with someone else, you need to have a management agreement in writing. This is true even if your business partner is your husband, best friend, or sister. Having a clear written agreement can help you figure out the issues that will come up in running a business.

Here are some of the issues you should address in the agreement:

  • Investments: You need to figure out what you and your partner will invest in the business. Money? Labor? Customers? You also need to figure out if you and your partner will be working full-time or part-time in the business.
  • Salary: Will you and your partner receive a salary or will profits be reinvested back into the business?
  • Management: Which day-to-day operating decisions can a partner make by herself? Which decisions will require everyone to agree? What happens if you can’t reach an agreement?
  • Exits: What happens if someone divorces, dies, retires, or just wants to quit? How do you prevent a partner from quitting and walking away with all of the customers and setting up a rival business?

I discussed in a previous blog post the importance of structuring your small business as a separate legal entity like a limited liability company (LLC) in order to protect your personal assets from business creditors. This is also very important if you are running your business with someone else to limit your liability for their mistakes.

Google is a Search Engine, Not a Lawyer

Enter the names of any of these agreements into Google and you will come up with hundreds of sample agreements. Why can’t you use something you find on the internet?

Where do I start?

You have no way of knowing whether or not the form you are looking at was drafted by a lawyer. You might select the wrong form resulting in a completely different legal consequence than the one you intended. All of that so-called “boiler plate language” at the end of a contract? It’s not there for filler. It has legal consequences and if you’re not a lawyer you won’t know. Stuff you find on the internet is also not going to be tailored to your specific situation.

I know, lawyers are expensive. If you have decided to use a contract you found on the internet and you really have to keep costs down, at a minimum have a lawyer spend a couple of hours reviewing and editing what you have found.

Are you ready to quit your day job and be your own boss? Leave a comment or send me an e-mail.

Disclaimer: This website is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and the publisher. The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

 

 

 

 

 

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