A business contract is a legal agreement between a buyer and seller of money, goods, or services. Large corporations, smaller entities, and individuals can use this document when making business exchanges.
This legally binding document should include all details about the exchange, including payment, the type of goods or services, and each party’s responsibilities. It will protect the buyer and seller if the other party doesn’t hold up their end of the agreement.
Is Every Business Agreement a Contract?
Not every business agreement is a contract. However, a business agreement becomes a legal contract when it meets the following four conditions:
- It indicates that the agreement is legally binding.
- It details the exchange of something valuable.
- It involves parties who can understand the agreement’s legal obligations and terms.
- It provides terms with unconditional acceptance.
Types of Business Contracts
Explore our free business contract templates to find one that’s right for your situation:
Partnership Agreement
Establish the rights, responsibilities, and obligations of each partner in a business partnership.
LLC Operating Agreement
Determine how your limited liability company will conduct itself and record information for the members' roles and responsibilities.
Employment Contract
Establish the conditions of someone else's employment, including their salary/wage, job responsibilities, work hours, benefits, and employment duration.
Independent Contractor Agreement
Record a relationship between a company and a contractor who works for themselves, including details like the scope of work, expected deliverables, payment terms, and deadlines.
Non-Disclosure Agreement
Establish a confidential relationship between the sender and recipient of sensitive information to protect its disclosure to unauthorized third parties.
Hold Harmless Agreement
Explain that one party will not hold another party liable for any potential damages, risks, or legal claims arising from a particular arrangement.
How to Write a Business Contract
Step 1 – Determine Why You Need a Contract
Determine why you need a contract before you write it out. The type of contract you need will determine the details, terminology, and language to include.
For example, some contracts involve exchanging services for payment, while others involve exchanging goods. Seek legal advice from an attorney or another legal expert to ensure you remain in compliance and execute the proper contract.
Step 2 – Define All Relevant Parties
Define all relevant parties in the agreement by providing the following information for each one:
- Legal name
- Business address (or residence address if you’re working with a customer)
- Points of contact (email address, phone number, etc.)
- Payment details and terms
- Deadlines and time limits
- Project requirements and scope of work
Confirm that all individuals signing the contract can serve as their organization or entity’s legal representative. This way, you can prevent issues if any party ever needs to pursue legal action against the other.
Step 3 – Include the Essential Elements of a Contract
All contracts share essential elements to make a legally binding agreement. These elements are the following:
- A valid offer: One party should extend an offer, such as providing services or goods, to the other.
- Acceptance: Both parties must agree to and accept the contract’s terms. If either party refuses acceptance, the other party can’t execute the document.
- Consideration: The parties must exchange something of value for the contract to be valid.
Both parties must also clearly understand the agreement they sign, be of legal age, and have the legal capacity to enter an agreement. The agreement must also contain legal actions. For example, the contract can’t facilitate the sale of illegal substances.
Step 4 – Name the Appropriate Governing Law and Jurisdiction
Federal regulations will govern your contract, but you’ll also be subject to state-specific provisions.
Your state or jurisdiction may use different guidelines to interpret certain sections of your agreement. Specify which state’s laws will apply to your agreement so that all parties are on the same page.
Step 5 – Explain All Details in Plain Language
Avoid using overly complex language in your contract agreement. Incorporating simple, plain language can increase comprehension for both parties, ensuring everyone knows what the agreement entails.
Using long blocks of text can make the text difficult for readers to scan. Instead, incorporate visual elements and other tools to increase readability and comprehension. For example, you can add proposals, sales quotes, expense forms, invoices, and bills of materials.
Step 6 – Use Repeatable Language
When you write a business contract, you don’t have to start from scratch every time. Use one of our free contract templates as a starting point. This way, you can include standardized terms and agreed-upon legal language.
Include party-specific information to tailor your contract as necessary. When you use a business contract template, you can save time while ensuring that you are thorough and incorporate legal requirements.
Step 7 – Describe Methods for Renewal, Termination, and Dispute Resolution
Explain the procedures for termination. For example, you may want to terminate the contract if it fulfills its purpose and you no longer need it. You may also want to terminate it if one party doesn’t fulfill their end of the agreement.
On the other hand, everything with the arrangement might be going well. If so, you may wish to renew the agreement. Describe how to renew the contract if both parties desire to do so.
Still, you can outline dispute resolution methods if a disagreement arises. This way, you’ll have a solid remediation plan, letting you resume the relationship efficiently.
Step 8 – Be Specific About Requirements, Deadlines, and Payment Plans
Outline the requirements of the arrangement. Explain what each party has to provide, including deadlines and the scope of work.
For example, suppose you have service agreements with customers for a cleaning company. You should emphasize what services you’ll provide and how frequently. The agreement should also state the customer’s responsibilities, like providing you with efficient access to their property.
A business contract should also state the payment terms. Depending on the agreement both parties reach, the payment details may differ. For example, if you enter a rental agreement, you may agree to make monthly rental payments. However, if you enter into a sales agreement to purchase equipment, you may make one lump payment at the time of the exchange.
Step 9 – Include NDAs or Non-Compete Agreements If Necessary
Business agreements may benefit from the inclusion of NDAs or non-compete agreements. This way, the other party won’t start a competing business, work for a competitor, or share confidential information. Tailor the NDA or non-compete agreement to your specific goals, ensuring the other party understands their limitations once they sign it.
Step 10 – Obtain Both Parties’ Signatures
Once both parties involved agree to the proposed terms and work through any remaining provisions, you can sign the document and obtain their signature.
Does a Business Contract Require Notarization
While notarization for a business contract isn’t always required, you may still consider it to increase its legitimacy.
When to Use a Business Contract
Here are some instances when using these legal contracts can be useful:
- Forming partnerships or collaborations
- Transferring business ownership
- Employing staff or hiring independent contractors
- Procuring or vending goods or services
- Renting or leasing commercial property
- Sharing confidential information with partners or employees
- Concluding mergers or acquisitions
What Business Contracts Does a New Company Need?
When you start a new company, you may need to complete the following documents:
- Incorporation or Formation Documents: These documents help legally establish your business. You may have to file them with your state, depending on your jurisdiction and business type.
- Founders’ Agreement: Highlight the duties and roles of each company founder.
- Operating Agreement (for LLCs): Explain the framework for an LLC’s operations.
- Bylaws (for Corporations): Outline a corporation’s internal management structure.
- Employment Agreement: Establish the terms of employment. You need to complete this document with each part-time and full-time employee you hire.
- Independent Contractor Agreement: Enter into a relationship with a contractor who provides specialized services on a contractual basis.
- Confidentiality Agreement: This agreement prevents specific parties from sharing confidential information. It protects trade secrets and proprietary information, and it can be unilateral (one-way) or bilateral (two-way).
- Customer Contract: Ensure customers understand both parties’ responsibilities in a client-business relationship.
- Vendor or Supplier Agreement: This agreement allows your business to secure the goods it needs to operate and prevent productivity issues.
- Commercial Lease Agreement: Rent a property where you can conduct your business.
- Partnership Agreement: This agreement establishes each partner’s rights and responsibilities within a business partnership and specifies the type of partnership, whether general, limited, or limited liability.
- Intellectual Property Assignment Agreement (IPAA): Transfer intellectual property (IP) rights from one entity to another.
Frequently Asked Questions
Can I force someone to sign a business contract?
You cannot force someone to sign a contract. However, you can refuse to do business with someone who won’t sign a contract. Losing your business might be the “nudge” another party needs to reconsider their position.
Do I need a new contract to change the agreement’s terms?
Yes. Any time the terms of the agreement change, you should document the changes in a new contract. The new contract should also clarify whether it will replace the old one entirely.
What is a conditional business contract?
A conditional business contract is one in which certain conditions must be true before the contract goes into effect.
For example, suppose you have a snow removal business. In that case, your service agreement may read, “Ace Snow Removal will remove snow from parking lots, walkways, and business entrances after snowfalls of two inches or more.”
This contract is conditional because the company will only provide snow removal services if it snows at least two inches.
How do I cancel a business contract?
Cancel a business contract by learning if it has cancellation provisions depending on specific reasons or causes. For example, you may follow specific steps if you cancel it because an illegal action or misrepresentation occurs.
If you cancel a contract, you may request to cancel in writing, preferably using a notice of contract termination.
Do business contracts require signatures?
Yes. To be legally enforceable, both parties should sign the business contract.
