Entrepreneur 101: Why Contracts Are Important For Doing Business

In this new series entitled Entrepreneur 101, professionals will discuss important areas and details that are vital for your success. First up is Andrea Harvey, Esq., an attorney located in Chicago. She is also the attorney who helped me with legitimizing this site including getting an LLC and helping me with my disclaimer legal jargon. Andrea will be discussing the importance of contracts for entrepreneurs—why it’s important to have them, what they need to include, etc.

The topic of contracts is as complicated or simple as the word itself. It is essentially Law School 101. One of the first things you learn in law school (and spend most of your first year learning) is what is a contract? A contract is defined as, “an agreement between two or more parties where there is a promise to do something in exchange for a valuable benefit.” Or in simple terms, a contract is an agreement between people to do something in exchange for something else.

Most people readily identify with the contract for services. For example, we often pay the repair person to come and fix a broken appliance. We pay money in exchange, for their service and the repair. A document is written up that explains what the repair company is going to provide for, both parties sign, and money is paid. That document is a contract.

Contracts are important in almost every facet of business life. Particularly those who work in the service industry. It is important for people to know what services you are providing for the money they are paying. No matter how large or small a business is, at some point a conflict can arise regarding services. It can happen both ways, the service people will take money and not provide the agreed upon services. Or the people for which a service is being provided will ask for more than the original contract covered.

Back to our earlier example of a repair person. If the appliance repair person came to fix your refrigerator and while they were there your dryer needed repair, would you expect them to also fix your dryer? Or if you contracted with them to fix your refrigerator and they came in and fixed your dryer, thus leaving your refrigerator still in repair would you be upset? Probably. That’s exactly what happens when contract are not clear. That is why in my opinion, a contract for services is one of the most important documents any business should have. There are some basic elements that every contract should have.

And because a contract is an agreement between people to do something in exchange for something else, it needs to have these basic elements:

1. Your name/business name

You want to be clear that the contract is between Bob Service, Inc. and customer. Again, when the repair man comes the contract is not between you and Richard the Repair guy, it’s between you and the service company.

2. Your services:

Be specific. Even add disclaimers of what your service does NOT provide.

3. Choice of law: (optional)

If you are working with individuals in other states, you need to clearly include what state would handle the case if a conflict would arise. I often suggest people use the state where their business is located.

4. Cost of services:

This is not an invoice, it is simply a document that shows the total cost of services, clearly and concisely.

5. Basic terms of the contract:

This portion will include the same terms that were discussed previously. The contract should only include those things that both parties had mutually agreed upon. For any of the readers who are really interested in the law, check out the parol evidence rule. Yeah. That.

6. Signatures of parties to the contract:

The signature indicates that both parties read the contract, and agree to its terms.

To be clear, you don’t necessarily need an attorney to draft a contract for you. But if you seriously plan to go into business, having a standard service contract that you use and modify slightly from client to client is strongly suggested.