For many entrepreneurs, starting a company isn’t just a pipe dream. It’s a goal that keeps them focused throughout the ups and downs of bringing a vision to life. Many founders have gone through the gauntlet of building a brand. More than 30 million small businesses operate in the United States, and most started out with little more than a good idea.
Launching an organization always brings challenges. There is much to navigate and many concepts to understand before you can begin. Contracts are one of those concepts. They are the glue that holds many business relationships together and keeps operations moving along, but many first-time entrepreneurs struggle to understand contract basics.
As a result, it’s not unusual for these founders to operate on handshake deals and verbal promises. While that might seem like a solution at first, it can lead to serious problems down the road.
What Is the Importance of a Contract?
What’s wrong with trusting people to do what they say? Quite simply, the end results don’t always line up with expectations. If a job isn’t done, it’s hard to enforce repercussions without anything in writing to justify your response. That makes it tough to prove claims legally, which is why most lawyers caution against leaning too heavily on verbal commitments or agreements.
Although an agreement sounds pleasant and mutual, it’s not binding from a legal point of view. Let’s illustrate the difference between an agreement and a contract with a scenario. It starts when you talk to a web designer you know. She says she can build a website for your online retail startup within two weeks. You give her some guidelines and parameters, then you sit back and wait to see the end result.
Three weeks pass, but you still haven’t heard anything. Concerned, you reach out to her and ask whether everything is going as planned — she doesn’t respond. By the fifth week, you realize you’re behind schedule in getting your business off the ground by a month, and you won’t be able to unveil your website by the beginning of the seasonal rush you rely on for profits. But there is a bigger problem at play: You never had a contract, so your agreement didn’t matter. There’s also no way to bring legal action against the contractor who didn’t hold up her end of the deal.
What Are the Essential Elements of a Contract Versus an Agreement?
A contract is a legally binding agreement that’s been laid out on paper — or at least in an electronic document. You’ve probably signed many contracts in your life, like when you took out a car loan or signed an apartment lease. Your car loan was valid because you and the other parties signed it. The lease was a written agreement. And the verbiage of both likely outlined everything you needed to know.
What if a clause in the agreement didn’t seem quite right to you? You might have been able to negotiate some of the terms of the contract. Perhaps the interest rate laid out in the car loan didn’t match what the salesperson told you to expect. At that point, you could bring up the discrepancy and request a new contract. Alternatively, the better interest rate might be added to the contract and the old one removed.
Once a contract has been sealed by all the parties, such as you and the auto loan financing institution or the apartment complex’s property owners, you’re bound by the agreement. As long as the contract was written and signed in good faith, it should be enforceable. The result? If either party fails to live up to the terms, the other party can then take suitable measures to make up for any damages incurred.
How Do Contracts Protect First-Time Entrepreneurs?
As mentioned previously, contracts provide a safety cushion for entrepreneurs that agreements can’t promise. Merely laying out contracts gives founders a leg up. It’s far too easy to overlook the moving parts of starting a business. Writing a contract forces you to create a road map for the future.
For example, imagine you want to hire a part-time salesperson who is paid only in commission. Having a contractual arrangement lets you both head off problems and concerns before they arise. With a contract in hand, your new team member will feel less stress because he or she knows what to do and expect. Similarly, you’ll have documentation to prove that you mutually reached an agreed-upon employment arrangement.
Contracts also tend to help entrepreneurs prepare for the unexpected. Building a business from scratch involves some trial and error. It’s impossible to see everything that’s coming. A competitor might cause a sudden disruption in the marketplace, or a global pandemic could radically change consumer behaviors. Nevertheless, contracts give CEOs and founders peace of mind by eliminating some of the business unknowns.
Finally, contracts encourage entrepreneurs to take their brands more seriously. Many entrepreneurial ventures begin as side hustles. When the side hustles take on more serious, permanent forms, contracts are valuable resources. Having a contract as an entrepreneur shows a sense of earnestness and professionalism. Those characteristics matter, especially to future workers, partners, investors, and clients.
Are Contracts for Entrepreneurs Always Necessary?
Of course, some entrepreneurs still hesitate to initiate and create contracts. Many feel that contracts are an unnecessary burden. Yet contracts are a great asset, especially when things go wrong — and things can go very, very wrong.
Most people have heard of a “breach of contract.” Breaching a contract involves one party not doing what’s written in a contract. A breach can fall into one of two categories: material or immaterial. Suppose you write a contract to buy a vintage guitar. The other party signs the contract, and you wire the money. Unfortunately, you never get the guitar — or you receive a different guitar. That would be a material breach.
On the other hand, say you wanted the vintage guitar because you were going to play it during a gig with a local band. You had to use a different guitar for the gig, and you’re unhappy about it. You eventually get the right vintage guitar, but not until after the show. As a result, the venue won’t pay you because you used a different guitar than you promised, which changed the appeal and quality of the show. That’s because the loss you suffered was immaterial.
Breaches of contracts occur quite frequently. Though you may be able to come to an agreement about how to remedy the situation, it will take time; it might also take money if you need to hire a lawyer to navigate the court system. Despite the possibility of breaches, having a contract is still much better than not having a contract. Imagine if the world worked without contracts. There would be a lot of unhappy business owners, employees, and customers.
Where Do Oral Contracts Fit Into the Picture?
If you’re still unsure about whether to create a written contract, know that oral contracts do exist. Nevertheless, they are tough to enforce if something goes awry. An oral contract lays out all the parameters of the terms of the relationship, but legal risk comes into play because nothing is written on paper. If one party decides not to fulfill the oral contract, the contract will be tough to prove in court.
Ultimately, two people who enter into an arrangement should sign a written contract. After all, they’re spending the time outlining the provisions anyway. Putting their expectations in writing protects both sides and holds everyone accountable.
What Should Entrepreneurs Keep in Mind When Developing Contracts?
By now, you’re probably getting an idea of how important contracts can be for you as an aspiring entrepreneur. Keep the following contract pointers in mind, and use them to start your personal contract checklist.
1. Rely on Contracts to Streamline Your Operations
If you start one business, you’ll likely start another. You may even find that you’re managing multiple companies at once. The smartest, most effective way to stay on top of your obligations is by having contracts that protect your organizations and interests.
Every time you set up a contract, you free yourself from having to wonder or worry about your agreement. It’s right there in document form. You should eventually encourage others on your team to learn how to create and seal contracts. That way, you’re not the one overseeing everything.
Ideally, you want to become your brand’s high-level strategist rather than its contract-maker. Train others in the art of contract development, and teach them to use contract software correctly. Just make sure that everyone on your team knows contracts are expected for all arrangements — setting that precedent should protect you in the long run.
2. Know the Minimum Requirements for Setting up a Contract
You don’t have to be trained as a lawyer or paralegal to set up a contract. Nonetheless, you do need to make sure that all of your contracts cover the basics.
What are the essential elements of a contract? In general, all contracts should include a few items. The first is the correct legal names of the parties involved. Again, “correct legal name” could be the name of the individual, the business (as in d/b/a — “doing business as”), or both. If you’re not sure what the other party’s legal name is, find out before signing anything.
Your contract should also include a full outline of each party’s rights and obligations. For example, maybe you’re hiring a virtual administrative assistant to work two hours a day, three days a week. In addition to outlining his or her work hours, you’ll want to outline what he or she will be responsible for doing. What are you each getting? If you end your arrangement at some point, who owns or keeps the intellectual property created during the relationship? These are important matters to consider.
All contracts should also talk about the terms of payment and other requirements. You can be specific, diving into technicalities of net delivery date post-invoice for all billing. Make sure your contract includes how and why the contract can end. As a final note, add one or more paragraphs about how parties can settle any disputes that arise.
3. Consider Using Digital Contract Technology When It’s an Option
In the past, all contracts were drawn up on paper. Today, there are plenty of software solutions to construct, deliver, and house online copies of legally binding documents. In fact, many entrepreneurs prefer to leverage technology for their contracts.
It only makes sense, particularly if you’re working with employees or partners remotely. It’s much easier to send them a copy of a digital contract than to mail a physical version. You’ll get the signed contract back much faster online, and you’ll be less likely to lose it since you can simply save a copy on your computer.
The only drawback to digital contracts arises when you need to have a contract notarized. If that’s the case, you’ll have to turn back the clock a bit and use paper to make everything official.
4. Make Frequent Use of Contract Templates
You can find contract templates for just about anything on the internet. Think of those templates as your friends. While you might not want to use all the language in a contract you find online, you should use much of it to ensure you include all of the necessary information.
Remember: Contract templates allow you to move closer to automating more of your to-do list tasks. That means you’ll be more efficient. All you’ll have to do is consult your templates to see which one makes sense for each new situation.
As you become accustomed to choosing and using contract templates, you’ll increase your comfort level with “legalese.” Many first-time entrepreneurs are intimidated by contract verbiage initially. The more often you tweak your contract templates, the more intuitive the process will seem.
Developing a Personalized Contract Checklist
Joining the ranks of entrepreneurs is a thrilling experience. Make sure you can enjoy the heights and avoid the pitfalls by embracing the art of contract writing. It’s easier than you probably think and can cover your exciting new venture with a legal security blanket.