Five Essential Contracts for Small Businesses

There is inherent risk in even the most basic business transactions, such as buying and selling a service. The impact of customers disputing billings, employees leaving a company and taking clients with them, and a host of other common occurrences that can damage your business’s bottom line can be reduced by employing the proper agreements and contracts. Although no contract can be guaranteed to prevent a dispute with a major customer, vendor, or even an employee or co-owner, having these agreements in place could avoid or minimize the damage.

1) Entity Operating Agreement. This may not seem like an obvious contract to place first on a shortlist, but disputes between partners or LLC members often arise because there is no clear agreement in place, or because the original agreement has not been updated to reflect the current realities of the ownership or operation of the business. Disputes between owners concerning matters such as capital expenditures, the division or distribution of profits, or the buy-out of an owner’s interest can assume monumental proportions and distract from the management of the business. If the business started as a single-member LLC, but new members have been added, be sure to have an appropriate operating agreement prepared or revised to clearly address such material issues.

2) Standard Sales Agreement or Bill of Sale and Credit Agreement. Having a well-drafted sales agreement or bill of sale form can be critical in the unfortunate event that a dispute arises. The contract should include key terms such as the price, quantity of goods or services, duration of the contract, events of default, and each party’s remedies. Credit issues like payment terms, late fees, collection costs, or interest charges for past-due invoices should be clearly spelled out. The agreement should properly identify the purchaser using the full legal name and any fictitious or trade names. Specify in the contract whether the buyer is an individual or an entity (corporation, LLC, partnership) and, for an entity, indicate the job title and the authority of the person signing on behalf of the entity. The sales or credit agreement should clearly state who is authorized to enter into contracts or to make purchases for that entity.

3) Vendor/Supplier Agreement. Next to a sales or credit agreement with a customer, a vendor or supplier agreement may be the most routinely used business contract. In specialized vendor agreements known as “requirements” or “buyer’s option” contracts, the quantity term may be implied rather than stated. In an “exclusive requirements” contract, the purchaser agrees to buy all of its requirements for the specified goods exclusively from the seller. A variation is the buyer’s option where there may not be an exclusivity provision. This type of agreement really benefits buyers when the buyer wants to assure a supply of the product and pins down the supplier to agree to provide a supply, even when the buyer is uncertain whether it will need 1000 or 1 million. An important protection for the seller in these types of agreements is to clarify the minimum amount of goods that will be purchased over a specified period of time. Although these types of contracts may be enforced without a quantity term, the seller then assumes the risk of all variations in the buyer’s needs, even to the point where the buyer may discontinue its business and have no “requirements” at all.