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Contracts and Small Business

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:

  1. A meeting of the minds.  Both parties understand and agree to the essential elements of the arrangement.
  2. 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.
  3. 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.)
  4. 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.

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Consultants and Independent Contractors

As a small business, it is not always possible to hire all of the employees you think you may need.  But this can be ok.  Hiring independent contractors or consultants instead can be beneficial.  You will get their special expertise, you will use them only as needed, you will save on tax contributions and benefits, and you will have flexibiity in the relationship.

It is critical, however, to carefully document your agreement with each independent contractor or consultant.  Failure to do so could result in serious tax consequences.  Also, if the relationship involves the development of a product, software, book, manual or intellectual property, to name a few, your agreement should set forth the rights you expect to retain in the final product.

Having employees is great, but independent contractors and consultants can often fill a specific need.

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Business Plan Basics

Taking the time to put together a solid business plan that includes your plans, strategies and goals for your business can make the difference between the success or failure of your company.  In fact, according to Dun & Bradstreet statistics, poor planning is the number one cause for failure of small businesses.

Your business plan should give a meaningful description of your business.  Think of it as a tool to help grow your company, and to monitor your company’s performance over time.  In addition, investors will typically want to review your business plan to determine whether to invest in your company.

Don’t worry that you can’t foresee every twist or turn your business will take, and be prepared to modify your business plan as you go along.  Do, however, be realistic in the assumptions you make while drafting your business plan.  Your business plan conveys a lot about both you and your business, so make sure you approve of the message it sends.

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Piercing The Corporate Veil

One of the most attractive features of a corporate structure is limiting the personal liabity of the company’s shareholders (or members in a limited liability company).  But simply incorporating your business is not enough; it does not automatically protect you from your company’s creditors.

Generally a corporation’s creditors can’t sue its shareholders for their personal assets (limitied liability). However, in certain instances courts will allow the creditors to pierce the corporate veil and do exactly that.  For example, courts sometimes allow piercing the corporate veil in instances of fraud or similar wrongdoing, not allowing the shareholder to hide behind a false or flimsy corporate veil.

It is important to adhere to corporate formalities, and treat the corporation as a separate entity.  (You and the corporation are NOT one and the same.)  Properly document transactions between the corporation and its shareholders, officers and directors, and make sure the transactions are fair and reasonable and in accordance with applicable corporate law.

Though piercing the corporate veil is not terribly common, it is important to protect yourself against even the possibility of losing your limited liability.

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Protecting Your Mark

trademark is a word, phrase, symbol or design that you use to identify and distinguish your goods from those of others.  A service mark is similar to a trademark, but refers to services rather than goods. In practice, however, the term “trademark” is often used to refer to both trademarks and service marks.

Must all marks be registered?  No, your use of your mark in commerce affords you common law rights to the mark.  However, federal registration has several advantages, including notice to the public of your claim of ownership of the mark, a legal presumption of ownership nationwide, and the exclusive right to use the mark on or in connection with the goods or services described in your registration.  Registration allows you to stop others from using a mark or trade name that is confusingly similar to your protected mark.

To register your mark, you must first file an application with the US Patent and Trademark Office.  The best marks are fanciful, arbitrary or suggestive. The USPTO generally does not register generic terms.  Examples of well-known marks include the Nike swoosh, Xerox and Windows, to name a few.

More information can be found at

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Letter of Intent

There are numerous types of contracts that will be important during the life of your business. An example is a letter of intent, which is often used for doing a particular deal. A letter of intent conveys to each party that the other is serious about doing the deal.

There are two differing thoughts as to how to draft a letter of intent.  One suggests that letters of intent should be short and to the point, highlighting the key points of the proposed deal.  The second says that letters of intent should be fairly detailed, addressing every major point of the proposed deal.  Which version works for you depends both on the circumstances of the particular deal and your personal preference.  The more detailed the letter of  intent, the more assurance there is of a meeting of the minds between the parties (though of course, that is not guaranteed).

Letters of intent often include certain basic terms, such as the confidentiality of ongoing discussions, the basic structure of the deal, the price and terms of the deal, the key obligations of each of the parties, the proposed closing date, whether or not negotiations are exclusive between the parties, conditions to be met prior to closing, and what obligations of the letter of intent are legally binding upon the parties.  These are just examples, and each letter of intent should be specific to the particular deal to which it applies.