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Essentials of Making a Business Contract: The Legal Ties that Bind

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As the owner of a small business, you will probably need to create business contracts as your company grows.

What is a Business Contract?

A business contract is a legally binding agreement between two parties for an exchange of services that are of value. For a contract to be valid, an offer must be made and accepted. Using a contract in business dealings helps ensure an agreement is acted on, insofar as a broken contract could result in a lawsuit or out-of-court settlement and the payment of damages caused by the breach. The best way to avoid a dispute or potential litigation, however, is to craft a solid agreement in which you’re confident you’ve negotiated the best terms for your business.

We have outlined basic business contract information for your small business; consult an attorney for legal advice.

When to Use Business Contracts

A business contract is often used for:

  • Hiring or being employed as an independent contractor
  • Buying or providing services or goods
  • Leases and real estate
  • Selling your business
  • Partnerships and joint ventures
  • Franchising
  • Confidentiality agreements
  • Noncompete agreements

A contract often involves paying for services, but non-monetary contracts are just as valid.

Oral Business Contracts

An oral contract is a spoken agreement that is as valid as a written contract. For example, if you have a promise that a job will be complete for monetary or other compensation, you have created an oral contract.

Oral contracts are legally enforceable, although they are frequently subject to misinterpretation and they can be difficult to prove in court because they often come down to one person's word against the other. Moreover, some types of contracts must be in writing, for example, contracts for the purchase or sale of any interest in real property.

Written Business Contracts

Written contracts are produced on paper or electronically. Legally, a written business contract is easier to uphold than an oral contract because there is a reference for the agreement.

With a written contract, it's "easier to prove … the terms between the parties and eliminate arguments over who said what," says Jack Cummins of Chicago-based Cummins & Associates, which represents small businesses. He adds that it's often easier for businesses to recognize potential points of contention in the language because the agreement is detailed in writing.

Whether your small business is providing or offering services, you should consider using a written business contract and including specific details about the agreement.

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