Small business owners probably think the legal side of things is comparable to watching paint dry, even more overwhelming, and possibly daunting. Small business owners should know some contract basics because:

• Ignorance is not a defense

• You do not want to end up in legal trouble

It does not matter if you think your business is too small to worry about legal contracts. The question should not be "if", but "when" a problem will arise for business owners.

5 Business Contract Basics

Here are five contract basics that business owners should know:

1. State Law Governs The Contracts

Contracts create private law between the parties. Court, arbitrator, or mediator determine what may have been the parties' intention if a dispute arises between parties. State law controls the enforcement and interpretation of the contract.

Federal and state laws in the U.S. have many similarities, but contract laws differ from state to state. Make sure you review the choice of law in every contract before entering.

2. Making Sure Both Parties Sign The Contract

Some business owners might forget to sign the contract after the other party signs it. Having a fully executed contract makes enforcement easier when a dispute arises. It is a great idea to use business management tools like an electronic signature provider.

Because you will receive an email reminder to let you know that you did not sign the contract while the other party signed it. Most states have adopted the Uniform Electronic Transactions Act.

3. Do Not Start Working Until The Contract Is Signed

Many business owners assume that it is safe to start working since the contract is floating around. A potential client, vendor, or collaborator might request revisions to your contract.

These might or might not be revisions that you want to accept. If you have already started working and decide that you cannot continue, you may be out of time or money now.

4. Important Relationships In Your Business Must Have A Contract

You must have contracts in place for every:

• Client

• Vendor

• Employee

• Independent contractor

Well-drafted contracts are like rule books. They provide the outline of your obligations and minimize the risk of misunderstandings during your relationship. Even if you decided to offer services to a family member or friend, it does not mean that you should continue without a contract.

5. Sign Business Contracts On Behalf Of The Entity To Maintain Limited Liability

If you formed a business entity that provides limited liability, you must maintain that liability. One of the most basic ways to do this is by making sure you sign your contracts on behalf of the entity. However, if you sign the contracts, you can be held personally liable for them.

The Bottom Line

Evidence is essential for small business owners in the event of a dispute. You must keep records of your contracts, all correspondence, and documents related to the contract to protect yourself if you need to sue or are sued.

Knowing how to create contracts and policies that are legally sound is a challenge. You should consult an experienced attorney to ensure that you are taking the right steps for you and your business.

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