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The Importance of Contracts in Your Family Business

 

No matter what your family business, you'll need to use contracts. If yours is a service business, you'll need retainers or service agreements. If you sell products, you may need to sign contracts with suppliers or sales contracts with newspapers, television or radio stations for advertising. As your business grows, you'll be signing even more contracts. Whether you write them up yourself or use an attorney, you need to have a basic understanding of how they work and their importance.

Contracts

When you enter into a contract with an individual, business, or organization, you and they ("the parties") mutually agree to perform or not perform a duty. A properly written and signed contract is legally enforceable. Any party to the contract can enforce any or all parts of the contract ("the terms") in a court or in arbitration.

Why Use Contracts?

A signed contract spells out the expectations of both sides for the benefit of everyone involved. It's also valuable to a third party, such as a judge or arbitrator, to refer to if a dispute arises. If you don't have a contract and you have to defend yourself in a lawsuit, it will be your word against theirs. This makes it much harder to protect yourself without a contract, and if you lose, you could suffer financial loss.

Typical Contract Terms

There are several standard terms that all contracts should have. Even if you decide not to include those terms (although a few must be included no matter what), you should be prepared to discuss with the other side why you're omitting them from your contract. The other parties may also try to add them back in during negotiations. Typical contract terms are:

  • Contracting Parties: This is essential and includes your family business and the individual or business that you're contracting with.
  • Term: This is essential and states how long your contract is in effect, i.e.: 1 year, six years?
  • Termination: When will it end? You'll need this as well. 
  • Signatories: The contract must be signed by both parties to be legally enforced. Don't forget to have your original copy with all signatures. This is another essential element. 
  • Cure Provision: If either party breaks a provision in the contract, they can have the opportunity to fix it when served with a notice.
  • Governing Law: Will your state, their state or another state be the law that a judge or arbitrator uses to settle disputes?
  • Addendums: You can use the same contract over and over again with different people and use addendums to spell out unique terms such as payment, duties and more.
  • Remedies: You can spell out what action or monetary compensation is available for a breach of contract. Some examples if someone breaches the contract are late fees, a requirement to go the mediation first and right to keep property.

 

Process of Signing a Contract

When you enter into a legal agreement with a party, by signing a contract, you can email, fax or mail the contract. When they review the contract, they will either sign it without any changes or send it back to you with changes. They may either meet with you in person to discuss the changes they want, send an email with bullet points describing the changes or call you to work on the changes together.

The best way to handle changes in a contract is to use the "Track Changes" feature in your word processor. When you add, change or delete a sentence, it shows up in red while still showing the original contract. This is referred to as "redlining." When all the changes are finalized, all parties will sign the contract. You should sign enough original copies that match the number of parties signing the contract, so that all parties will have one original contract. If you need the contract signed right away, you can sign and send a faxed copy, but it should be followed up by original copies signed.

Do not neglect your duty to get the proper contracts for your family business. You can write them yourself if you cannot afford to hire an attorney by researching various free and paid legal forms online.

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Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.

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