Protecting Your Startup with Contracts

By Andrew Longcore on December 13th, 2012 / Comments

When most entrepreneurs think about their startup they are focused on funding, trademarks, patents, business plans, and business development issues. All of these things are important to a startup but they mean a whole lot less if the business does not take the proper steps to protect itself.

Contracts are critical keys to ensuring your startup has that protection.

Internal Agreements

Drafting formation documents should be one of the very first steps that a startup takes. Not only are there certain tax advantages to doing business as corporation or limited liability company, but organizing or incorporating your business adds legitimacy to what you are doing. This is on top of the liability protection these entities can provide.

These documents are essentially contracts. They are agreements on how the business will operate and the rules it will follow. These agreements are especially important for businesses with multiple owners. It’s easy to agree on these terms and rules early on in the process, but much more difficult later when there is value to the startup and it is nearly impossible to agree on anything if a dispute arises between owners.

Other internal contracts are necessary too. These can include agreements to transfer property to the business or loan agreements between owners and the business when personal funds are transferred to the business. Even simple rental agreements should be drafted if the business is being operated out of a personal residence or a building owned by another business. These types of agreements are proof of your new business is operating independent of you personally or another business you might own.

External Agreements

Contracts with third-parties can be vital to the success of your startup. There are still a lot of people that like the romantic notion of “doing business on a handshake.” If someone’s handshake is that trustworthy then they should not have a problem putting that agreement down on paper.

It is important for you to tell your customers, clients, vendors, representatives, suppliers, investors, and anyone else you are doing business with what they can expect from you.  At the same time it is important for those entities to know what you expect from them. That way there are no surprises and everyone knows the terms they will be doing business by.

These types of agreements with parties outside of the business can also be drafted to ensure payments are received, work is completed, certain events take place, and more. This allows you to operate your business with the security that everyone will keep their promises.

Entrepreneurs put in so much hard work in growing their idea into a startup and then into a sustainable business.  It is so easy to have these plans go off track if just a few customers fail to pay or if one supplier fails to fulfill an order or if there is no plan on how to handle a dispute among the owners.  Having the appropriate contracts in place will not only help you avoid costly startup problems, but will make you money.

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About the Author

Andrew Longcore

Startup and small business lawyer, entrepreneur, founder of The Business Law Group, and living the dream everyday. @BusinessLawGR