How Did We Get Here?… Key Contracts for Any Company.
By Atty. Nouvelle L. Gonzalo and Macarena Bazan
You run your company with a close attention to detail. You should protect it in the same way. Contracts help you do this. What often happens, however, is we face the tyranny of the urgent. Often we are reactive and focus on the urgent things as they arise instead of being proactive and addressing the extremely important goals first, regardless of their urgency. This same concept of focus on the most important is emphasized in the book, The 4 Disciplines of Execution by Sean Covey. Covey and his co-authors explain that a company must first focus on its wildly important goals before moving on to others. Urgent matters will arise, yet a disciplined focus on the most important goal first, is an effective operations strategy. We agree that this is especially true when it comes to use of contracts to protect key business groups such as:
1. Business owners.
5. Investors and Consultants.
Agreements with each of these groups must include the foundational contract requirements in order to bind the parties.
I. No More Business on a Handshake: Foundational Contract Requirements
Whether we like it or not, gone are the days when we do business with a handshake. Even if you are a reliable business person and your word is your bond, there is no guarantee that the person on the other side of the table believes the exact same thing. Further, even if they do feel the same, time and circumstances can change, and what one person wanted to be their agreement, can change out of necessity. This is where contracts play a beautiful and effective role to protect the parties. Contracts can also grow and change with the relationship of the Parties.
Contracts bind those involved to specific responsibilities. For any contract to be valid it must contain: an offer, an acceptance and an intent to be bound, the parties must have the legal capacity to contract (no minors or elderly with dementia can contract directly), and there must be something of value to exchange (payment). There are multiple contracts a company can have, so the question often becomes, “Do you need them all at once?” Yes, you need them, yet you can do them in order of that wildly important one is first and work your way to the others.
II. Deciding Which Contract is First: Select Your Wildly Important Contract First.
We often work with clients to select the most important agreement for the operation of their businesses.
If the company has a single owner and is a serviced based business, then often the service contract with clients is the most important agreement to address first. This is how revenue is generated for the company and often makes sense to prioritize first. This is followed closely by the contracts you have with your employees. If you are a single owner in a product based business, then the contracts you have with your vendors will be the first agreement that you want to have in place, then the operating agreement, and then employee agreements.
This guidance changes when there are multiple owners. Whether you own a company with family members or those outside your family, a contractual agreement between the owners is job one. This is because the comfort level and trust owners have with one another, has a direct impact on how the company runs. You, as an owner, want to execute confidently your responsibilities without a question mark about whether you are protected amongst the other owners. This frees you up to focus 100% of your time, energy, and effort on the business of the organization. This leads to sustained, and in many cases, increased revenue. Further, it can prevent interruptions to the business due to ownership disputes. The following are some of the most frequent agreements we prepare for companies.
III. OWNERSHIP CONTRACTS
Whether you are a new business or an established one, owners of the company should have an agreement in place that outlines their roles, rights, and responsibilities, and the consequences for not carrying out their respective duties. Two examples of these contracts are: Operating Agreements, Partnership Agreements, and Shareholder Agreements.
Operating Agreements are used by members of Limited Liability Companies (LLCs). These agreements outline the expectations and regulations of each member-owner when it comes to operating the company. This contract mainly serves to organize the internal operations of an LLC and protect its limited liability status under the law. Limited Liability Companies also have Member Agreements.
Similar to Member Agreements among owners in an LLC, Partnership Agreements also detail the responsibilities and binding agreement between multiple business partners. These agreements explain how a company will handle its financial obligations, contributions, ownership interests, and dissolution of the business. Shareholder Agreements in corporations serve the same function as well. While these are just a few examples of owner agreements, inquiring minds want to know why have these? Who cares? I’m so glad you asked!
Why Have These?
When you have these agreements in place, you have a road map for owners for how to address certain situations. If you have nothing in writing and you have dissolved a business, have a partner exit, bring on a new partner, or take any other significant act that affects your company, you will need to hire counsel at that time or, depending on the matter, a judge may have to decide based on default state statutes. Then you have little to no say, you simply follow state statutes. That may work for your company or it may not. If you depend on state statutes or a judge, you have fewer options than if you had created your own agreement before certain matters arose.
Further, it is helpful to have an agreement with an operating agreement in place if you ever plan to have an investor or to obtain a bank loan. Investors and banks often request to see these agreements to see how the company currently operates and if it is a good place to invest funds. It also demonstrates your organization is a serious company with the proper corporate formalities in place. This is always a plus!
IV. SERVICE & PRODUCT AGREEMENTS
Another type of contract is a Service Contract if your company provides services to the public. This contract creates a mutually binding obligation between your business and those to whom you provide services. They are very helpful to prevent misunderstandings of what services are being offered. This contract can contain set fees, reasons for any additional fees, and what happens if payment is not received. In addition, contracts make clear which services are provided and what are the expectations of each party.
Alternatively, if your business sells products, a Product Sales Contract can be drafted. They go to anyone who will buy your product on a large scale. Product contracts in particular focus on the characteristics of the product and the expectations of the products’ quality and delivery. If you sell a product, you will also consider agreements for bulk retail vendors, manufacturers, and distributors.
V. EMPLOYMENT AGREEMENTS AND INDEPENDENT CONTRACTOR AGREEMENTS
Employment agreements as well as independent contractor agreements serve to create binding obligations between individuals your business hires to perform services. Like all other contracts, these must include an offer, acceptance of that offer, capacity to contract, and value exchanged. In addition, your business can add any benefits, bonuses, or additional compensation for employees.
You will make clear in the independent contractor agreement, that these items are not available and that the contractor is responsible for its own taxes and is not a partner that can bind your company. It is important to include how conflicts will be resolved if they arise and the restrictive covenants that apply to employees. So, an independent contractor cannot take your employees. A well-crafted agreement will ensure both parties have a clear understanding of all expectations and it is clear what will happen if one party fails to comply.
VI. NONCOMPETE AGREEMENTS AND NON-DISCLOSURE AGREEMENTS
Finally, your business should consider whether you need to draft Noncompete and Non-Disclosure Agreements.
Noncompete agreements ensure that employees do not use any of your business’ information to create a competing business or work for a competitor. These agreements can be required from all employees. Make sure your Noncompete Agreement specifies the time frame the restriction is to last and the location in which competition is prohibited.
Similarly, non-disclosure agreements also protect your business and its information. If your business has proprietary information it would like to protect and prevent from being shared, enforcing non-disclosure Agreements is imperative. These agreements prevent employees and members of the company from disclosing information they learn during their employment. This protects your company from any loss of trade secrets or proprietary information.
In short, talk with legal counsel when you draft your corporate Agreements. There are several options. Contracts are some of the most important legal documents a business must-have, and their accuracy is essential for enforcement. They should be drafted with care and reflect the needs and heart of the company they are there to protect.
Nouvelle Gonzalo is a U.S. and international corporate lawyer who works with companies across the globe. She is the managing attorney of Gonzalo Law LLC, a U.S. and international corporate law firm with offices in Florida and Ohio. In addition to the active practice of law, she has served as adjunct faculty at the University of Florida Levin College of Law where she has taught international corporate law for several years. She was recognized as a rising star by the national organization, Super Lawyers, in 2019 and 2020. Her practice areas include: international corporate law, intellectual property law, and nonprofit law.
Macarena Bazan is a current sophomore at the University of Florida majoring in Political Science and Business Administration with a specialization in Pre-Law. Macarena is a Legal Intern for Gonzalo Law a U.S. and International Corporate Law Firm, the Vice President of the University of Florida chapter of Phi Alpha Delta, and a member of the Honors College. She placed 3rd in the National Phi Alpha Delta Mock Trial competition and has received the President’s Honor Roll and Dean’s List throughout her college career. Macarena has been with Gonzalo Law since January 2020. She focuses on case research, drafting and editing contracts, and additional research.