We recognize that many small business owners often operate with various informal agreements. However, we want to ensure you recognize that it is frequently important to formalize an agreement with a legal contract. For example, any agreement upon which you rely that can affect the future of your business is important enough that it should be formalized.
Among other things, contracts allow both parties to clearly define their obligations and expectations to and from one another, establish (and potentially limit) their liability, set forth payment terms, and allow each party to understand its responsibilities.
A legally valid contract has four basic components:
- A meeting of the minds. Both parties understand and agree to the essential elements of the arrangement.
- Consideration. Something of value must be exchanged by each of the parties. This can be in the form of money, goods, or even a promise to do something.
- An agreement to enter into the contract. A written contract signed by both parties satisfies this requirement. (Oral agreements can also be valid in certain circumstances.)
- Legal competence. Each party must have the capacity to enter into the agreement, meaning each must be of sound mind, and neither can be a minor.
While most contracts address specific items, such as payment terms, timing issues, and the exact subject of the agreement, the above four components are a critical starting point. Remember, if it’s important enough to cause you to wonder, it’s probably important enough to formalize the agreement.