Contracts are legally binding agreements made between two parties. For a business, contracts help make sure you get what you pay for and can protect you from certain liabilities. As a business owner, you’ll come across a wide variety of contracts. Read on to learn about types of contracts in business.

What is a contract?

A contract is a written or spoken agreement enforceable by law. Contracts can either be verbal or written. Some contracts must be written down (e.g., selling and leasing real estate for longer than a year and taking on another party’s debts). Even if you can get away with a verbal agreement, it may be wise to get everything in writing because it holds everyone accountable. Remember, not everyone you do business with is trustworthy, dependable, or exactly sure what your agreement entails. 

Contracts are integral to starting and growing your business. If you overlook their importance at any stage of your business, you’ll soon realize the mistake. Among other things, contracts will help you hire employees, manage sales and purchases, and protect your intellectual property.

Written contracts can protect your business if the other party breaks their agreement. 

Generally speaking, contracts can help you:

  • Protect private information
  • Define responsibilities
  • Offer a sense of security
  • Prevent lawsuits
  • Act as a legal record of agreements
This graphic is titled "examples of general contracts for your business." The first is a partnership agreement that details how much of the business a partner owns and their share of profit and loss. The second is a franchise agreement that outlines terms and conditions for the franchisee. The third is an indemnity agreement that helps protect you from customers lawsuits if they are injured. The fourth is a non-disclosure agreement which can be used whenever you want to keep something private--can be used for employees, partners, and customers. The fifth is settlement agreements which help resolve disputes between parties through mutual agreement. The last example is security and privacy agreements which regulates how customer data is or isn't used. This isn't a complete list of business contracts, but only a small example.

Types of contracts for your business

If you haven’t realized this already, you soon will—there are many different types of business contracts. Contracts cover most aspects of a business. We’ve pulled together the most common types of contracts you’ll come across.  

Read on to learn about contracts for your business, employees, and sales.

General contracts for your business

Contracts are the foundation of any business. They are just as important as your brand or product. Business contracts operate behind the scenes to make sure that your day-to-day runs smoothly. 

Partnership agreement

A partnership agreement details how a business will operate under two or more people. This agreement lays out:

  • How much of the business a partner owns
  • The amount of profit and loss a partner is responsible for
  • Rules of management

Franchise agreement

A franchise agreement defines the franchisor’s terms and conditions for a franchisee. This agreement covers everything about how the franchise will be run and what the franchisee can expect from the franchisor. 

Indemnity agreement

Indemnity agreements help protect you from customer lawsuits in case they injure themselves. Indemnity agreements are often used by businesses offering services that put customers at risk (e.g., skydiving, deep-sea diving, and bungee jumping). 

Non-disclosure agreement

A non-disclosure agreement stops any of its signatories from sharing confidential business information with anyone outside of the business. If information is shared, whoever broke the agreement can be sued. 

Whenever you have sensitive information you want to keep confidential, use an NDA. For example, you may use an NDA to prevent the following parties from disclosing business information:

  • Employees
  • Partners
  • Customers

Settlement agreement

A settlement agreement is a legally binding contract that helps resolve disputes between parties by mutual agreement. This agreement details the terms that both parties will adhere to. Settlement agreements are created through mediation and generally can help avoid a tedious trial. Because of this, these agreements can help save time and money. 

Security and privacy agreement

A security and privacy agreement regulates how a business can use a customer’s data. This agreement details a customer’s rights and your obligations to keep their data confidential. It can also stipulate how, when, and with whom you will share their data. This can be a key part of a business’s relationship with its customers. 

Contracts for employment

Contracts for employment cover every stage of an employee’s tenure with your company. You’ll use contracts for employment whether you’re hiring or firing.

Employment contracts

Employment contracts define how the employer and employee relationship operates. This contract lays out the responsibilities of both parties as well as employee compensation, benefits, and grounds for termination. If applicable the employment contract can also include the duration of employment. 

There are many different types of employment contracts. Employment contracts can include:

  • Full-time contracts: For full-time employees (e.g., those working 35 or more hours each week). These contracts often include information about benefits such as PTO, vacation time, and retirement plans. 
  • Part-time contracts: For part-time employees (e.g., those working under 35 hours each week). Unlike full-time contracts, part-time contracts usually don’t include insurance, retirement, and PTO, as these benefits are reserved for full-time employees.

There’s no standard number of hours for full- or part-time employees—that’s entirely up to you.

  • Zero-hour contracts: For temporary employees (e.g., day laborers or caterers) that work irregularly or only when work is available. Zero-hour contracts may state the minimum number of hours or shifts worked for a month. The employee has the right to refuse work for any reason. These contracts don’t have to include information concerning rates of pay or employee benefits.
  • At-will agreements: For temporary or at-will employees. Unlike zero-hour contracts, at-will agreements allow the employee and the employer to end employment at any time, without reason. At-will agreements can detail benefits, salary, and time off, but often don’t include any of the employee’s rights. 
  • Fixed-term contracts: For employees working for a fixed amount of time or until a project is completed. These contracts often include the same benefits and protections as full-time or part-time employees. 

Non-compete agreement

A non-compete agreement keeps an employee from competing with your business either directly or indirectly during their employment and often for a specific period afterward. 

Termination notice

A termination notice formally notifies an employee that they no longer work for a company. 

Independent contractor agreement

An independent contractor agreement defines the work and subsequent payments for projects or services provided by contract workers. Contractors are not considered employees, and there are strict standards that detail the differences between the two. You are not responsible for an independent contractor’s tax obligations, nor can you control how they operate their business or who they take on as clients. 

When working with an independent contractor it may help to draft a statement of work (SOW). A statement of work is a contract that defines the scope of the contractor’s project. A statement of work is at its best when it’s as detailed as possible. You can include:

  • A definition of the contractor’s responsibilities
  • A timeline for stages of and/or the completion of the project
  • Any liability inherent to the project
  • The terms and conditions between you and the contractor

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Contracts for sales

Contracts for sales may be the most common type of contract you’ll come across. Because of their frequency, you’ll get to know these types of contracts pretty well. 

Bill of sale

A bill of sale legally transfers property from one party to another. You can use this contract to prove ownership of land or property. 

Purchase order

A purchase order is a contract between a business owner and a supplier or seller of goods or services. A purchase order defines:

  • How much the business will pay for the goods
  • The due dates for payments 
  • The date of delivery

Order form

An order form is similar to a purchase order, only it binds a customer to a business. Customers use an order form when they purchase services or products from businesses. An order form defines:

  • The number of services or goods purchased
  • How much the customer will pay for services or goods
  • The due dates for payments

Renewal order form

A renewal order form streamlines subscription renewal for customers. This contract reduces the amount of time it takes to fill out an order form once the initial contract period is over. A renewal order form includes details of the services or products purchased, the billing period, and any additional fees. 

Warranty

A warranty guarantees that you’ll repair, replace, or refund a product if it doesn’t meet the customer’s expectations within a specific time frame. Warranties can be full or limited. Full warranties cover the entire product as well as parts and labor. Limited warranties often only cover specific parts.

Purchase and sale of business agreement

A purchase and sale of business contract is a bill of sale when you want to purchase or sell a business. This contract generally includes the following provisions:

  • Party identification: Ensures that all parties are correctly identified. Includes legal name and contact information of both the seller and buyer
  • Business description: Offers an overview of company operations
  • Financial Terms: Includes purchase price, required deposits, and date and time of transfer
  • Sale: Defines what’s included and excluded from the sale, as well as the condition of assets included in the sale
  • Covenants: Covers all agreements or obligations involved in the closing of the sale (e.g., taxes, loans, and fees) 
  • Closing: Outlines the basic information of the sale such as the date and time the sale was closed. Can also include the amount paid at closing 

This is not intended as legal advice; for more information, please click here.

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