Small businesses are often on tight budgets. Once they’ve answered the question of whether to incorporate or not, founders can be leery of spending time and money on “legal” when there are so many other priorities. But when it comes to preparing, reviewing, and signing everyday contracts, the legal juice is worth the squeeze. We walk you through the key steps involved.
What you should know
The first, and arguably most important, reason for a written contract is to have a clear record of what all the parties agreed to do. Properly drafted, a good contract lets everyone know where they stand: employees, suppliers, landlords, and the business owners themselves.
But there are other reasons for having written contracts.
A written contract means you’re serious. As in, professional. It signals to the other side that you are a reputable business owner.
Written contracts act as a deterrent against bad behaviour. Agreeing orally to do something is less forceful. Putting it in writing forces everyone to consider the plans more deeply, because a written contract spells out what happens if you don’t get things done.
Written contracts are more enforceable. While an oral agreement may be enough to create a legal obligation, if things go sour and the parties disagree, that oral “yes” is hard to prove. When you put pen to paper — or a digital signature on a document — it creates an unambiguous record of the agreement. A well-written contract reminds the parties what will happen if they don’t keep their end of the bargain.
"With so much going on when I was getting my shop up and running — leasing space, getting suppliers lined up, hiring staff — I just had to move quickly. I didn’t have time or money to prepare written contracts for everything, or to review the contracts put in front of me. This is the life of an entrepreneur, I guess! But now, I wish I’d taken my time. A lot of my agreements are turning into 'he said, she said' situations."
– Jean, Port Moody, BC
So what written contracts should every small business owner have in place? Here are a few to consider:
Contracts with your workers. Here’s your record of how much they’re getting paid and their job title and vacation-time allotment. Written employment agreements can also clarify severance payment obligations, exclusivity (whether your worker is free to work for other folks too), and intellectual property ownership. They can also be important in helping to determine whether your workers are contractors or employees.
Contracts with your suppliers. Written agreements can, among other things, set out payment terms, exclusivity, delivery deadlines, and dispute resolution mechanisms.
A carefully considered commercial lease. More often than not, your landlord will require a written contract here anyway. But this doesn’t mean you should just sign on the dotted line — read it! It’s especially important to understand exactly what you owe each month, what the landlord has to provide, and how long the lease lasts (and whether and how you can get out of it early).
Contracts with your customers. A coffee shop doesn’t need an elaborate contract with its regulars. But a professional services company — like a designer or a home reno contractor — would be smart to have a template agreement customized to each customer. Key elements are payment terms, deposits, deadlines, and a clear process for how deficiencies will be handled.
"After a good conversation with a key supplier, he sent over some paperwork for me to sign. The first document was a one-page order form, so that was simple enough to understand. But the other was more detailed: eight pages of dense terms and conditions. I didn’t take the time to read it carefully and just signed. Now a small dispute has come up between us, and I’ve learned that those terms and conditions mean I can’t use other suppliers, and am locked into this deal for a full year."
– Ajeet, Richmond, BC
Fine print: many peoples’ eyes glaze over at the first glimpse of it. But before you sign any contract, it’s important to read and understand what you’re getting into. Broadly speaking, here are a few questions you should be able to answer before you agree to something:
What must I do? And What may I do? It’s an important distinction. Some items in a contract are required, while others might be optional. For example, you may have to buy 100 boxes of coffee cups by the 15th of the month, but then you have the option to buy another 50 boxes at half price before the end of the month. Look for the words “must,” “will,” and “shall” for things that you likely have to do, and “may” or “can” for optional provisions.
When do I have to pay? Sometimes you need to pay up front for things; other times you can pay on delivery or at the end of the month. Be careful with up-front deposits — especially from folks you haven’t dealt with before. They might take your money and run. (You can always sue, but that’s expensive, time-consuming and stressful.)
Can I make changes? Let’s say you don’t need 100 boxes of coffee cups this month. Can you let the supplier know in advance that you only want 25, or are you not allowed to make changes? The more flexibility you have as a small business, the better.
There’s no substitute for getting a professional to review an important contract before you sign it. What makes the cut as “important”? Inking a five-year lease usually would, while hiring a part-time employee might not. Clearly though, it all depends on the nature of your business. You know best.
Remember that you have bargaining power. You might be a small business owner, but you still have leverage — be it with new hires, suppliers or landlords. Work on your poker face, and don’t feel like you have to say yes to a first offer. Take your time, consider counteroffers and adjustments to key terms, and only sign when you’re ready.
Make your contracts
You needn’t try to draft a contract from scratch — lawyers have done that work already. So where can you go to get started?
A good business lawyer. Yes, yes, “good” and “lawyer” can appear in the same sentence. Legal service delivery models are changing; the bill for what you need may be cheaper than you think. Get a quote up front and ask what’s included. If you incorporate your business through a lawyer, they might provide you with good templates for start-up contracts (like employment agreements for your staff). Some might only charge a flat monthly fee for legal advice. You just have to shop around.
Online subscription services. Some Canadian websites specialize in basic contracts that you can fill out online. But they aren’t perfect. They won’t be tailored to your situation, and might not be BC-specific (some contract rules are different from province to province). So proceed with caution.
Read through each clause carefully and adjust as needed. If you don’t see something that’s important to you, add it in. Don’t feel it has to sound fancy just because it’s a legal document: write in clear language that’s easy to understand. This will help everyone know what they’re agreeing to. We have more contract drafting tips here.
The days of filing clerks requiring things signed in triplicate are long gone. An electronic signature with a copy saved in the cloud are now the norm. It’s pretty easy to organize your contracts, and the sooner you get on it the better.
That said, don’t try to force a system you can’t sustain. Here are a few tips to make the process simpler:
Always use the same email address for business contracts. Many contracts are signed electronically. Running everything through a single email address will make your signed contracts easier to find.
Get things signed! It might sound silly, but it’s easy to forget this step and end up with a word processing copy of a contract that’s invalid because nobody has signed it. You can use electronic signature software (like Hellosign) that keeps track of this sort of thing.
Rename file names. There are no hard rules here. Do whatever feels right for you to stay organized. One way could be for all of your file names to have the date, a descriptor, and a status. Something like: “2021.06.17 Employment Contract John Smith - final signed copy.” But whatever you do, be consistent. You’ll thank yourself later when you’re looking for a specific file.
Create a folder taxonomy that works for you. Some people just stash all the contracts into a folder called “SIGNED CONTRACTS.” Others might have various subfolders devoted to specific subject matter or dates. Either approach can work; just make sure you’re comfy.
Who can help
Business Law Clinics at UBC and UVic
Provide free, business-oriented legal advice to individuals and small businesses.