Why Small Businesses Need Written Contracts

why small businesses need written contracts

Do I really need a written contract?

Don’t make the mistake of operating your business without appropriate written contracts.

By law, some contracts must be in writing to be enforceable, including, in most cases, contracts for the purchase of real estate. In other words, if you have an agreement with another business and they fail to perform their obligations, you cannot take them to court to recover damages or force the other party to comply if your agreement is not in writing. 

Even if the law does not require it, having written contracts helps all parties to the transaction understand their rights and obligations, as well as other important details of the transaction, leading to less confusion and fewer disagreements in the business relationship. Business contracts can also help avoid costly litigation if issues arise by including provisions that cover how disputes are handled, such as by mediation or arbitration.

If there is no contract, courts may apply various rules and/or laws when contracts disputes. In some cases, such as with businesses engaged in sales of products, basic business terms can be provided by state law or by the "Uniform Commercial Code" (commonly called the UCC). If there are no statutory rules that apply, the court will try to determine what the parties to a transaction intended by looking at past history of dealings between the parties, other communications, and/or general practice in the industry. As a result, if a dispute arises and you do not have a contract, you may be subject to terms that you did not intend to agree to. 

What kinds of contracts does my business need?

The types of contracts a business needs depends on several factors, including the applicable industry, where the business is located, where business is transacted—i.e. “brick and mortar” location or do business online, and whether it has employees, among other factors. You should have written agreements covering all aspects of your business, including with vendors and suppliers, employees, independent contractors, clients and customers, and more. 

Not all of these contracts will be created by you; some will be created by others who you do business with. For example, you may be required to sign a commercial lease agreement for your business location, a hosting agreement for your company’s website, or a contract with your IT service provider—all of which may be drafted by the other parties to the transaction.. 

How can I ensure I have the best contracts for my business?

While there are many available DIY contracting forms and services, you should be extremely cautious about using them. A DIY contract form will not be able to help you decide when you need to change standard terms and may not take individual state laws into account. As a result, they may not account for specific terms, agreements, and/or licenses that may be required in your area. This could open you up to expensive, time-consuming litigation that could have been avoided if you had handled the contract appropriately at the outset.

It is important to read and understand the contracts executed on behalf of your business, whether prepared by your business or another party. If you are drafting your own contracts, keep in mind that if a disagreement arises, the court will often hold confusing or unclear provisions against the party that drafted the contract. 

For these reasons, it is important to seek the help of a qualified business lawyer when drafting or negotiating contracts, and to have your contracts reviewed by your attorney before you sign them or present them to others for signature. A lawyer can help negotiate, create or review your contracts to ensure that they will be legally enforceable and will protect you and your business if a dispute arises. Summarize your legal issue on our site to quickly find a qualified business lawyer in your area.

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Posted - 05/13/2018