Are you thinking about starting a business with another person? If you are, you’ll need to set up specific contracts such as a partnership agreement. They’re necessary even if it’s your spouse, a relative, or friend who’s going to be your business partner. Here are four contracts you should have in place when you have a business partner. We’ll also talk about some other important legal documents you’ll need.
1. PARTNERSHIP AGREEMENT
When you have a business partner, it’s critical to get a partnership agreement. There could be disagreements, confusion or even a change in the partnership. A partnership agreement protects you from liability and legal problems because it spells out the liability of each partner. Moreover, this type of contract helps to prevent tax issues since it defines the tax status of your partnership.
A partnership agreement lays out the conditions and terms of the relationship between business partners. It should include the duties of each partner, plus the percentages of ownership and how profits and losses are distributed.
Your contract should describe management powers, the length (term) of the partnership, and how the partnership can be terminated. What’s more, it should outline the procedure for a partner when wanting to buy his/her share of the partnership.
2. NON-DISCLOSURE AGREEMENT
To protect confidential information shared by another party, a non-disclosure agreement is used. Also known as an NDA or Confidentiality Agreement, this agreement is a legally binding contract where a party agrees to keep confidential information that’s received private. For example, if you hire a partner and share a trade secret with him or her; you can ask that your secret remain confidential.
3. EMPLOYMENT CONTRACT
If you need to hire other people as your business grows, you’ll need an employment contract. This type of business contract spells out specific expectations and duties of each partner from the onset. It covers items, such as salary, work hours, benefits, annual leave, and job termination. Moreover, an employment contract can help in curtailing conflicts so that your workplace is a positive environment.
4. INDEPENDENT CONTRACTOR AGREEMENT
If you plan to outsource part of your business to freelancers or independent contractors, you’ll need to set up an independent contractor agreement. Even though you won’t have to pay independent contractors for employee benefits, payroll taxes or workers’ comp, the IRS is on the prowl for employers who misclassify regular employees as independent contractors. That’s why it’s a good idea to draw up an independent contractor agreement clearly defining your relationship with your workers. Be sure your contract confirms that independent contractors know they’re responsible for their own taxes.
KEY PERSON INSURANCE AND LEGAL DOCUMENTS NEEDED
You’ll also need to have what’s known as key person insurance. This type of insurance policy is one that covers a prolonged period in the event that a key person is unable to work, is incapacitated or dies suddenly. Additionally, it can be for providing temporary staff or for training and hiring a replacement for a key staff member.
A term sheet is another important legal document needed for a partnership. It’s used during the negotiating period when you’re determining the basic terms for a partner joining you in your business.
A memorandum of understanding is a written agreement designed for helping business partners to get a clearer understanding of the intentions of each party in a partnership. You need this document if you’re sharing sensitive information to a potential business partner so that you can protect the information.
OTHER CONSIDERATIONS AND WARNINGS
- Don’t rush when drawing up a contract.
- It’s best to keep a non-disclosure agreement brief as it’s more effective when it’s only a few pages long.
- Consider how it’s easy to get the wording in a contract or document wrong, especially if you don’t have any legal training. To be safe, hire a top-notch business attorney to help you prepare your contracts and documents.
- In fact, a contract or document that’s poorly written can be even worse than not even having one at all.
Because drawing up legal contracts and documents can often be extremely complicated, you need to hand over this job to a highly trained and experienced business attorney. Please contact us at Dungan & LeFevre and learn more about our wide range of legal services.