4 Core Contracts Every Business Owner Should Know
Contracts: The Foundation of All Business and Commerce
by Ali A. Akhtar
Contracts are written legal agreements, and they are the foundation of all business and commerce. Business owners should become fluent with basic contract language so they can know what to look for in their contracts and avoid common pitfalls. In this blog, I’ll explore the four foundational contracts that every business owner should know.
1. Operating Agreements
An operating agreement is a governing document for any business entity. It is a signed contract between the owners of a company (members, partners, or shareholders depending on whether the company is an LLC, partnership, or corporation) that outlines their rights and responsibilities to each other and the company.
It can be as simple or detailed as the owners want but should contain at least the basic terms such as: what each person’s ownership/profit interest is, what each person’s capital contribution is, what the voting/decision-making procedure is, how owners can be withdrawn or added, and under what circumstances the company may cease operations or dissolve. Even as the sole owner of a business, having an operating agreement helps you adhere to a standard operating procedure and assists with good record-keeping. It’s also helpful to have in the event that you need to add someone to your business as a prospective partner or member of your team.
One of the most common mistakes I encounter with my Texas business clients is not having an operating agreement in place -- even close friends or family members running a business together should take the time to think through and draft an operating agreement, to prevent misunderstandings or disputes from arising down the road.
2. Independent Contractor Agreements
These contracts can get you the help you need without many of the legal commitments of an employer-employee relationship. Independent contractor agreements are flexible documents that can be drafted to hire and compensate the contractor in a variety of ways, such as at an hourly rate, on a project-by-project basis, or at a flat fee for the services.
Hiring independent contractors can be advantageous because you don’t have to withhold or pay taxes for them, provide benefits such as health insurance and P.T.O., or register them for unemployment accounts with the Texas Workforce Commission (TWC). This keeps operations and paperwork simple for business owners.
It is important to note that, once you use an independent contract, you must comply with the written terms and procedures of the contract. Business owners cannot dismiss a contractor “at will” the way an employee can be hired or fired at-will in the State of Texas. Additionally, you cannot make independent contractors agree to devote full-time hours and efforts to your business or they may lose their independent contractor status and be treated by law as employees. The TWC is experienced at catching employers and businesses who try to mischaracterize personnel as independent contractors when they’re really employees, so beware! I’ll be discussing more of these pitfalls in my forthcoming blog, “Beware of Using Employment Contracts!”
3. Client/Customer Service Agreement
Depending on your industry and type of business, you may have customers or clients sign a contract called a service agreement. It is essential that businesses not engage in work for customers based solely on verbal agreements or simple quotes, so these contracts are especially important in fields like construction, remodeling, and other specialty trades or professions.
Knowing the laws and regulations governing your industry is especially important because businesses are responsible for following these codes even if they’re not included in the contract. If you don’t know your industry-specific legal requirements, you’ll want to contact an experienced Texas attorney for that guidance.
Your service agreement should outline the key terms, such as: scope of work, fees, approved methods of payment, warranties and liabilities that you will/will not assume, warranties and liabilities that your customer will/will not assume, and dispute resolution procedures.
4. Vendor Agreements
A vendor agreement is a contract made between your business and another business. This other business will likely be a supplier or a service provider, but it could be any business with whom you may be subcontracting or doing any sort of common enterprise. It may take the form of a purchase and sale agreement, a warranty contract, or a service/maintenance agreement, just to name a few.
More often than not, the company supplying products or services to you will have its own agreement for you to sign. While this makes working with them easy, it’s always a good idea to have your Texas business lawyer review the document and advise you on the terms contained in the contract before signing. Agreements with long, costly cancellation clauses or terms that waive too many warranties and liabilities on the part of the other company are traps, so it’s important you spot and avoid them upfront.
Whether you’re growing your business by bringing on help or changing your supplier for a product, having a general understanding of the nature and purpose of these contracts will enable you to conduct business more smoothly and confidently.
Remember: weak, incomplete, or “form” contracts can cause serious problems for you and your business down the road. That’s why it is imperative that an attorney reviews and advises you on your contracts before they’re used, especially if you use a software or online service (e.g., LegalZoom) to generate them.