As a lawyer, the first question I ask my clients is: “What did you agree to?” This question shapes the whole conversation. It may feel cool or cavalier to do a big deal “on a handshake,” but everyone’s looking for an edge, and it’s a heck of a lot easier to get out of a handshake deal than a hard-signed contract!
Contracts make and break businesses.
Get everything in writing, even if it’s just a small change. Get it signed. Get confirmation. It’s a win-win; either everyone does what they said they would do, or you get to sue them for breach of contract, in which case you can make them do what they said they’d do (or pay for it, at least).
Let’s go over the main contracts important to all small companies!
If it weren’t obvious, there are a LOT of different types of contracts out there. For the purposes of this article, though, we’re going to focus on the top 5 – the big ones that affect companies most often.
I hate to say it, but employees can become toxic and really do damage to a small business – namely, because they’re on the inside of things. Big companies, I think, can weather the storm that negative employees create, since they have so many of them, but small companies get hit hard, and need to be prepared with a strong employment contract. Let’s go over some of the downfalls of businesses I’ve seen:
This is probably the most neglected type of contract for business owners, which is sad, because it’s often the most important! There are 2 main things going on with these sorts of agreements.
First, every business (even businesses owned by just one person) must have what is called “Governing Documents.” For LLCs, that means an “Operating Agreement” and for Corporations, it’s a set of contracts between the business owner and the Corporation itself that all fit into the “Corporate Binder.” These contracts dictate the legal relationship between the business owner(s) and the company, itself. Specifically, that means the contract states what exactly the owner can and cannot do with the company. You probably won’t be able to open a company bank account without Governing Documents that prove you both own the company and have the ability to open bank accounts in the company’s name. That may seem trivial, but it’s not. Without a company bank account, you can’t take payments from customers. There are several other needs as well, not least of which is “limited liability.” If you don’t have a contract stating that you’re benefiting from limited liability – that any liabilities are explicitly limited to your company, then you risk not getting it. Why does that matter? Well, companies get sued all the time (trust me, I would know), and you don’t want that lawsuit to go after everything you own! You want the lawsuit to (attempt) to go after your business only (not you, personally).
Second, these documents matter if there are multiple owners–business partners. I hate to say it, but partnerships almost always have problems. When there is an issue, you’d better have a great partnership contract in place that can handle whatever that problem is. We’ve been writing partnership agreements (and working with owners who are at each other’s throats) for over a decade now, and we’ve seen just about everything. Entrepreneurs will save literally hundreds of thousands of dollars in legal fees alone if they take the time (and pay the money) to get a great partnership contract in place.
A friend of a friend called me up in 2020, telling me that he had used LegalZoom to write his partnership contract (an Operating Agreement). His company, which he owned 49% of, was wildly successful, clearing 4.5M for year 2, and most of their income was profit (they had very low expenses). Tragically, LegalZoom’s contract gave the right to the “majority shareholder” (his business partner, with 51% equity) to force the minority partner to sell all of his equity for “Book Value.” Book Value is a term of art for accountants, which basically means the assets that the business owns, which, at the time, amounted to about 10K worth of laptops and office furniture. Crazy, right? We were able to get him a good result, despite this legal pickle that LZ caused, but it was an uphill battle, and if they’d hired real attorneys to write their partnership in the first place, that problem wouldn’t have existed!
Every business has vendors, be it your company’s accounting teams, marketing firms, staffing companies, lawyers, manufacturers or suppliers, payroll services, and more.
As you can imagine, every one of these vendors has an agreement with your company (and it’s usually very one-sided and in their favor). But, that doesn’t mean you can’t negotiate a better deal! When working with vendors that are small to mid-sized firms themselves, you’ve probably worked out some unique terms for how and when to operate with their company, and those unique terms are meaningless if you don’t have them written down in a binding contract!
One of the most common things that we do at Sparks Law is help businesses with negotiating their vendor contracts, so that the agreements are more palatable to our client’s businesses. This has often resulted in 6-figure savings annually for them, and of course, these savings give them a cushion when those contingent problems happen.
Unless you’re a restaurant, there’s probably some sort of contract between your business and your customers. For service companies, it’s a Master Services Agreement (MSA); if your company is just a website you’ll have a terms and conditions (T&C) or Privacy Policy in place; and of course, for the sale of most manufactured goods, there’s contracts regarding warranties, serviceability, and so on.
Your business depends entirely on your customers, their loyalty to your company, how they interact with it, what all they expect from it, and of course, when and how much they need to pay you. Like most relationships, customer relations start out positive, but friction happens, as is life, and then what happens to your business depends on whatever contract you have in place.
These days, we have an added level of complexity from online negative review sites – it’s basically frictionless for a customer (or even just someone who doesn’t like your company) to leave a 1 star review, and it’s near-impossible to get the Google Gods to remove it! Most small businesses have under 50 reviews in total, so that single negative review can offset 40 great ones! No, it’s not fair, but there are some legal things we can put into modern customer contracts that offset this.
Estate Planning isn’t technically a contract, but it has monumental consequences for small businesses. Usually, an entrepreneurial family’s main and most valuable asset is the business itself. But, what happens if the main manager dies unexpectedly? Without a professionally drafted Will or Estate Plan, the business will probably crumble and give away all of that hard-earned market share for free to competitors, leaving the family behind without any meaningful source of income.
How do we best protect our families? We get an Estate Plan together, plain and simple!
It’s important to note that there’s a lot of nuance to a business owner’s estate. It’s not just the normal W2 income and social security that a non-business-owner has; instead, it’s a living, breathing business that has a great deal of value, so long as it’s able to continue to run. Getting the right Estate Plan together can easily solve this problem and protect that value for your family if you pass away or become disabled unexpectedly.
As you can see, there are several contracts that are fundamental to a small business’s success (or failure). Each of these needs a lawyer’s attention, even if it’s just a short review. Most of these agreements can be tailored to favor the business owners if something unexpected occurs, and in my experience, the people on the other end of the signature block rarely make a stink about them, if they bother to read them at all!
Having your lawyer draft your contracts is akin to playing a board game, where you’re a player in the game but you also get to make up all the rules before you start. That may feel like cheating, but it’s not; it’s just good business!
At Sparks Law, we LOVE writing contracts for small businesses; we’ve been doing it for well over a decade, and will continue to do so. Take advantage of our know-how and experience – reach out today!
