A handshake may be a meaningful way to seal a deal, but a written contract gives you solid legal protection. With that in mind, be sure to protect yourself and your business with the proper documentation.
Here are three agreements you’ll want to have for your business:
Buy-Sell Agreement
A buy-sell agreement is a contract among the owners of the business to decide what happens to ownership interests when certain events—death, retirement, personal bankruptcy, etc.—occur. Without an agreement in place, the interest of a departing owner can fall into the hands of family members or outsiders who may not necessarily be able to work well with the other owners. A better strategy is to use a buy-sell agreement.
Basic terms
Decide what happens if an owner wants to leave or dies. This can be the requirement of the remaining owners or the company to buy out the departing owner’s interest. Include a formula or clause that will be used to fix the value of that interest. For example, the agreement could require a business appraisal to set value or use a formula based on book value, revenues, or some other financial measurement. As an added benefit, if the agreement restricts transfers and meets certain tests, the valuation method will be acceptable for estate tax purposes as well (additional conditions apply in the case of a family businesses).
Also, include a non-compete clause to prevent a departing owner from setting up a competing business across the street and taking all of the current customers with him. A non-compete clause will be upheld if it is reasonable as to time and location; you can’t keep someone from working forever.
Funding
Decide how to pay for the buyout. Usually, life insurance is used to fund a buyout at death. The agreement can call for the company to buy back the departing owner’s interest over time using company profits.
Resources
You can use a template to create a buy-sell agreement (see Jian at www.jian.com/software/business-contracts/sample-contract/Buy-Sell.pdf). Then have your attorney review it before you sign.
Independent Contractor Agreement
Outsourcing is a good way to get work done for your company without paying workers’ compensation, payroll taxes, and employee benefits. If you use freelancers and independent contractors to do various tasks for your company, be sure that you follow the law and classify these workers properly. The IRS and many states are hot on the trail of companies that mislabel employees as independent contractors merely as a ploy to avoid payroll taxes and other employee-related costs.
The determination of whether a worker is an employee or independent contractor is a matter of control. If you have the right to say when, where, and how the work gets done, then the worker is your employee regardless of what you call her.
An independent contractor agreement spells out the relationship between you and the worker, making it clear that you intend her to be an independent contractor responsible for her own taxes. Having a written agreement with a worker is no guarantee that the IRS or your state will respect the arrangement, but it is helpful as evidence of the intended relationship.
Resources
Use a sample that you adapt for your company’s needs (see Lectric Law Library at www.lectlaw.com/forms/f050.htm). Again, have your attorney review it carefully.
Nondisclosure Agreement
This is a confidentiality agreement that protects your proprietary or secret information. You’ll want to use a confidentiality agreement:
- When you do business with someone and need to disclose a trade secret or other confidential information. For example, if you partner with another company for a particular activity and share your customer list, you’ll want this information protected.
- When you hire new workers who will be exposed to confidential information. This bars employees from using this information when they leave your employment.
Resources
Find a sample nondisclosure agreement from SCORE at www.score.org/downloads/NonDisclosureAgreement.pdf. After you complete this, have it reviewed by your attorney.
