Understanding the importance and use of contracts is an essential part of running a small business. While it is strongly advised that owners work with an experienced small business attorney from the beginning, it is also a good idea to have a basic knowledge of how contracts work.
As a small business owner, you will be entering into contracts more frequently than you might realize. Any time your business agrees to take some action or make a payment in exchange for anything of value, a legal contract has been created. This is the case even when the agreement does not appear to be a formal contract. For example, most bills of sale, purchase orders, employment agreements, and other common business transactions are legally enforceable contracts.
The Basics
A contract is a legally enforceable agreement between two or more parties that creates an obligation to do or not do certain things. The term "party" can mean an individual person, company, or other legal entity. Typically, contracts must have the following elements:
- Parties who are competent to enter into a contract. For example, a mentally disabled person cannot enter into an enforceable contract. Minors can enter into contracts, but in most cases have the option void them before reaching the age of majority.
- Mutual agreement by all the parties. In other words, the parties must have had a meeting of the minds on the subject of the contract. Each party either agrees to perform an act that said party is not legally required to perform, or promises to abstain from performing an act that the party is legally entitled to perform.
For some business agreements to be enforceable, they simply must be in writing. Examples of these types of agreements may involve real estate, sales of goods valued over $500, and contracts that require more than a year to perform. Whether or not it is legally required, a written agreement is valuable because it serves as proof of what was agreed upon and prevents the other party from trying to alter the agreement later on. Drafting a contract also forces the parties to think through the nature of the agreement and how best to facilitate and enforce it.
The attorneys at Lambros Law Office have the experience and expertise to guide you through the process of getting your small business off the ground. We are proud to serve the residents of Rhode Island from our Cranston office. To learn more, give us a call at 401-369-8534, or send us an email at [email protected].
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