Cheat Sheet

Business Contracts Kit For Dummies

Business contracts form the backbone of all business transactions. Knowing the key terms used in contracts, how to conclude a contract, and some terms to beware of in a lease can put you ahead of the game. And if you’re an employer, you need to know what you’re obligated to provide for both employees and independent contractors.

Key Business Contract Terms

If you’re dealing with business contracts, you need to be able to speak the language. Some common contract terms you may encounter while doing business are defined in the following list:

  • Boilerplate: Standard contract terms, usually found at the end of the contract, that are important but that do not reflect the essence of the deal. Examples of boilerplate terms include provisions describing notice, governing law, or payment of attorneys’ fees.

  • Breach: A claim by one party to a contract that the other party has failed to perform as required under the contract.

  • Conditions: Provisions in a contract that deal with the certain events happening or not happening. Conditions are like triggers that, when pulled, cause some other part of the contract to come into effect.

  • Consideration: A benefit or right that the parties to a contract exchange with each other in order to form the contract. Consideration can be a promise to do something (such as a promise to pay money or to lease your office space) or a promise not to do something (a promise not to lease your office space to your neighbor’s biggest competitor), but whatever the parties exchange with each other, each party’s consideration must be something of value to it.

  • Damages: A type of remedy for a party’s breach of a valid contract. Damages usually involve an award of money to the injured, non-breaching party.

  • Recitals: Language at the beginning of the contract that describes why the parties are entering into the contract. Recitals are not always legally enforceable, so always repeat significant contract terms in the body of the contract after words such as “the parties agree as follows.”

What to Watch Out for in a Business Lease

If your business has a physical presence, you’ll most likely negotiate a business contract known as a lease for rental of space to house your business. Be aware that the landlord may use a form lease that contains gotchas. Gotchas are provisions that may cost you a lot of money or headaches in ways that you didn’t plan. Your best bet is to negotiate them out of the lease. Some classic gotchas to look out for include:

  • The landlord’s right to pass increased operating costs in the building on to the tenant without limitation

  • The tenant’s obligation to pay any increased taxes as a result of the landlord’s selling the building

  • The landlord’s right to terminate your lease early for his or her convenience

  • A disclaimer about the building and the services provided to tenants

  • Severe limitations or prohibitions on subletting your space (you may need to sublet space if your business shrinks)

  • Personal guarantees or payment of the rent required from the company’s owners

Differences between Employees and Contractors in a Business Setting

Your business may offer contracts to independent contractors — people who do work for your company but who don’t work for your company in the sense of being an employee. Independent contractors differ from employees in some key areas, listed in the following table. Many of these issues directly affect what forms you must fill out with respect to the worker.

Employer Responsibility Employee Independent Contractor
Contribute to Social Security Yes No
Contribute to Medicare taxes Yes No
Withhold applicable federal taxes Yes No
File Form 1099-MISC with IRS if you pay the person $600 or more No Yes
Carry Worker’s Compensation Insurance for the person Yes No
Contribute to unemployment insurance fund and/or tax Yes No
Grant employee job benefits such as paid vacation, sick leave, holidays, and stock options Yes No
Pay employee for overtime Yes Generally no
Right to control how the worker performs the specific task for which he or she is hired Generally yes Generally no
Right to direct or control how the business aspects of the worker’s activities are conducted Generally yes Generally no

Finishing Up a Business Contract

Before you sign off on a business contract, make sure that it contains everything it should and nothing it shouldn’t. Use the tips in the following list before you conclude any business agreement:

  • Date and sign the agreement. Date the agreement so that the parties can refer to it easily. The parties also should indicate the date they sign the agreement at the signature block. The parties don’t have to sign the agreement on the same day, but unless the contract says when it will start, the contract is effective on the date of the last signature. It’s a good idea to date the contract and then define that date as the “Effective Date.” This way there will be no confusion about the start date of the contract regardless of who signs when.

  • Prepare two final copies of the contract. Both parties should sign both copies, leaving each party with a signed original of the contract. Just sign the last page. You don’t need to initial every single page unless you are worried about the other party changing the “final” copy without your knowledge.

  • Initial any handwritten last-minute changes. If you make minor handwritten changes to the final copy before it is signed, both parties should put their initials next to the changes. This way, the parties will avoid claims that the handwritten changes are not legit.

  • Using fax signatures. It’s okay to sign a contract by fax, as long as neither side claims that the fax signature is a forgery. Because it’s much easier to forge faxed signatures than “blue ink” original signatures, it’s best to follow up fax signatures with originals sent by mail to each other for signature.

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