The Importance of Contracts

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Almost everyone has heard the phrase “Get it In Writing”!  The reason for that is simple: If the parties fail to document their agreement in writing, there is always room for future disagreements.  And more often than not, failing to draft good written agreements leads to serious (and often expensive) disputes.  Nowhere is the need for written contracts more important than in your business.  One of the most common mistakes that a business owner can make is not having good written agreements.  Think about it – your landlord isn’t going to rent you a space in their building without requiring you to sign a lease, correct?  You can’t buy a car at a reputable dealership without signing a contract.  Obviously, the list goes on and on.  So why would you do business without requiring signed contracts from your purchasers, vendors, and/or business partners?  Below are some guidelines to consider when deciding if and when a contract is necessary.

External Agreements:  Dealing with folks outside of your own business.

All of your important business agreements need to be in writing.  Oral agreements are very difficult to enforce, and they often leave you with no recourse for compensation or legal action if the other side fails to keep their end of the bargain.  Many times the failure is not intentional, but rather, is due to each party’s fading memory of what they actually agreed to.  A good contract can avoid that situation entirely.  While many small sales and/or purchases don’t require a contract, larger deals should always be put in writing.  The size of the deal obviously varies from situation to situation.  But if it the agreement is important to you, for whatever reason (whether its money or principle), put it in writing.  Make sure your contracts are well thought out, drafted in your favor, and give you flexibility and protection.  If the other side breaches the contract

Internal Agreements: Not Clearly Documenting Partners’ Rights and Responsibilities

Founding shareholders or partners should have an agreement that answers at least the following questions:

  • How much time and effort is each person expected to contribute?
  • How much capital will each person contribute?
  • What happens if the business needs more capital?
  • What happens if one person leaves the business?
  • What happens if one person dies?
  • Will the stock or partnership interest be bought back from the estate of the deceased or from the person leaving the business?

Obviously there is no single, “one size fits all” contract for every situation.  It is important to seek the advice of an experienced business attorney to help guide you through your particular situation and draft a solid contract that fits your needs.  Investing a small amount up front often saves considerable time and money in the long run.

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