Common Types of Legal Contracts Entrepreneurs Need to Know About
A growing number of people around the world are starting their businesses. According to Hill, there are more than 582 million entrepreneurs around the world. As exciting as it is to open a new business, it gets challenging when you have to make important decisions, have bills to pay, and documents to sign.
Running a business is more than product development, customer service, and sales. The business needs to be secured with legally binding contracts to avoid facing any trouble later.
A business deals with contracts such as licensing agreements, employment agreements, partnership agreements, and many more. Even though a legal counsel will solve your legal issues, understanding the various types of contracts will help ask the right questions to your legal team.
Common Types of Contracts in Businesses:
We have divided the common types of contracts into three subcategories for better understanding.
A) General Business Contracts
This category of contracts includes all the agreements a business has to sign while starting and running a business. Let’s understand them one by one.
1.Non-disclosure Agreements (NDAs)
A non-disclosure agreement is also called a confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), secrecy agreement (SA), or non-disparagement agreement. NDAs are legal contracts between two or multiple parties that prohibit sharing of confidential information to external third parties.
In simpler terms, when you sign an NDA, you promise to keep the shared confidential information to yourself. And when you issue an NDA, you are asking the other party to do the same. It ensures that parties can share information safely without it being leaked or shared with a possible competitor.
Here are a few instances where you will need an NDA:
While discussing licensing of a product or technology you own.
When employees have access to confidential information about your business.
While talking to investors or during Mergers & Acquisitions.
While entering into a new business deal.
2. Partnership Agreement
A partnership agreement is a contract between two or multiple parties involved in starting a partnership-structured contract. The agreement states the rights and responsibilities of each partner.
A partnership agreement includes:
Details about the title, roles, and duties.
The length of time of partnership.
How to add new partners.
How to leave the partnership.
The decision-making process.
How to manage the death or disability of a partner.
A partnership agreement provides clarity on how the business will operate and who has command over it. The partnership agreement also helps in avoiding legal issues, disputes, tax issues, or changes in business terms.
3. Indemnity Agreement
Indemnity means to ‘hold harmless’. When an Indemnity agreement is signed, one party holds the other harmless in case of any burden or loss. An indemnity agreement is a contract voluntarily given as security or protection to prevent suffering any damage.
An example where indemnity agreements are very commonly used in businesses that involve adventurous activities such as skydiving, bungee jumping, river rafting, etc. Before people undertake the risky activity as a customer, the service provider makes people sign the agreement acknowledging the possible risk of the adventure and reducing liability on the company.
Often instead of making a separate indemnity agreement, indemnity clauses are added to the main contract.
4. Licensing Contract
The licensing contract is an agreement between two parties wherein the licensor (property owner) permits to use their brand name, trademark, or patent to the licensee (the other party). In exchange for using the trademark or selling the goods, the licensee makes payments to the licensor which is known as royalties.
An example of a licensing agreement is when a software developer who has copyrights of the software allows other businesses to sell it as a bundle with other software.
5. Franchise Agreement
A franchise agreement is a contract between the franchisor (business) which grants the business name and its working system to the franchisee (an individual or an entity).
A franchise agreement includes:
Details of the location and development.
The period of the agreement.
Training and support.
Provision details and fees.
Renewal policies and cancellations.
An example of a franchise agreement is when McDonald’s corporation allows McDonald’s franchisees to use the company’s materials, branding, and advertisements.
6. Equipment Lease Agreement
An equipment lease agreement is a contract in which one party permits another to use the product or equipment for a specific period in exchange for payments. The owner, however, can cancel the equipment lease agreement if the other party breaks any terms of the contract, or uses the equipment for illegal activities.
An equipment lease is generally used for leasing heavy construction vehicles, factory machines, or high-technology products.
7. Settlement agreement
A settlement agreement is a legal contract between two or more parties who wish to resolve all disputes by agreeing. When parties sign the settlement agreement they no longer want to have a court case involved. It saves costs and time for the parties involved eliminating the long grueling process of court cases.
One of the examples, where a settlement agreement is used is when one partner wants to withdraw from the ownership position. It is important to document when a partner leaves the company. If there is no record of the person leaving the ownership, the other partner may get exposed to claims that it never happened. Here, a settlement agreement will be issued to ensure all the liabilities are cut off and the leaving partner is not responsible for it. The partner who chooses to stay and continue can terminate the withdrawing partner’s ability to take any actions on behalf of the company.
8. Promissory note
A promissory note is a legal promise in writing, where one party (issuer) promises to pay a determined sum of money to the other party (payee) at a specified time or on the demand of the payee under the terms of the contracts. A promissory note contains details such as interest rate, principal amount, maturity rate, date and place of issuance, and issuer’s signature. For instance, a promissory note is required to take a business loan.
9. Assignment of Contract
An assignment of contract is used when one party of an existing contract (assigner) gives the contract’s obligations to a new party (assignee) or outsources it. For the assignment of contract to be applied the initial party of the contract must be notified priorly.
An example of this is when a company is assigned weekly cleaning services for your apartment, they may with your permission outsource the services for some time when in need.
10. Sales and Purchase Agreement
A sales and purchase agreement is a contract between the buyer and the seller. It is used very commonly in all types of business. The contract finalizes the terms and obligations of the sale and is further up for negotiations between the buyer and the seller.
For example, a Sales and Purchase agreement is used between the supply chain company and a large-scale business that needs a regular supply of plenty of goods.
(B) Employment Contracts
A business is run with the help of a team whether small or large. Every aspect of the employer and employee relationship must be covered in the contract. Let’s understand the common forms of employment contracts in business.
1. Employment Contract
An employment contract establishes the rights and responsibilities of the two parties i.e. the company and the worker.
An employment contract usually includes:
Roles and duties.
Duration of the employment.
Statement on confidentiality of the company.
Contract termination terms.
2. Fixed-term employment agreement
A fixed-term employment contract is issued when an employee is hired for a specific amount of time. The agreement is usually a year-long contract and can be renewed by the employer depending on the requirement.
It is generally given for temporary jobs or for particular projects. The fixed-term employment contract may also be issued when a permanent employer is on leave for a particular amount of days and needs a replacement.
3. Independent contractor agreement
An independent contractor agreement is a legal contract between the hiring company and a contractor. It is also called a freelance contractor agreement. The freelancer is asked to complete a particular project and is not supervised by the company on the working hours or the way the job gets done. The agreement includes details about the deliverables, scope of work, and payment.
4. Non-compete Agreement
The non-compete agreement is placed to signify that the employee must not enter into any competition with the employer after the completion of the employment. It also forbids the employee to share any confidential information about the company with any other party, before or after the employment period.
(C) Sales-related contracts
One of the most common types of contracts a business encounters on a daily basis is sales-related contracts. These contracts specify how the goods, services, or property will be sold, transferred, or purchased. Here are some common types of sales-related contracts in business.
1. Bill of Sale (BOS)
The bill of sale is a written legal document that states that the parties involved in the transaction have agreed upon the terms of the sale of a property or service. For example, vehicles are usually transferred using BOS to recognize new ownership.
2. Bill of Lading (BOL)
The bill of lading is a legal contract often issued by the carrier to the shipper. It includes the details on the type, quantity, and destination to which the goods are being carried. The BOL also acts as a receipt for freight services.
3. Purchase Order (PO)
A purchase order is a commercial contract between the buyer and the seller. It gives details about the payment terms, delivery date and location, and other terms and conditions.
4. Security agreement
A security agreement is a legally binding contract that provides the lender with a security interest in an asset or property that is pledged as collateral. In case the borrower defaults on the loan, the lender can seize the borrower’s asset or the property according to the security agreement. It is necessary for businesses because lenders usually do not extend credit without a security agreement.
A warranty is a written promise made by the seller of the product assuring the repair or replacement of necessary parts within the specified time.
Now that you have a fair idea about the different types of contracts, you might have realized how each one is crucial for a business to run smoothly.
Misplacement of contracts can cost your business valuable time and money and may even land you in court if a dispute arises. Hence, managing contracts and their workflow is equally important. You can simplify the process by implementing a contract workflow platform into your business.
Learn more about the benefits of the contract workflow platforms and their key features in the article below.
These are a few contract types that you will encounter in the course of running and operating your business. Each of these contracts is legally binding and understanding them in detail helps you protect your business in adverse circumstances.
InkPaper, an effective contract workflow, and collaboration platform allows you to manage all of your contracts in a single place.
InkPaper simplifies each step of the contract workflow management, so you can focus more on business development and do more work in less time.