9 Contracts Your Business Should (But May Not) Have
Dealing with contracts probably isn’t your favorite part of running your business. It’s plenty tedious, and there’s nothing glamorous about it. It can—to use a tired metaphor—feel kind of like flossing your teeth.
But just as flossing your teeth is essential to keeping them healthy, having the contracts you need in place is essential to keeping your business healthy.
With that in mind, we’ll briefly touch on the following 9 contracts that most businesses should, but often don’t, have in place.
Entity operating agreement
Employment offer letter/agreement
Independent contractor agreement
Entity Operating Agreement
This is an agreement between the owners of your company. For corporations, it’s the bylaws; for LLCs, the operating agreement; for partnerships, the partnership agreement.
No matter the name, this agreement serves the same basic, yet essential, function—to establish how the company will operate. For that reason, this agreement is often the most important one your business will ever enter. A perfunctory or careless operating agreement can, and often does, lead to contention among the owners, which more often than not sends the business spiraling downward.
So don’t use a free form you found online. Find a lawyer you trust and get a custom operating agreement in place.
A buy-sell agreement is a particular type of stockholders agreement. While the contents of these agreements may vary, their purpose usually is to allow stockholders to keep control over who can own equity in the company and to establish the circumstances in which shares can be liquidated, including events like death, divorce, deadlock, bankruptcy, and more.
Failing to have a buy-sell agreement in place can lead to all sorts of unpleasant scenarios for your business, like your business partner’s ex-spouse helping run the company or a bank owning part of the business after your co-founder files for personal bankruptcy.
If you have employees, you should probably have an employee handbook that sets out your workplace policies. This provides a good opportunity to explain workplace expectations to your employees in a single source (it can also help an employer defend against later lawsuits).
There are a number of different policies to consider including in an employee handbook. These include equal employment and anti-discrimination policies; anti-harassment and anti-retaliation policies; disability and religious accommodation policies; sick leave, holiday, vacation, and paid time off policies; family and medical leave policies; social media policies; and many more.
Employment Offer Letter/Agreement
Most startups and small businesses use offer letters for their employees. They may use employment agreements for executives and certain management figures.
Assuming you’re using offer letters, it’s a good practice at least to include the key terms and conditions of employment in these letters, like title/position, start date, term of employment, rate of pay, and others.
It’s smart to find a lawyer who will put together a standard offer letter that you can then customize for subsequent hires. That way, you don’t need to incur legal fees every time you hire a new employee.
Independent Contractor Agreement
The service (or gig) economy is here to stay, and with it the ubiquitous presence of independent contractors. More and more companies, Uber being the paradigmatic example, are relying almost exclusively on independent contractors, as they often serve the same purpose of employees but aren’t entitled to many of the same rights and protections.
But simply calling workers independent contractors doesn’t make them so. And the consequences of worker misclassification can be severe. That’s why using independent contractor agreements is a good place to start in terms of establishing the nature of your relationship with the worker. This type of agreement can also provide an opportunity to deal with intellectual property rights as between the IC and your company (for more on this, read this post on copyright and “works made for hire”).
Many businesses, particularly in tech-friendly Seattle, have confidential information that’s critical to protect from release. That’s why non-disclosure agreements can be essential to have in place. They can provide clear recourse in the event that proprietary or otherwise confidential information is improperly disclosed.
Depending on what information you want to protect, you may need to have NDAs in place with not only your employees, consultants, and independent contractors, but also with other businesses with whom you’re contracting or otherwise dealing with.
A non-compete is an agreement where a worker, in exchange for being given a job by an employer, agrees not to work for a competitor of the employer or start a business that will compete with the employer. The scope of these agreements should, at the least, be limited by time and geography. Remember that non-competes can be, and often are, inserted as clauses into employment agreements, rather than as stand-alone agreements.
Related: Non-Compete Agreements In Washington.
If you don’t floss your teeth, you’ll end up with a bunch of cavities. Not great, but not the end of the world. The dentist will chide you and fill your cavities.
If, on the other hand, your business doesn’t have key contracts in place, it could face much more serious—and lasting—consequences. So floss your teeth tonight and, in the morning, consider what contracts you may need but have not yet put in place.