Having all the right kinds of contracts in place ensures that business is conducted smoothly, protects from unexpected liability, prevents misunderstandings and arguments between the parties, and helps business owners avoid protracted and costly litigation. The following are basic agreements that companies most commonly need. Of course this list is not exhaustive, other contracts may be necessary depending on the particular industry, but it is a broad-spectrum look at the contracts and agreements that are used irrespective of the business specifics.
Shareholder Agreement, Membership Agreement, or Partnership Agreement
Depending on the legal structure of the company, the owners should have either a shareholder agreement (corporation), a membership agreement (LLC), or a partnership agreement (partnership). These important agreements serve as guidance for the business relationship between the owners of the company. They set forth the transferability of ownership in the business structure, provide for management and voting rights, distribution of profits and losses, deal with the affairs of the business in general, and help to fill in the blanks on many issues that any business may face during its life cycle or afterward. For example, in order to avoid unpredictable difficulties and business disruption, the partners should negotiate in advance the method of business assets distributions in case one leaves the company by choice, death, or any other situation.
Employment or Independent Contractor Agreement
If a company hires employees or independent contractors, the managers should negotiate the terms of those working relationships in a written contract instead of allowing the general employment laws to fill in the blanks by default. By doing so, the management makes clear to the employee or contractor what is expected, what consequences may be for noncompliance, and what severance options are available. Many companies may require their employees to keep company information confidential, to avoid competing with the company in the same business field during a period of their employment or some time thereafter, to assign to the company all ownership rights for the products, services, and procedures they have created in the course of their employment, as well as to restrain from other actions that may be detrimental to the company’s overall wellbeing.
Confidentiality Agreement
This agreement binds parties to keep certain business information obtained during their involvement with the entity as a secret. It prevents former associates from taking advantage of this information after their business relationship with the company comes to an end. Business owners should carefully determine what information is considered confidential and clearly state to all parties what knowledge obtained they may or may not use for their personal benefit or for the benefit of third parties. This agreement should be executed with every person who will have any access to insider information. This would include professional consultants, employees, business partners, vendors, investors, independent contractors, and many others.
Service Agreement and/or Sale Agreement
These agreements are made between the company and its vendors and customers. Such agreements set forth definite terms between the parties, manage expectations and liabilities in case of noncompliance, and very often prevent arguments and protracted litigation. If a company supplies goods or provides services, it helps to have one standard agreement that sets forth all its terms and conditions, with respect to whatever is offered for sale. If such agreement is tendered by one of the company vendors, it is very important that a business lawyer reviews it to avoid double-meanings, ambiguity, or missed terms. The signed contract is binding on the parties, and it is vital to know in advance all rights and responsibilities of each party before making commitments on either side.
Intellectual Property Assignment Agreement
If there is a possibility that someone who works for the company (such as an employee, independent contractor, or business partner) may create something for the company, it is in the company’s best interest to make sure that person is required to assign ownership of that intellectual property to the company. The law states that ownership of the work product automatically lies with its creator. A work product can include name of the company, trade dress, logo, design, concept, branding, or anything related to the business. For example, if someone creates a website for the company and does not assign ownership of the intellectual property rights pertaining to the look and content of that website, the web designer can subsequently build the same website for numerous other companies; as an owner of the intellectual property, the designer can unrestrictedly exploit that creation. Business owners expect that everything done for their company belongs to them. In order to duly transfer ownership of those creative works (i.e. intellectual property in the form of copyrights, trademarks, or patents) to the company, a business owner should have all other owners, employees, and independent contractors enter into a formal written agreement stating that those rights will be automatically transferred to the company upon creation of the product.
Terms of Use for the Website
Under certain conditions, puffery or advertisement may become an enforceable contract. Also, a company may be held liable if the words or actions of its employees induce an individual or other entity to act in some way. Therefore, if the company owns and operates a website that describes goods or services, it is very important to post an express disclaimer stating what the company agrees to be responsible for and what it does not. Third parties will rely on information on the company website, and it is important to avoid misleading that may cause them to suffer damages. Disclaimers can contain a large amount of legalese, but they only need to be drafted once and reviewed periodically if the business of the company changes.
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