Contract Guide for Business Owners: 21+ Easy-to-Use Tips

In this quick and easy guide, we give you our top contract tips.

You’ll learn:

1. Which contracts business owners should be using
2. How to make a contract legally binding
3. What to do if a contract promise is broken

And so much more!

Strong contracts have power to make your business a success or a failure.

We can prove this in many ways, but let’s start with a story. What if you found your competition with an edge up in your industry? What if it was because your employees were leaking secrets about your business success? And what if your contracts–or lack thereof–were the problem?

In 2024, Ameriprise Financial and LPL Financial found themselves in this situation. The conflict wasn’t over money directly, but something equally valuable–confidential business information. Ameriprise accused LPL of basically stealing client info. Allegedly, when Ameriprise advisors switched companies from working for Ameriprise to LPL, their new employer encouraged them to bring with them confidential client info. As you can imagine, this was a great competition problem. LPL would know trade secrets about Ameriprise clients, and LPL would have a step up in marketing to these clients. The lawsuit was fierce.

This kind of dispute highlights the importance of strong contracts in business contracts. The right agreements clearly outline what can and cannot be shared. They keep sensitive information protected even when employees leave or switch companies.

Your business needs strong contracts to protect and promote its success.

5 Benefits of Contracts for Businesses

Contracts offer your business:

1. Clarity and Communication: Contracts set clear expectations on roles, responsibilities, deadlines, and deliverables, which reduces misunderstandings.
2. Risk Management: Well-drafted contracts help manage risks by specifying what happens if terms aren’t met.
3. Financial Security: Contracts ensure payment terms are transparent and binding, protecting you financially.
4. Legal Protection: Good contracts hold up in court, offering options if someone doesn’t fulfill their side of the agreement.
5. Professionalism and Trust: Contracts demonstrate commitment and seriousness, helping you build trust with clients, partners, and employees.

The Dangers of Not Having Business Contracts

Without contracts, businesses face higher risks:

1. Financial Losses: Without payment terms, clients may delay payments or refuse altogether.
2. Operation Problems: Vendors or partners may fall through on their commitments, halting your operations.
3. Brand and Business Reputation Damage: Disputes over roles and quality of work can hurt your brand image.
4. Legal Vulnerability: Without legal terms, you may find yourself defenseless if a conflict arises.

Since partnerships are so common, let’s take them as an example. If a partnership doesn’t have a formal agreement, it is especially risky. Your business partner may make a decision that hurts your reputation or rack up debt, and you could be held liable for their actions.

Top 5 Essential Contracts for Business Owners

1. Non-Disclosure Agreement (NDA)

An NDA helps keep your business’s important information safe by legally requiring others to keep it confidential. For business owners, NDAs are usually a better option than non-compete agreements because they don’t limit where employees can work after they leave. Instead, it simply protects your intellectual property, business methods, client lists, and trade secrets from being shared with competitors. Every business should have an NDA.

2. Partnership Agreement

A partnership agreement defines the roles, contributions, and decision-making authority of each partner. It also outlines how profits, expenses, and responsibilities are shared. It’s essential for avoiding “accidental partnerships” where one partner’s actions could create liabilities for the other. Here’s an example: two business people agree to work together on a few graphic design projects, verbally deciding to split profits and expenses. Without any formal contract, partner one decides to sign a costly deal with a third party, assuming that partner two will cover half of the cost. Now, partner two is unexpectedly liable for the debt due to their accidental partnership. What’s the moral of the story? Use partnership agreements.

3. Employment or Contractor Agreement

Whether you’re hiring employees or contractors, you’ll want a contract that outlines their responsibilities, payment, work expectations, and termination policies. It protects you by clearly defining the working relationship and helping to avoid any mix-ups about the person’s role.

4. Service or Sales Agreement

Service or sales contracts outline what services or products you’re providing, timelines desired, quality standards, and payment terms. Because it sets clear expectations with clients, this agreement helps ensure you get paid as agreed.

5. Intellectual Property (IP) Agreement

If your business creates, licenses, or distributes intellectual property, like original art, writings, designs, business processes, and software, an IP agreement is important. It clarifies ownership, usage rights, and royalties. IP agreements are particularly useful for safeguarding your creations in partnerships or with contractors.

4 Types of Contract Terms

Contracts are made up of specific terms, which define the rights and obligations of each party. Common types of contract terms include:

• Payment Terms: Define when and how payments will be made.
• Confidentiality Terms: Protect private information.
• Termination Terms: Specify conditions for ending the contract.
• Breach Terms: Outline what happens if one party doesn’t fulfill their obligations.

Danger Terms to Watch out For

When reviewing any contract, pay attention to specific terms that can restrain or hurt your business. Here are some common terms to watch out for:

• Indemnification Clauses
• Watch Out for Perpetual or Exclusive Rights
• Review Remedies and Choice of Law
• Be Cautious of Long, Complex Paragraphs
• Look for Automatic Renewal Clauses

Learn more about these red flag terms on our blog What to Watch for in Terms and Conditions.

Q&A: What Makes a Contract Legally Binding?

Q: Does a contract need to be in writing?

A: No, but written contracts are easier to enforce.

Q: Does it need to include legal language?

A: No, simple language that both parties understand is fine and often preferred unless there is a defining legal term that could be helpful and clarifying.

Q: Do both or all parties have to sign?

A: Ideally, yes, though if the contract is followed, this action by the parties involved can imply agreement. Action on as well as signing on a contract makes the contract strong. 

Q: Does a contract have to be a certain length of document?

A: No. It simply needs a promise and an exchange of value.

Should You Have a Business Lawyer Involved in Contract Writing and Enforcement?

Often, the answer is, “Yes.” Here are five reasons to have a lawyer helping with your business contracts:

1. Professional Contract Drafting: A business lawyer makes sure your contracts are clear, comprehensive, and enforceable.
2. Customized Terms: Lawyers help tailor terms to your specific needs and industry.
3. Risk Mitigation: Business lawyers spot potential issues that you might miss, helping prevent costly disputes.
4. Efficient Negotiation: A lawyer helps you negotiate terms for the benefit of your business and that offers each party a “win-win situation”. This saves you time, worry, and potential mistakes.
5. Assistance with Breaches: If a breach (broken agreement) occurs, a business lawyer guides and advises you on what to do next. They’ll help you decide if you should sue or if the dispute can be solved with compensation. Often, their authority resolves conflicts more quickly and allows relationships to be maintained between the contract parties.

5 Steps to Contract Negotiation

Contract negotiation is the process of adjusting the terms of a contract to make sure the contract meets each party’s needs.

Steps for Successful Negotiation:

1. Know Your Goals: Clarify what you need and where you can be flexible.
2. Ask Questions: Ensure you understand every term.
3. Be Open to Revisions: Adjust terms as needed for balance.
4. Set Clear Consequences: Specify what happens in case of a breach.
5. Review Before Signing: Double-check all terms to ensure alignment.

Good negotiation is about creating a win-win situation, building a strong foundation for future dealings, and preventing potential disputes. Keep that in mind as you negotiate business contracts.

4 Types of Contract Breaches and How to Handle Them

• Minor Breach: A small oversight that doesn’t majorly impact the contract’s purpose. Discuss solutions with the other party.
• Material Breach: A serious breach affecting the core of the agreement. You may consider ending the contract or requesting compensation (seeking damages).
• Anticipatory Breach: When one party reveals ahead of time that they won’t fulfill their contract obligations. You can seek legal advice immediately.
• Fundamental Breach: A severe breach that allows the non-breaching party to sue, terminate the contract, and seek damages.

Tips for Dealing with Breaches:

• Review the contract’s breach terms.
• Gather evidence of the breach.
• Communicate with the breaching party to resolve the issue.
• Consult a business lawyer for advice and services.

Specific Examples of Where Contracts can be Beneficial

• IP Creation and Distribution: Protect your intellectual property with contracts when working with others to create or distribute content. Consider using a partnership agreement and a non-disclosure agreement (NDA) in these cases.
• Trade Secret Protection: Use NDAs to safeguard confidential business information that gives you a competitive advantage.
• Financial Guarantees: Contracts offer clarity on payment terms and timelines to protect your business revenue.

How to Learn more about Mastering Business Contracts for Entrepreneurs

While this blog guide gives you a good start to understanding contracts, there is a lot more to contracts. So, if you want to become more prepared to defend and promote your business with contracts, check out our attorney-created course, Mastering Business Contracts. It covers basic and advanced contract handling. It also gives you the knowledge to handle contracts confidently so that your contracts can can:

1. Give you a competitive edge
2. Provide strong protection for your business
3. Promote strong legal consequences for broken agreements

When you finish the course, you’ll understand how contracts work to help you protect and promote your business.

This 4-part course includes sections on:

• How to Read a Business Contract
• Key Components of a Valid Contract
• Red Flags to Watch for When Reviewing a Contract
• How to Make Changes to a Contract
• When to Get Legal Help for Reviewing a Contract
• Negotiating Contracts

Learn more about contracts: Ready to promote and protect your business with an easy course on mastering contracts? Learn more today.

P.S. If you missed the first 5 blogs in this series on strengthening your business contracts, you consider signing up to get them delivered free to your inbox.