The Five Agreements Your Business Needs

There are five important agreements every business needs to have in place. Without these five important agreements, business owners face serious risks in operating the business and may expose his or her business and personal assets to unnecessary liability. These are important agreements for every business, whether owned by one person or multiple owners. A business owned by multiple owners faces particular risks if the Owner Agreement (described below) is not properly prepared.

1. Owner Agreements

These are agreements between the owners of the business, and may be in the form of a “Partnership Agreement,” “Shareholder Agreement” or “Operating Agreement.” These agreements should address the following key issues:

Getting In– who contributes what property and/or services into the business, in exchange for ownership interest? Some types of property that are contributed into a business (such as real estate) may generate tax consequences. If an owner wishes to obtain ownership interest in exchange for future contribution of property and/or services, then an agreement to reflect this obligation should be prepared and signed.

Getting Along- a multiple-owner business is like a marriage. Managing a business while maintaining good relationships between the owners takes work. It is very important that the owner agreement address how decisions are made, when they’re made and who makes them. Some businesses are owned by silent investors and the daily operations are run by a manager or managers (who may also be an owner); if so, the investors will want a clear understanding of what authority the manager has over the daily operations. Other businesses are run on more of a consensus basis between all of the owners. Having a well-thought-out provision addressing management decisions is an investment in the future well-being of the business.

Getting Paid- put simply, how are the owners paid? Since cash flow is the lifeblood of any business, it is important that the owners have a written agreement on distributions of profit, as well as any salaries to be paid. Careful attention should be paid to the need to build and maintain operating cash reserves.

Getting Out- finally, an owner agreement should address how an owner gets out or otherwise disposes of his or her ownership interest. Also, the agreement should address what happens when an owner dies, retires, goes bankrupt or becomes disabled. Business owners may want to consider a non-compete agreement to prevent an owner from leaving and taking key customers to a competing business.

2. Vendor Agreements

A carefully prepared vendor agreement will address and reduce the risk to the business with its vendors. Some vendors may provide their own agreement, while other vendors should be supplied with a standard vendor agreement. While the terms may vary between businesses, a properly prepared vendor agreement will address payment and delivery terms; what happens in event of a default or breach, including the ability of a party to recover attorney’s fees and costs in the event of a dispute; the ability of a party to assign the contract; and the warranties furnished by the vendor.

In the event that the business wants to outsource services to independent contractors, then particular attention needs to be paid to the agreement to avoid the misclassification of the independent contractor as an employee of the business.

3. Customer Agreements

Properly drafted customer agreements will reduce the business risk when selling goods and services to customers and clients. Many of the same provisions of a vendor agreement will be included in a customer agreement, along with particular language unique to the business.  These agreements are frequently viewed as “boilerplate,” but setting the terms of the boilerplate is within the control of the business operator.

4. Website Agreements

Nearly every business maintains a website and many businesses sell their goods and services online. Every business with a website should adopt a website user agreement that is available for review by website visitors. Businesses that gather any sort of information from visitors should also adopt a privacy policy, and businesses that sell through the internet should also ensure that customers agree to the terms of sale before they process their purchase transactions. These agreements will go a long ways towards reducing potential risk associated with advertising and selling through the internet.

5. Non-Disclosure/Non-Circumvention Agreements

Finally, business owners should strongly consider using non-disclosure agreements where it is important that the recipient of proprietary, confidential or trade secrets not disclose that information to any other third party. Additionally, the business should strongly consider having key employees and owners in the business execute non-circumvention agreements to prevent the use of customer data in a competing business after departure of the employee or owner.

Every business should consult with an experienced business lawyer to review these five important agreements for every new business.