As a small business owner, you probably think legal is about as interesting as watching paint dry. And even more overwhelming (and potentially scary).
Look, I get it. Not every one is as fascinated by the legal mumbo jumbo as I am. And that’s why I have a business!
BUT there are some contract basics you should know as a small business owner. Because:
(A) you don’t want to end up in legal hot water;
(B) ignorance is not a defense.
It does not matter if you think your business is “too small” to have to worry about all that contract legalese. The question is not IF but WHEN an issue will arise as a business owner.
So, here are 5 contract basics every business owner should know.
Before you jump in, know that everything I chat about is legal education and information; it is NOT business, financial, or legal advice and does not create an attorney-client relationship between us. While I am an attorney, I am not your attorney unless a signed written Retainer Agreement exists with Nicole Cheri Oden Law. You should consult with an attorney in your area to make sure you’re taking the right steps for you and your particular business.
1.Contracts are governed by state law.
Contracts actually create private law between parties. And if a dispute arises between the parties, it is the role of the Court (or Arbitrator or Mediator, depending on what the dispute resolution section of your contract provides) to determine what the intention of the parties may have been – and they’ll start with the language of the contract itself.
So, it’s important to note that while United States federal and state laws have a lot of similarities, contract laws actually vary state to state. And state law governs the interpretation and enforcement of contracts.
Lawsuits are typically filed in the jurisdiction of the defendant (the party accused of wrongdoing), unless otherwise agreed to in your contract. And for that reason, you want to be sure to review the choice of law (what state’s law applies) provided for in every contract you enter into
2. Don’t start work until your contract is signed.
This may seem like a bit of a “no-brainer,” but you would be surprised by how many business owners assume that since the contract is floating around it’s safe to start work. Please don’t assume that is the case!
Contract negotiations are common. It won’t always happen, but a potential client, collaborator, or vendor may request revisions to your contract. They may or may not be revisions you want to agree to. And if you’ve already started work and then decide that you can’t move forward, you may be out time, money, or both.
As a side note, if someone were to send you a contract and say: “Here, sign this as drafted or no deal” – that’d be a red flag! And you probably wouldn’t want to move forward working with them. So, remember that when dealing with others.
3. Make sure both parties sign the contract!
Sometimes after the other party signs a contract a business owner may forget to sign it herself. It’s more common than you think!
Having a fully executed contract makes enforcement easier if a dispute arises. So, using an electronic signature provider like DocuSign, Hello Sign, or a business management tool like Dubsado can be a good idea. And that’s because you’ll receive an email reminder letting you know that while the other party has signed the contract, you haven’t yet.
And note that contracts are still valid even when they’re signed with electronic signatures! The Uniform Electronic Transactions Act (UETA) has been adopted by the majority of states and the Electronic Signatures in Global and National Commerce Act (ESIGN, for interstate and foreign commerce) provides that: “a signature, contract, or other record relating to such transaction may not be denied legal effect, validity, or enforceability solely because it is in electronic form.”*
4. Sign business contracts on behalf of your entity to maintain your limited liability.
If you’ve formed a business entity that offers you limited liability (i.e., your business is liable for your business debts and liabilities, not you – think LLCs and corporations), then you want to maintain that liability.
And one of the most basic ways to do so is to make sure you sign your contracts on behalf of your business, such as “Wendy Doe, Owner of Wendy’s Widgets.” Because if you only sign the contract as “Wendy Doe” – you could be held personally liable!
For more information about business entity basics, read here.
5. All important relationships in your business should have a contract.
At the end of the day, you should have a contract in place for every client, vendor, independent contractor, and employee. Period.
A well-drafted contract is like a rule book. It provides an outline of your obligations and helps minimize the risk of a misunderstanding during the course of your relationship.
And even if you’ve decided to offer services to a family member, or a friend, that does NOT mean that you should proceed without a contract. In fact, that’s even more reason to make sure you have a contract in place. Read the 5 Reasons to Get Your Legal Together as an Online Entrepreneur.
And, because I love a good bonus:
6. Keep records of your contracts to protect your buns.
Evidence is key for small business owners if a dispute arises. You should keep records of your contracts, including all correspondence and other documents relating to the contract itself, to protect your buns if you are sued or have to sue.
Every state has different statutes of limitations depending on the cause of action (i.e., the maximum amount of time you have to initiate legal proceedings). Typically, they range from 3-15 years, but a good rule of thumb is to retain records for at least 7 years.
REMEMBER: A judge won’t really care about the fact that you thought legal stuff was too confusing, that lawyers were too expensive, or that you were too small to matter. Legally, you are accountable to all the laws governing your business…even the ones you don’t know about.
But, as a busy small business owner, juggling life and family – the struggle to figure out what you need to have in place in order to protect your business can be rough!
And . . . even if you did have the time to figure out what you need, it’s a challenge to know how to create contracts and policies that are airtight and legally sound.
That’s why I created my legal template shop.
I want to take the stress out of making your business legal. My easy to use templates are customizable but drafted with all of the legalese you need to ensure your businesses safety. Head to my Legal Shop to protect your business and keep your sanity.
* 15 U.S.C. § 7001(a)(1)
Great advice Nicole! I’ve had my biz for 12 years and this tip — “Sign business contracts on behalf of your entity to maintain your limited liability” wasn’t one I was aware of. Thank you for this! Going to update my contracts and improve my process.
I’m so glad you found it helpful! That seemingly small tweak will help protect you in the long run 🙂