Entrepreneurship might feel like a glamorous undertaking, but to build a thriving business you have to create strong foundations for your venture first, which includes your legal framework. I’ve experienced firsthand how crucial small business contracts are. Whether you’re forming an agreement with a manufacturer, bringing on a new supplier, or hiring a marketing consultant, you’re going to need to create a contract that outlines the nature of the agreement and protects your business.
The Basics of a Contract
A well-crafted contract is a blueprint for a business relationship that clearly defines the nature of an agreement. In order for a contract to be legally binding in the United States (there may be additional requirements based on the nature of the agreement and your location), it has to include certain elements:
1. Mutual Assent
This simply means that all parties must agree. In order for this to happen, there needs to be an offer and an acceptance. For example, you might initiate a contract with a vendor, offering to provide a certain compensation for a certain amount of product. When the vendor agrees to the offer, there’s mutual assent.
2. Consideration
The heart of any contract, consideration is what each party promises to do. In your contract with the vendor, their consideration is the product they’re providing, and your consideration is the money you’ll pay.
3. Capacity
This refers to the involved parties’ ability to satisfy the elements of a contract. Is each party of legal age? Do they have the mental capability to understand and agree to the contract’s terms?
4. Legality
As you would expect, a contract needs to comply with the laws of the location where it’s being carried out. A contract that promises the exchange of illegal goods, for example, wouldn’t be enforced.
How to Start Crafting a Small Business Contract
Whether you were accepting a job offer or signing an apartment lease, you’ve likely seen a contract before — so you know that a standard contract contains much more than just these basic elements.
The language used in contracts is complex and nuanced. Unless you’re a lawyer, I don’t recommend you draft your own business contracts. Ideally, you should work with a lawyer, but if that’s not feasible for you at the moment, start with legal templates.
Using an online contract template, you can customize it according to your unique situation. As your business grows more sophisticated, however, I recommend transitioning to a lawyer who can create custom documents for your needs.
The Importance of a Solid Legal Agreement
“A contract serves as a translator, turning a spoken agreement into a universally understood language in the eyes of the law.” – Nancy Twine
It allows you to avoid those worrying “I thought you meant…” moments that are all too common when different parties with distinct ideas and interpretations are involved.When you have a contract with a strong legal foundation, you leave little to no room for ambiguity and protect yourself and your business from potential legal and financial setbacks. When I was building Briogeo, I had to make sure our manufacturers were maintaining our high standards of product quality and delivering on time. In order to safeguard my business, we needed to have comprehensive agreements in place so that each party knew exactly what was expected. By crafting strong contracts, we were able to scale Briogeo successfully.
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Seeking Professional Advice vs. Doing it Yourself
As a budding entrepreneur, you’re resourceful and self-sufficient — but business contracts are not the arena to test your DIY skills. Contracts contain precise, intentional language based on legal precedent. Without sufficient legal knowledge, you might make errors or omit important clauses without which your business agreement won’t have a solid legal foundation.
These are some common pitfalls to crafting a contract yourself:
1. Overlooking Key Clauses
Contracts demand meticulous attention to detail. If you leave out an indemnification clause, you might face a lawsuit. If you fail to include a confidentiality clause, your classified business information could be disclosed to the public. Without a proper dispute resolution clause, there won’t be guidelines on how to handle a future disagreement.
2. Using Ambiguous Language
A contract’s terms need to be spelled out precisely, leaving no room for confusion or misinterpretation that could lead to a dispute.
3. Failing to account for the future
Given the nature of operating a business in a dynamic market, a contract needs to adapt to evolving circumstances. If a contract doesn’t allow for updates or future termination, you could find yourself stuck in an arrangement that no longer works for you. It’s crucial to create a future-proof contract that evolves with your business.
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Is Hiring a Lawyer Worth the Cost?
“One of the key lessons I learned while scaling Briogeo is that you need to know when to invest in a lawyer.” – Nancy Twine
Leveraging someone else’s agreement or using templates might not cover all aspects relevant to your business — or meet your state and local laws — which can potentially lead to major repercussions. Customized legal advice is invaluable in these cases.
Legal expenses can be high, so it’s important to get an upfront quote. If the cost is prohibitive, have a discussion with the lawyer to see if they can reduce the amount of hours. You might be able to supplement the lawyer’s work by drafting a contract using a template, and having them look everything over and revise as needed.
By investing in legal expertise now, you can avoid financial burdens that are many times higher than what it costs to hire your lawyer.
The Takeaway
A legally sound contract involves specific requirements, precise language, and an understanding of contract law. Though online templates are a great starting point, an experienced attorney’s expertise is unmatched. By working with a legal expert to craft strong contracts, you’ll be setting yourself and your business up for success.
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