Most Common Types of Business Contracts
The types of business contracts you’ll need depend on your business’s nature, size, and complexity. Contracts are a way to protect your interests. They also clarify what each party is obligated to do and their rights. You may not think a contract is needed until a business relationship goes sour and you’re left holding the bag. Rather than find yourself in this spot, consider using a business attorney to draft your contracts to ensure they fully protect your interests.
What Makes the Types of Business Contracts You Should Be Using Enforceable?
A contract is a legally binding agreement or promise between parties. Contracts can be powerful tools for your business. The attorneys at Lusk Law, LLC, can put together the recipe for your legally binding business contract. Basic elements of a contract include:
- Competent Parties: Minors and those who lack mental capacity can’t be parties to an enforceable contract.
- Offer: One party makes a proposal and a commitment to do or pay something. It’s communicated to the other party and has conditions or terms. Both parties understand the offer. It can be accepted, denied, or a counter-offer made.
- Acceptance: Both parties agree to the same terms. There is a “meeting of the minds.”
- Consideration: Each party gains something through the contract. If one side agrees to do something, they must get something in return.
- Performance: The obligations are met. If all goes according to plan, the contract may end. If performance is partial or faulty, depending on the circumstances, the contract may or may not be breached.
With some exceptions, a contract need not be written to be enforceable. But getting it in writing is better than a verbal agreement. It forces both parties to think about what they need and what they’re willing to do to get it. It’s much harder to dispute what the contract covers when it’s in writing.
What are Common Types of Business Contracts?
There are many, including:
- Ownership agreements
- Licensing agreements
- Employment-related contracts.
Depending on your business’s needs, other types of contracts may be useful to protect your interests and legal rights. Contracts are like insurance policies. They can pay off if something goes wrong. A well-drafted, written contract may prevent you from being sued or make a much stronger case against another party.
A business with more than one owner should have an agreement between those involved. No matter what legal entity is created (partnership, corporation, LLC), all those sharing ownership should be a party to this contract. It can spell out:
- The relationship between parties
- Individual obligations and contributions to a business
- How disagreements are resolved
- How to change the agreement
- What happens if a party wants to leave the business
- How to add new partial owners
- What happens if the business closes.
You may have a great idea for a new product or you want to make or sell someone else’s product. Both of these situations can be covered by licensing agreements. You agree to allow others to make and or sell your product in exchange for certain limitations and payment. You can also make or sell another’s product with the permission of the inventor. You would pay them for that privilege.
If you come up with the product, this can be a great option if you’re unwilling or unable to launch sufficient production. Licensing is also the legal alternative to stealing another’s intellectual property by making and selling knockoffs. Doing so could expose you to civil and criminal liability.
If you don’t own your office, warehouse, or production space, you probably lease it. You also may need expensive, complicated equipment but you lack the money to buy it. In either situation, you’re probably a party to a leasing contract.
The contract spells out who is responsible for what. The property or equipment owner defines what it will do; you agree to make payments and to obey specific rules. Though you don’t get the benefits of ownership, your costs should be lower, and you may get favorable tax treatment related to your payments.
Your biggest expense may be your payroll. Without the right workforce, your business may fail. Contracts can protect your interests while providing you the work you need. The more you ask of your employees, the longer and more comprehensive contracts become and the greater the risk that potential workers will refuse to sign. You must balance your needs while not scaring away prospective, valuable employees.
A general employment contract spells out the relationship between you and your employee. You can cover the duration, pay, benefits, reasons for termination, and any other issues that relate to your business. The team at Lusk Law has experience with a wide range of business contracts and can craft core documents related to employees to ensure that you and the employee have clearly defined rights and duties.
Noncompete and Nondisclosure Agreements
Noncompete agreements state that the employee cannot work for or start a competing business when he or she leaves. These agreements need reasonable time periods and geographic reach. A contract stating that an employee can’t perform similar work for ten years anywhere in the U.S. probably won’t be enforceable. Under Maryland state law, these agreements can’t apply to employees making less than $31,200 per year or $15 per hour.
A nondisclosure agreement could prevent or limit the release of valuable information and intellectual property. During and after employment, the person could be contractually obligated not to disclose certain information.
Employee or Independent Contractor?
You may need work done, but you may not need an employee to do it. Under the right circumstances, you could use an independent contractor. You would save money because employee-related taxes, costs, and laws wouldn’t apply. That relationship could be memorialized in a contract between the parties.
But you can’t transform someone who, under the law, works as an employee into an independent contractor through a contract. It may have little or no weight if there’s a legal dispute with the worker. What may count much more are the facts surrounding the work and the relationship.
Labeling the wrong people as independent contractors carries a lot of risks. If you misclassify someone as an independent contractor and are sued for back pay, benefits, and taxes, the cost could be steep. Failing to have workers’ comp coverage for someone misclassified as an independent contractor could result in a fine of up to $10,000.
Maryland uses the ABC Test to determine if someone is an employee or a contractor. Under the state’s Workplace Fraud Act and Unemployment Insurance law, a person would be an employee unless:
- You have no direction or control over the worker.
- The person is usually engaged in an independent business that’s the same nature as the work performed.
- The work is outside your usual course of business or it’s performed outside your places of business.
What Types of Business Contracts Do You Need? How Should They Be Worded?
If you own or manage a business, you should think about the common types of business contracts and those that will meet your unique needs. A business contracts attorney at Lusk Law, LLC, can discuss the types of business contracts you should use and how they can be customized for you. We are advocates for life’s obstacles and opportunities. Our clients use contracts because they can help avoid obstacles and exploit opportunities. Call us at (443) 535-9715 today.
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