Business development · 26 June 2017

Five essential business contracts every small company needs

Business contracts
They might not be the most interesting part of entrepreneurship, but business contracts are essential

Our legal expert David Walker, founder of Grid Law, begins a new series by examining the business contracts you’d be a fool to live without as a small company owner.

  1. They’re a record of what you and who ever you’re working with have agreed
  2. They help you both comply with the law
  3. They help you avoid misunderstandings that could lead to costly disputes
  4. They help protect you if the other person doesn’t stick to their side of the bargain
  5. They help prevent someone stealing your ideas or poaching your staff

Most companies only need five types of business contracts to cover the vast majority of situation that arise.

Let’s look at each of them now.

Standard terms and conditions of business

Whether they’re “click to accept” terms on your website or they’re printed on the back of an order form, your standard terms and conditions are the unsung saviours of your business.

They give your clients clarity about what to expect when they work with you. For example, they explain exactly what service you’re providing, whether the result is guaranteed or just a target, what your payment terms are, and many other important details that are specific to your business and the services you provide.

Using standard terms and conditions can also free up vast amounts of your time because you don’t need to prepare a bespoke contract for every client or new piece of work. You can also authorise your staff to agree contracts with clients subject to your standard terms without them consulting you every time.

If you’re selling products or services online, you must have written standard terms and conditions. It’s impossible to have a verbal agreement with your online clients because you won’t have any direct contact with them.

However, your standard terms and conditions need to be kept up to date. If the law changes or you change your way of working, your terms and conditions should be updated to reflect this.

Shareholders/partnership agreements

When starting a business with other people (particularly friends and family), it’s very easy to assume that you all want the same things out of it and that you all have the same ambition.

The reality can be very different.

A shareholders’ agreement (if you’re running a limited company) or partnership agreement (if you’re running a partnership) will be a written record of the contributions that each of the business owners makes. For example, one may be contributing cash, another expertise. One may own intellectual property rights that are crucial for the business, another may provide premises or equipment.

The agreement will also set out how the business will be run and how the owners will split the profits. If the business doesn’t work out or the owners decide to go their separate ways, it can help prevent disputes by, for example, pre-agreeing whether any property or assets they contributed should be returned to them.

However, in my experience, the true value of a shareholders or partnership agreement comes from everyone sitting down and talking through these issues. This ensures everyone knows exactly where they stand, right from the start.

Non-disclosure agreements

Using non-disclosure agreements (sometimes referred to as confidentiality agreements or NDA’s) will help protect your ideas and trade secrets from being stolen. They create a legally binding obligation to keep what ever is disclosed confidential and gives you the right to claim compensation if that confidentiality is breached.

Sometimes it makes good commercial sense to enter into a confidentiality agreement but other times it’s essential. For example, if you have invented a new piece of technology and there’s a chance you could patent it, you must keep it confidential. If you don’t, and the idea becomes public, you won’t be able to register a patent later and this could put your business at a huge disadvantage.

Employment, consultant and freelancer agreements

As your business grows, you will need more help, so you will need to take on employees or freelancers.

If you employ people, having proper employment contracts and all the necessary policies to accompany them is the best way to ensure you comply with your legal obligations as an employer.

When you work with freelancers there are far fewer rules and regulations to comply with. On the one hand this could be good news for the business, but on the other it means the whole relationship is governed by the terms of your contract. It’s therefore very important to get it right.

For more information on what should go into a freelancer contract, please see my previous article: Five essential considerations when hiring a freelancer.

Website agreements

Many people think that a website’s terms of use and privacy policy are just standard documents and give them very little thought. They think they can just copy them from another website and this will be good enough.

But this is a risky strategy and I strongly recommend that you don’t do it.

If these agreements have been properly prepared and tailored specifically for your business, they will help protect your website from unauthorised copying. They can also contain disclaimers to protect you and limit your liability if someone tries to sue you.

If you’re collecting any personal information via your website, e.g., names and email addresses, the privacy policy will help you comply with your legal obligations under the Data Protection Act 1998.

So, what happens if you’re not using these business contracts in your company? The consequences could be disastrous and you could lose everything.

If, for example, you don’t have a written contract with the freelancer who designed all of your branding, you won’t own it. Your brand may be your single most valuable asset, and it won’t be yours because the law says that intellectual property rights can only be transferred by way of a written contract that has been signed by the transferor (the designer).

If you tried to franchise your business you wouldn’t be able to give your franchisees a valid licence of your brand.

If you tried to sell your business you couldn’t include your brand and this may be the most valuable asset the purchaser is interested in.

If someone copied your logo or brand name and you tried to sue them, they would have an easy defence. All they would need to say is: “But it’s not yours, so I’ve not infringed any of your rights.”

What happens if you don’t have a shareholders agreement? I’ve seen too many best friends and family members fall out when they disagree on the direction the business should take and they can’t find a solution to this. A shareholders agreement can prevent this.

How about a disgruntled customer?

Imagine they were expecting a certain ROI from the social media marketing campaign you ran for them. You thought it was a target but they thought the result was guaranteed. They may try to sue you for lost profits. Your standard terms and conditions could prevent this by clarifying what had been agreed and limiting your liability if targets were not met.

Even if these situations are not fatal to your business, they’re going to be extremely costly in terms of the time, money and stress they will take to resolve. Having proper, legally binding contracts in place is the best way of eliminating these problems.

Sadly, it’s not until something goes wrong that many of my clients appreciate the true value of a contract. So, if you would like to know more about the contracts you should have to protect your business, please feel free to email me at editors@businessadvice.co.uk and I’ll be happy to help.

Have a look at some of our other favourite David Walker articles:

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ABOUT THE EXPERT

David Walker is the founder of Grid Law, a firm which first targeted the motorsport industry – advising on sponsorship deals, new contracts and building of personal brands. He has now expanded his remit to include entrepreneurs, aiding with contract law, dispute resolution and protecting and defending intellectual property rights.

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