Legal Disputes in Small Businesses: Why Small Business Contracts Are Essential

Why is it essential to maintain small business contracts? Contract law disputes are common among small businesses. However, a whole host of legal troubles can be avoided if you have the right documentation. As a business owner, legal contracts help you abide by the law and avoid costly disputes. They also protect you and your employees by acting as a record of everything you’ve ever agreed.

Despite the importance of small business contracts, many small business owners neglect their legal obligations. Others may think contracts are not worth the hassle, especially with a new or loyal client. These are mistakes that could cost your business dearly.

What are small business contracts?

A business contract is a legally binding document that lays out an agreement between two parties. As a small business owner, you should have various business relationships that involve some form of contractual agreement. Dealing with them is part of running a small business, however daunting they may seem.

Business contracts can be verbal, written or both. However, written contracts are undoubtedly the most reliable, since spoken agreements are often difficult to prove. You may think verbal contracts are enough to keep your small business running, but these rely on nothing more than the good faith of all parties, which isn’t always dependable.
Email conversations can be used as contracts in court, but they are only permitted if both parties support it. Other agreements must be in writing, such as consumer contracts, mortgage documents, and consumer credit agreements.

It is advisable to make all your business arrangements in writing, in the form of a legal contract. You should also keep electronic versions of these documents stored on the cloud so you’ll always have a copy to hand.

Why legal contracts are essential

Contracts are essential to small businesses because they help them avoid costly legal disputes, idea theft and data leaks. A signed agreement is legally enforceable, so it will be able to protect you should you need to take legal action.

Many business owners are put off by the cost of having a contract drafted by a professional. However, the initial investment is far less than the potential costs of a legal dispute.

Without a contract, a disagreement between your business and a former employee, vendor or contractor could result in the following:

  • Wasted time and resources
  • Loss of revenue and profits
  • Bad publicity
  • Negative business relationships
  • Money spent on legal fees
  • Court appearances
  • Substantial fines

Starting any business arrangement without a signed contract doesn’t just make you look disorganized, it also makes you seem untrustworthy. When customers, suppliers, contractors, and employees go into business with you, they want to know your position is clear.

Legal contracts provide a solid foundation that helps keep your business on the right side of the law. With written proof of your business agreements, you can minimize disputes and resolve problems efficiently. With the rights and obligations of both parties set out in writing, you will reduce any uncertainty that surrounds your business.

Essential contracts for small businesses

It’s best to draw up contracts for all your business agreements, but the five major documents to focus on are as follows:

1. Employment offers

Before a new employee starts working for your business, it’s best to have them sign an offer letter which outlines the scope of the relationship between both parties. An employment offer letter should include the job title and responsibilities, salary and benefits, and that the document can only be amended in the future in writing, signed by the employer and the employee. If you need your employee to sign a confidentiality agreement or NDA, this should be clear in the job offer.

2. Confidentiality agreements

Without a confidentiality agreement, you risk another company or person stealing your ideas or product designs. If you want someone to invest in you or work alongside your business, then you need to have them sign a confidentiality agreement in place. The confidentiality agreement (also referred to as a Non-Disclosure agreement or NDA) ensures the recipient of the contract will hold your company information in strict confidence. It’s important to have this drawn up before any disclosure takes place.

3. Service contracts

If your company delivers professional services instead of products, then you must have a standard form service contract in place. This written agreement lays out the terms and conditions under which you provide services. It also spells out your responsibilities and liabilities. Service contracts are imperative if you want to avoid misunderstandings and undue liability to your business.

4. Website terms of use agreements

These days, most small businesses have an established web presence – or at the very least, a website. If this is the case, you must display a Terms of Use Agreement, which acts as a contract between the user and the website owner, protecting any goods purchased from the site.

Having a Terms of Use Agreement in place will help you avoid liability if your site is used unlawfully. This agreement should include copyright protection warnings, disclaimers, limitations on how the site should be used, disclosure on the site’s privacy policy, and the location where any disputes must be brought, which is usually the hometown of the website owner.

5. Rental leases

If you rent your business premises or office space, you need to have a standard lease in place with your landlord. A landlord will usually provide this document, but it’s best to have your solicitor look over the contract to make sure your needs (as well as the landlord’s needs) are met.

How to draft legal contracts for your business

Understanding legal contracts can be tough for new entrepreneurs. However, written agreements are essential if you want to protect your business from legal disputes. If you are using contracts of law, it is best to have them prepared by a solicitor with knowledge of the commercial law in your industry.

Bear in mind that verbal agreements, email communications, and poorly drafted contracts may not protect you in court. If you want your business to remain trusted, safeguarded and unambiguous, you should start working with professionally-drafted legal contracts right away.

Timothy Kelly

Timothy Kelly

Tim has been a writer for over 20 years covering financial markets and small business. In addition to writing about the financial markets, Mr. Kelly writes extensively about digital marketing and SEO. Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art. Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York. Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine. Contact Tim