The 10 Contracts Every Business Should Consider
Whether you’ve been in business for twenty days or twenty years, protecting your business from legal problems is an important consideration. Here’s a list of the Top Ten contracts:
- Employment Agreement
- Non-Disclosure Agreement
- Non-Competition Agreement
- Independent Contractor Agreement
- Partnership Agreement
- LLC Operating Agreement
- Corporate By-Laws/Corporate Minutes
- Pre-Nuptial Agreement/Post-Nuptial Agreement
- Life Insurance Agreement
- General Liability Agreement/Worker’s Compensation Agreement
Not all of the agreements above are necessary for every business. If you’re a sole proprietor you needn’t have a Partnership Agreement. If you’re not a Limited Liability Company (LLC) you don’t have to have an Operating Agreement. If you’re not a corporation, you needn’t have By-Laws and Corporate Minutes. Click on the Contract you are interested in and read about it.
Every business with employees needs an Employment Agreement with each of its employees. This agreement can be very simple. It should address the issue of at-will employment. An at-will employee may be terminated without notice and without cause by his employer. An at-will employee may terminate his employment without notice to his employer. Most employees are at-will. Notable exceptions are professional athletes who usually work for a term of years. If the main focus of the contract is to confirm the at-will status of the employee a simple application obtained from an office supply store may suffice. No need for a lawyer.
Businesses may choose to have employment contracts for key employees that set out a term of years of employment in order to entice the potential employee to join the firm. These Employment Agreements should be drafted by an experienced business law attorney.
A business that has employees may need a Non-Disclosure Agreement. Whether incorporated into an Employment Agreement, or separate, it should be drafted by an experienced Los Angeles business law attorney. Non-Disclosure Agreements control the dissemination and use of business information, such as trade secrets and important proprietary data by employees and ex-employees. Each situation is unique, so Non-Disclosure Agreements purchased on the internet are rarely sufficient. Each business is different and internet based contracts are not going to take into account the facts specific to your agreement.
As a Los Angeles business law attorney, I routinely see litigation arising out of Non-Competition/Non-Disclosure Agreements that have been prepared by businesses located both in California and outside of it.
Many business owners confuse Non-Disclosure Agreements with Non-Competition Agreements. A Non-Competition Agreement is an agreement not to compete with the business. In California, Non-Competition Agreements are unenforceable and illegal for the most part. Unless an individual has an ownership interest in a business, or meets other narrow and unusual criteria California law does not permit the employer to require a Non-Compete Agreement.
What Los Angeles business lawyers often face are out-of-state companies that hire Californian employees who work in California. The companies require the Californian employees to sign a non-compete as a condition of employment. Even though a Non-Competition Agreement is enforceable in all the other states, if a company’s employee is in California, the Non-Competition Agreement is unenforceable here.
If a company uses independent contractors, either in conjunction with employees or by themselves, the company should have an Independent Contractor Agreement. In California, independent contractors must meet certain requirements in order to qualify as independent contractors. Businesses should consult with an experienced California business law attorney about the persons working for the company to ensure that a person who is described as an independent contractor meets the legal requirements.
The reason is if the “independent contractor” does not meet the legal requirements, he or she can file suit against the employer to recover overtime, break-time, and penalties because the company mischaracterized the worker as an independent contractor.
I’m often asked whether a business should incorporate or become and LLC. My answer is surprising to some. A brand new business with very little exposure to lawsuits from consumers might do well not to become an LLC or a corporation until it is making money. Whichever legal entity one chooses – corporation or LLC – one adds a layer of administrative work and complexity to the business.
For more information on whether to incorporate or create an LLC read this article, in brief it is my opinion that most new businesses should often focus on marketing and providing excellent services or goods. This means that a business owned by one person would do well to remain a sole proprietor until the business is firmly in the black.
Having cautioned you that incorporating too soon may not be wise, a business in which there is more than one owner will need a Partnership Agreement, immediately. It is critical that a business with more than one owner set out in writing what the rights and obligations of the owners will be. Using an internet service or a form that one orders from the back of a magazine is a huge mistake. An experienced business contracts attorney can prepare a Partnership Agreement for a modest fee that will ensure all possible future facts are taken into account.
For example, if one of the partners is married has spouse may have a community property interest in the business. What happens if there is a divorce? Usually, partners don’t want to be in business with the ex-wife of their partner.
A Partnership Agreement can set out what happens in the event of the death, departure, or divorce of one of the partners. Even better the partners would have Pre-Nuptial Agreements or Post-Nuptial Agreements that complement the Partnership Agreements.
The Partnership Agreement can create a mechanism for partnership interest buyouts that won’t break the business. It’s very common that one partner or another will wish to leave the business, and if the business is lucrative, he’ll expect to be paid. A Partnership Agreement can set out the terms of the partnership buy-out in advance. That way both partners (or more if there are more partners) know the buyout terms and can ensure the business can afford to pay the buy-out with shutting down. (Business with more than one owner, whether partnerships, LLCs or corporations should have non-competition agreements between the owners. They are legal in California.)
There are important differences between LLCs and corporations; however, LLC and corporations must have a structure and an operating plan. The LLC needs an Operating Agreement drafted by an experienced attorney that sets out the rights and the obligations of the members and describes how the business financial and functional decisions will be made.
Corporations must have by-laws which are the operations outline for the corporation. Corporations must record the corporation’s actions, which records are called Corporate Minutes. Again using Internet services or companies from a magazine advertisement is dumb. The prices are attractive, but you receive what you pay for—very little. Your business law attorney will craft the necessary documents for you and explain what the business needs to do in the future to comply with the relevant laws and obtain the full benefit of the security of the business entity.
Insurance contracts on the life of business owners are an overlooked yet critical aspect of business. Sometimes called “key man” policies these insurance policies can keep a business in business after a tragedy. For example let’s say ACME Sconces, Inc. has two owners. One owner is the salesman and another is the manufacturer of the sconces. The salesman dies. If there is key man insurance the manufacturer will be able to afford to pay a salesman. It’s a simplistic example, but you get the picture.
The most important contracts
The most important contracts are commercial liability coverage policy (also known as a general liability policy) for the business and worker’s compensation insurance and an agreement between the owners.
Worker’s compensation insurance is required by law and is absolutely necessary. Many of the lawsuit threats business owners believe they can avoid by incorporating would be better addressed with a commercial liability insurance policy. And as stated above the owners have to a written agreement defining their roles and their rights.
Business planning for legal issues is cheap when compared to the expense of litigation over any one of the issues outlined above, and yet the vast majority of businesses cut corners or even ignore legal issues all together. The classic situation is the company that files the documents to incorporate the business and never takes another step to abide by the corporate formalities.
Either through ignorance or intent the company’s owners co-mingle the business assets with their own. Then, the company is sued and the plaintiffs seek to reach the personal assets of the owners–the very thing the owners sought to avoid by incorporating. The plaintiffs point to a lack of record keeping by the corporation as well as the co-mingling of the personal and private assets and the business entity may be “pierced” for purposes of the lawsuit.
Beverly Hills Business Attorney Galen Gentry can help you create your business start ups, draft employee contracts, partnership agreements, employment agreement, non-disclosure agreements, non-competition agreements, and incorporate your business or create your LLC. With 21 years of experience and the highest rating for legal skills and ethical conduct from avvo.com and martindale.com Galen can work with you to avoid costly legal problems through proper planning. Call 800 486 6814 for a free, no obligation consultation. Serving clients in Southern California including Los Angeles,Beverly Hills, Santa Monica, Hollywood, The San Fernando Valley, Ventura County, Orange County and Long Beach.