When you’re starting a small business there’s so much to think about. You get your business registered, put together a business plan, then you get busy putting yourself out there.
Probably you’ll have a website designed, create products or put together service offerings, get out and network and then you land your first client.
You’re so excited that you set to work immediately. Perhaps you’re selling them a product or providing them with a service? Either way, your customer is happy, payment is made and soon other orders or bookings follow. At the back of your mind you know there are business contracts your small business needs, but you’re so busy launching your company.
One year into your business and it’s been a whirlwind. You’re not a millionaire yet but you’re running your small business with increased confidence and are starting to make money. You’ve done it all without a single contract in place. Perhaps – you think – there aren’t really any business contracts your small business needs? You keep it on the to-do list anyway, promising yourself you’ll get around to it. Soon. Maybe next month. Or after this quarter.
It’s a common scenario so if this sounds like you, you’re not alone.
We sign all sorts of contracts throughout our lives – rental agreements, employment, loans, marriage, mortgages, phone contracts, etc. Yet, there can be something awkward about presenting a client or customer with a business contract. As if you’re entering into the relationship with the assumption that something will go wrong. This can be off-putting at a time when keeping your customers and clients happy is vital to your survival as a company.
If you intend to provide a high-level service then it’s easy to assume no problems will arise. Yet, according to an independent study, 7% of all businesses have faced legal consequences at some point due to improperly drafted contracts. If you have no contract at all then any disputes you have with clients, customers or employees (given that they aren’t criminal) could have no legal backing at all.
Can You Write The Contracts Your Small Business Needs?
Many business owners choose to use templates to create their contracts. This can be a cost-effective way of protecting your business. However, contracts that are too generalised or are not well written enough can result in them letting you down so if you do go down this route, be thorough.
Let’s look at the four most common contracts for small businesses – what they provide, how important they really are and whether it’s possible to avoid paying professionals and write these contracts yourself.
Common Contracts For Small Businesses
It’s difficult to cover all the possible licenses, contracts and agreements each small business might need because so much is dependent on the sector, the goods being sold and where they may be operating. Of course, for businesses employing staff they’ll be additional contracts to consider and legal information you should familiarise yourself with. For the purposes of this article, we’ll focus on four of the most common contracts for small businesses. So, make sure you check if there are any other contracts you should have in place.
Terms And Conditions
Also known as terms of service, terms of sale and business terms, your terms and conditions detail the conditions of the agreement between seller/supplier and customer/client. Once signed, this constitutes a contract.
There is no legal requirement to have terms and conditions in place. However, they can protect you and help you and your client to agree on the terms under which you work. For example, if you are a freelancer providing a service, you might state in your terms and conditions:
- When payments are due and based on what work is being completed
- What materials/information needs to be supplied by the other party for work to commence
- In the scenario the client fails to communicate, what happens to the project and in regards to payment?
- What happens in the case that the project requirements change?
- What happens if the freelancer fails to meet deadlines?
If you are an online retailer then you might include the following in your terms and conditions:
- Shipping time frames
- Returns policies
- Payment terms
- Conditions of use
- Privacy of personal information
Why Are Terms And Conditions Important For A Small Business?
As a small business, ending up in Small Claims Court is something you’ll want to avoid. It can be very stressful and there may be upfront costs. Once there, if your terms and conditions do not hold up against scrutiny then you may find yourself unable to retrieve costs and perhaps even lose the money you’ve spent on court fees.
Whilst it is best to approach business relationships with confidence and enthusiasm, terms and conditions can lay out the terms of business thereby avoiding dispute. For example, if you’re a freelancer and a project is cancelled the client may not be expecting to pay. However, if you have started the work then you should be paid for the time you have invested in the project. If this has been agreed to in your terms and conditions then it’s likely the client will adhere to the contract.
Of course, there is legislation that protects you from many of these scenarios, especially in regards to item returns and refunds. So why are terms and conditions also needed?
Terms and conditions provide clarity. They can help to remind a client or customer of their obligations to you and your role in the business or customer relationship. Whilst a customer or client may be investing financially in you or your product, you are offering up your skills, time and/or wares and having T&Cs in place allows you to set your expectations too. Often, when both parties are clear on the terms of business, there is far less chance of there being a dispute, especially because any good lawyer will advise against pursuing any claims that the contract does not support.
Intellectual property can be protected through copyright, patents, or trademarks. Your intellectual property may be your trading name, your products (if you have designed them yourself) or the work you produce.
Patents require the disclosure of the components that make up your design, in order to prevent others from being able to legally recreate your product or invention. Patent application can be a lengthy process but not having a patent means another business, possibly with more resources and faster routes to market, can copy your design and sell a very similar product. Too many budding inventors have gone through this demoralising experience and the patent solution is there to even the playing field.
Intellectual property is especially important for photographers, musicians, and artists who make a living from sharing their art with the world and need to retain rights over their usage. It would be difficult to make a living as, for instance, a photographer, if your photos were not copyrighted. Fortunately, your work is automatically copyrighted when it comes into existence so there’s nothing to apply for. However, this means when you do permit your copyrighted work to be used, you have the opportunity to agree, in contract, to the terms of the usage. Not to mention, agreeing to the cost of using your images.
The British Library defines trademarks as badges of origin. Trademarks identify your products or brand and are usually a version of your logo. Registering a trademark prevents others from using your name and branding, at the very least in a way that may compete with you. As a general example, this would mean that it would be possible to trademark a board game name to prevent a copycat board game. It would not necessarily prevent a restaurant though from using the same trading name, because the purpose is so different. Applying to register a trademark does come with a cost attached and this is payable regardless of application approval. Therefore, it may be wise to seek legal advice to increase your chances of successfully registering a trademark the first time.
How Can Intellectual Property Be Protected?
Intellectual property can be protected through trademarks, patents, and copyright. The rights and usage of your intellectual property might also be included in other contracts. For many business owners, the protection of their intellectual property is a high priority. Many of us have seen films that document the legal disputes of major brands, such as Social Network and The Founder. Who can forget the heartbreaking scene in Joy when the main character discovers her manufacturers are working behind her back to patent her product idea under their name? Hollywood versions of Intelectual Property disputes elevated to David and Goliath-style battles make for great stories unless they’re happening to you. If they’re happening to you then you’re just someone who had an idea, worked hard, and had somebody else take it away. It is essential for small businesses to protect intellectual property when it is truly unique to them.
Usually, it is possible to trademark and/or patent your work yourself. However, it can be costly to make applications so may be more cost-effective in the long run to obtain some legal advice.
Confidentiality Agreements/Non Disclosure Agreements
Non Disclosure Agreements (NDAs) have gathered a bit of stigma in recent years, having been used to protect the wrong people or enable exploitation. However, businesses use regularly use ethical NDAs so that they may share materials and ideas with people outside of the business, without fear of competitors becoming aware of confidential information.
The fact that it all sounds quite ‘cloak and dagger’ means some small businesses believe NDAs don’t apply to them. However, small businesses should consider confidentiality agreements when entering discussions with outside parties regarding potential joint ventures.
NDAs are especially important if you’re outsourcing work to freelancers or other agencies on behalf of your clients because you will need to protect their confidentiality too. However, requesting that employees sign NDAs can create an atmosphere of distrust and can make attracting talent to your organisation challenging. So, deciding whether and how you might use an NDA is a matter of balancing risk. It may well be worth consulting a legal professional specialising in NDAs to advise on what you might need from a confidentiality agreement.
How Important Are Contracts For Your Small Business?
When you’re starting out in business, funds are often limited and legislation, contract drafting, and IC applications may not be the most exciting place to spend money. Especially when you’re technically able to draft contracts yourself, submit your own patent/trademark applications, and even have contracts automated online. However, an improperly drafted contract will not necessarily protect your business and could leave you vulnerable. As a Limited Company, this may mean letting down shareholders. If you are a sole trader, this means you could be personally liable for any mistakes made. In all likeliness, business contracts your small business needs are probably few and fairly simple to put together. Therefore, if you are able to have them professionally drafted, or have an expert assist you with applications, then doing so could save you considerable time and money in the long term. Not to mention, it may put your mind at ease, leaving you to get on with the important business of…well…your business.