Making Contracts for Your Small Business: A How-To Guide.
A legally enforceable agreement between two parties is known as a contract. It may take the form of a written contract or an agreement made verbally. It is advantageous for you, as the owner of a small company, to create contracts since these documents help you to describe the expectations of both parties.
All parties engaged in the sale of the items will be able to fully appreciate and comprehend the agreement when it is structured in this manner.
We have compiled a comprehensive guide that details the actions that need to be taken in order to construct a contract for your small company, as well as the legal papers that are required in order to enforce any business deal.
Do not forget that if you choose to incorporate your business, you will have access to our extensive collection of legal templates, which will make completing this step much simpler.
Why are contracts with customers so important?
The agreement between the business and the client, whether it be verbal or written, is referred to as a client contract. There are several reasons why client contracts are extremely crucial, including the following:
They provide both parties with legal protection in the following ways: Having goals, terms, and conditions written down significantly improves the possibility that those responsibilities will be met.
They ensure the safety of monetary transactions: The terms and circumstances of payment are outlined in a contract.
This includes the length of time the customer has to submit an invoice, the amount that is owing to you or that you owe, and any other pertinent information.
They describe the boundaries of the labor agreement as follows: The specifics of the planned project and a timetable for its completion are often outlined in the contracts that are drawn up between two parties.
When is a written contract absolutely necessary?
Contracts may be verbal agreements, but in practice, they are almost always written down since the majority of verbal contracts are assumed to be implicit. Putting a contract in writing is advantageous for a number of reasons, including the following:
The initial agreement may be forgotten or misunderstood by one of the parties, and as a consequence, the parties may be unable to fulfill their duties under the contract.
People aren’t always honest, which means there’s a possibility that you won’t be paid the agreed-upon amount for your services or that you’ll have to do business with customers whose actions may hurt your company’s image.
There are many different forms of commercial contracts, but they all have to comply with the statute of frauds standards. The term “statute of frauds” is just a reference to the many types of contracts that are required by law to be written in Canada. Some examples of this are as follows:
A purchase agreement for the sale of commodities with a value of at least $500
A legal agreement about a marriage (for example, a prenuptial, or a divorce)
A contract that binds one party to guarantee the financial obligations of another (for example, a rental agreement between a renter and a landlord)
Contracts vs. agreements
The terms “contract” and “agreement” are often used interchangeably because of their superficial similarities. However, there are a number of legal distinctions that exist between the two.
Contracts
Contracts are a formal agreement. They may be made enforceable by legal action, like as a lawsuit, in the event that one or more of the parties does not comply with their terms and conditions.
Agreements
An informal arrangement (often one that is not written down) between two or more people might be considered an agreement. The parties participating in an agreement, as opposed to those involved in a contract, are not bound by clauses or other legal obligations; rather, they depend only on the honor system to ensure that they live up to their half of the deal.
A closer look at the fundamentals of commercial contracts
Contracts for businesses have a number of fundamental components, which may be categorized into the following six elements:
Offer
A precise definition of the offer must be included in the contract. For instance, if the contract is connected to the employee’s employment, it should define a start date, the rate of compensation, the terms and conditions of the agreement, an overview of the function, and the obligations that are described and anticipated to be accomplished by the employee.
Acceptance
It is necessary for the other side to accept the offer. It is possible that in some circumstances, a counter-offer may be presented; in this instance, the contract will need to be updated to reflect any changes.
Taking Into Account
It is necessary to specify within the terms of the contract what kind of valuable object will be traded back and forth between the parties. One example of this would be the sale of products or supply of services on behalf of your company in return for monetary compensation.
Mutual consent
In order for the contract to go into effect, its terms and conditions need to have the backing of both parties. It is strictly forbidden to compel someone to sign a document, and parties should not be pressured into doing so unless they support the proposed agreement in its entirety.
Competence
Both sides need to have clear heads and an in-depth knowledge of the planned business agreement in order for it to go forward. In a general sense, this indicates that neither party may sign the contract if they are under the influence of drugs or alcohol, are a minor (the age of majority in Canada is 18 or 19, depending on which province or territory you live in), and do not have an intellectual disability. In the United States, the age of majority is 18.
Legal purpose
The only reason for the existence of the contract must be one related to the law. For instance, if you are the owner of a small firm, your client contract should assure that the parties you serve will pay you for the services you provide in a prompt way. They may be held legally responsible for violating the contract if they are unable to fulfill this obligation.
How to draft a binding agreement with a customer
There are just ten simple stages involved in the process of writing a client contract. The most essential point to keep in mind is to communicate in a clear and succinct manner that all involved parties can comprehend. This will assist to eliminate the possibility of the contract being misunderstood or interpreted incorrectly.
Ensure that both parties’ contact information is included.
Have you ever been issued a fine, only to have it thrown out of court because of a misspelled word or because the person who issued the ticket scribbled the incorrect information on it? A contract operates in the same manner.
To ensure that contracts are legally enforceable and can be upheld in court, it is essential that all of the contact information for all of the parties involved be accurate.
Include the full legal names of all businesses participating in the contract, as well as the principal contact, physical address, billing address, and any other relevant contact information.
Instead of referring to your customer as a “third party,” it is recommended that you use their name or the name of their company throughout the whole of the contract. This will help avoid any confusion. Even while doing so is not against the law, leaving possibility for loopholes and making the contract less specified are both negative consequences of doing so.
Provide an overview of the project’s parameters and scope
Make sure that the facts of your business agreement are laid out in the contract in the most explicit way feasible. Include specifics such as the beginning and ending dates of the service or project, the projected amount of time that will be required to finish the arrangement, the particulars of the payment, and so on.
This eliminates any possibility of misunderstanding and guarantees that both parties have crystal-clear ideas of what they should anticipate from one another.
Establish the conditions of payment
Your client contract has to have the payment conditions spelled out very clearly. There are several factors to take into consideration, including the following:
Pricing: Will the labor be compensated on an hourly basis or will there be a set cost associated with each project?
If the remuneration for the project is based on the number of hours worked, you should determine a minimum and maximum amount of hours that may be worked in a single workday to guarantee that you are paid fairly regardless of any possible shifts in the workflow for the project.
Billing schedule: Specify whether you want to begin billing the client immediately after entering into an agreement or after the job has been finished. If you are going to be paid by the hour, you should specify whether you will be paid once a week, twice a week, or once a month.
Make a plan for your day.
The establishment of a timetable is essential since doing so enables you to maintain tabs on any deadlines connected to the parameters of the project or the scope of the task. Additionally, it enables you to maintain control over the deliverables for your clients.
For instance, if in order for you to finish the project, your customer has to give you with supplies, establishing a timetable would guarantee that you get everything on time, so preventing any delays in the deadline for the project.
Determine a course of action in the event that a contract is canceled.
When commercial dealings don’t go according to plan, it’s necessary to call off the contracts that were previously agreed upon. You will want to make sure that your company is protected in the event that the customer gives you short notice and cancels the contract.
The money that you get for your services is the most crucial asset that you need to safeguard. If you intend to send out invoices at various stages of the project, it is a good idea to include a stipulation that any work that has been completed is non-refundable.
This will ensure that you do not waste time providing services that the client will not pay for in the event that they change their mind about the project. In addition, some proprietors of small businesses implement what is known as a “kill fee,” which is a non-negotiable payment equal to a certain percentage of the total amount that is anticipated to be spent on the project.
In the event that the customer terminates the contract prior to the completion of the project, this sum is then returned to the customer.
Find out who the owner of the ultimate copyrights is.
Small company owners that generate work for a customer in the creative area, such as film screenplays, other print and digital works, or graphic design, are the ones who are most likely to be faced with the challenge of determining who really owns the final copyrights for the work.
In general, you are the owner of the rights to whatever that you create up to the point when the client pays you, at which point the copyright is transferred to that party.
Always be sure to include a comprehensive description of copyright in the contract, so that after the project is finished, all parties are aware of who owns what.
Elaborate on the nature of the collaborative effort
It is essential to have a clear understanding of your connection with respect to the scale of the task that you are assuming. You need to specify in the contract that you are a freelancer or an independent agent working on behalf of the firm to prevent anybody from thinking that you are an employee of the company.
This will also protect you when it comes time to file your taxes.
Choose the applicable legal system and location
You will need to lay out the specifics of where and how to initiate legal action in the event that a disagreement between the parties involved needs be brought before a judge.
If you choose your own state and municipality, you won’t have to pay exorbitant airfare if you ever have to fly out of state or between cities since you’ll be able to remain put in your own backyard.
Take into consideration the inclusion of a mediation and arbitration provision
A language requiring either mediation or arbitration is often included in business contracts. When one or more of the parties involved in a dispute are unable to settle it via discussion, the provision that requires them to participate in mediation is put into effect.
In the event that disagreements emerge that cannot be addressed, the mediation provision stipulates that a third person who is impartial shall listen to the reasons presented by both parties and then reach to a conclusion.
The arbitration provision is basically the very last choice before bringing the disagreement into a legal courtroom. It is also more discreet and less costly than going to trial would be.
Ensure that your contract can be upheld by the appropriate parties: Consult with an attorney.
Even though there are plenty of free contract templates accessible online, in the end,
it is this particular form that safeguards your company from financial loss in the event that an agreement turns bad. It is always a good idea to consult with a lawyer who knows the legal lingo and can detect any loopholes that may put your company in jeopardy.
While there are aspects that you can fill out on your own, it is always a good idea to work with a lawyer. By ensuring that a lawyer is present throughout the creation of the contract, you can be certain that none of the essential clauses that are necessary to make the agreement legally binding will be forgotten.
Some companies may need their customers to sign non-disclosure or non-compete agreements, for instance, as a condition of doing business with them. Because of these agreements, customers are prohibited from cooperating with or receiving services from rival businesses.
However, the rules of the province may supersede these kinds of contracts, making a non-compete agreement null and void.
A qualified attorney will be familiar with all of the important particulars that must be included in your contract in order for it to be enforceable and to safeguard your legal rights as the owner of a small company.
Create your company in accordance with the law.
The drafting of a company contract may seem to be a challenging task, but it need not be so. Because of the one-of-a-kind nature of each company, many contracts, including those with customers, have been established throughout the years.
No matter what sector your company operates in, having a firm grasp on how to draft contracts on the organization’s behalf is the single most important thing you can do to safeguard your property and guarantee the smooth operation of your business.
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