Must Have Business Contracts To Avoid Future Pain
Are your business interests protected? Here are some of the contracts you need to safeguard your rights and protect your investment…
Are you going into business with a partner or a friend?
Are you hiring an independent contractor to do work for your business?
Is there more than one shareholder in your company?
Whatever the case, you need to make sure your business interests are protected. Business agreements can safeguard your rights and investment from the outset of any arrangement.
The rights and responsibilities of those involved must be spelled out clearly before the work starts to ensure clarity.
To prevent minor misunderstandings from turning into full-blown disputes, we have made the following list of business agreements that you and your partner(s) can use to protect your business interests.
Depending on your business, one or a combination of the following agreements may suit your needs.
- Joint venture agreement:
You enter a joint venture for a specific project. There is a time limit on joint ventures, and they have clearly stated limits on their purposes. Two or more companies might enter a joint venture in order to make a product or produce a service that they don’t have the ability to exercise on their own.
A joint venture is different to a partnership.
In a partnership, the two organisations have joint interests in the project and are severally liable for the expenses of the project. In a joint venture, the organisations usually have defined interests and are usually liable for their own debts, which they incur individually.
- Mutual non-disclosure agreement:
If you are in a discussion with two or more parties in relation to business, you can maintain confidentiality by signing a ‘mutual non-disclosure agreement’. This prohibits the parties from discussing the information elsewhere and has serious consequences if breached.
- Operating agreement:
An operating agreement is an agreement among limited liability companies (LLC). This is an agreement between an organisation’s members governing the business processes and members’ rights.
It allows you and your stakeholders to structure financial operations and working relationships in the best interests of your business. Many issues must be covered in the LLC Operating Agreement. Some of them include:
- Each member’s ownership expressed as a percentage
- The members’ responsibilities and voting rights
- A layout of the duties and powers of members
- The profit and loss allocation among members
- The rules related to holding meetings and taking votes
- The issues related to the management of the LLC
- Buyout and buy-sell provisions, when a member wants to leave and sell his/her share; also should include what will happen in the event of a member’s death.
- Independent contractor agreement:
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement.
However, it is beneficial for your business to have any agreement in writing.
Having an independent contractor agreement in writing will help to prevent misunderstandings or disputes by making the agreement clear from the outset, detailing payments, time-frames and work to be performed under the contract.
Further, if a business subcontracts someone, the agreement has to cover who owns the intellectual property which is created throughout the relationship and who owns the intellectual property once the employment is terminated.
- Partnership agreement:
What is a partnership agreement? A partnership is between two or more competent persons to place their money, effects, labour, and skill — or some or all of them — in lawful commerce or business, with the understanding that there shall be a proportional sharing of the profits and losses between them.
Even though the Partnership Act 1892 governs the operation of partnerships, it is important for you and your business to have a ‘partnership agreement’ in place to ensure all parties have enforceable rights and are protected from harm should unforeseen circumstances arise.
What to include in your partnership agreement?
You and your partners should consider the following issues before you put the terms into writing:
Name of partnership
The registered name of a partnership can include last names, for example ‘Smith and Wilson Co’.
Contributions to the partnership
It’s vital for a successful partnership that you and your partner(s) record the contributions to be made to the business by each partner. It will be a lot easier for you to decide on these essentials before any disagreements take place.
Allocation of profit, losses and draws
This is an area that needs particular attention.
Disputes over money can very easily arise when the rights and obligations of partners are not clearly recorded. This is the principle function of the partnership agreement and provides a written reference to the intentions of all partners long after each has forgotten the specifics of negotiations that took place at the outset of the business.
Both you and your partners will have different ideas about how the money should be divided and distributed according to differing financial needs. Properly recording the rights of all partners is, therefore, a priority when creating the partnership agreement to avoid costly disputes in future.
Without an agreement to the contrary, any partner can bind the partnership without the consent of the other partners. If you want one or all of the partners to obtain the others’ consent before binding the partnership, you must make this clear in your partnership agreement.
Management duties include a duty or obligation to satisfactorily perform or complete a task (assigned by someone, or created by one’s own promise or circumstances) that one must fulfil, which has a consequence penalty for failure.
Management duties such as roles and responsibilities need to be precisely defined and delegated in the agreement for the purpose of the efficiency of the business and avoidance of conflict.
For example, who will keep the books? Who will deal with customers? Supervise employees? Negotiate with suppliers?
Think through the management needs of your partnership and be sure you have everything covered.
Admitting new partners
Eventually, you may want to expand the business and bring in new partners. Agreeing on a procedure for admitting new partners will make life a lot easier when growing the partnership.
Withdrawal or death of a partner
In the partnership agreement, you should devise an exit plan if a partner wishes to withdraw. For example, provisions of dissolution or withdrawal may specify a prohibited period of time in which you are not allowed to withdraw.
Death/ trauma or permanently disability of a partner
You need to have a ‘business will’ in your agreement. The agreement allows for the parties to agree upon a process that will be followed in the event any one of the partners in the business should die, suffer trauma or become permanently disabled. In this situation, the process in the agreement is followed and this provides certainty and peace of mind to all involved.
It is essential for every business to have this provision in your agreement to ensure a seamless and equitable transfer of a partner’s share in the business in the event of death, trauma or permanent disability.
- Resolving disputes
Finally, if you and your partners become deadlocked on an issue, your first port of call shouldn’t be the courts. It will benefit everyone involved if the dispute can be resolved through an alternate dispute resolution such as mediation, conciliation or arbitration. The preferred process should be determined in the partnership agreement before signing to ensure it is in place before a dispute arises.
Want to know what an agreement could do for your business? Please don’t hesitate to contact our experienced Newcastle commercial lawyers at Butlers Business and Law on (02) 4929 7002 or fill out an enquiry form on our website.