Some rules are made to be broken, while others are made to be followed. When it comes to contracts in business, breaking certain rules could be disastrous for your bank account, your business, and your health.
Here are 5 contract rules to follow in business:
1. Never put your personal name at the top of a business contract.
I have seen this mistake too often and it almost cost a client $20,000. In business, your LLC or corporation is a person in the eyes of the law and can enter into contracts. Think of a baby once it is born. That baby has its own identity separate from the mother as evidenced by the issuance of a birth certificate and a social security number. Same is true for a registered business. A business register with the Secretary of State has its own name, certificate of incorporation (birth certificate), and EIN (social security number).
As its own person, your business is the one entering the contract and the LLC or corporation has liability protection. However, if your name is at the top of a contract, then you, personally, are liable for the business.
If it is a business contract, then it should state your business name at the top of the contract aka the preamble. The business name should also reflect the name as registered with the state in the articles of incorporation (aka the legally listed name on your business’ birth certificate).
2. Conduct a due diligence search.
Before you sign your next contract, conduct a due diligence search for your business and the other party.
If the other party is another business, ask for their state of incorporation and search the business records in that state to determine if the business is in good standing. A business in good standing has met all the legal requirements to do business in that state. However, you may find that the other business or your own business is not in good standing to do business either for delinquent filings, unpaid taxes, or forfeiture of the business (no longer exists).
Conducting a due diligence search for an individual includes a search of state criminal and civil records. The results can provide you insight on a person’s interactions with the law and others, and their character. Better to avoid the snake in the garden, than deal with the consequences of a snake bite.
A due diligence search can help you avoid future legal problems and also save you money and stress. Knowing a business owner is two years behind on taxes or that the business has been forfeited by the state provides you with intelligence to determine whether to proceed or walk away from the contract. I mean… if they are not paying the State, do you trust them to pay you or deliver what they promised?
If you find that your business is the one not in good standing, simply identify what is required to bring you back into good standing and take those actions immediately. Failure to do so could expose you personally to liability, the same as signing your personal name at the top of a business contract.
3. Always have an exit strategy.
Never enter a business contract without a way out. It should be clear when the relationship ends and how to end the relationship. This is typically found in the term and termination section. The last thing you want to do is be stuck in a bad business relationship for the entire duration or cough up a significant amount of money to pay to leave.
It should be clear what methods can be used to communicate termination of the contract - in writing either by email or certified mail. We all know someone, real or on television, that has difficulty communicating. Nobody, and I mean nobody, got time to read between the lines of whether the person is still in or out of a relationship. Making it clear how to exit the contract and on what grounds you can and cannot exit as well as the proper way to communicate the intention to end the contract avoids a ton of problems and misunderstandings. That in turn can avoid lawsuits.
4. Don’t ignore intellectual property.
Intellectual property is a wealth generating asset. Do not avoid intellectual property rights within the contract. A contract should identify ownership and/or licensing of intellectual property created and/or owned before, during, and after the contract is signed.
For example, if you create a branded product with another company but it fails. Who has the right to pick it up 5 years from now and do profits need to be shared? All of that depends on the terms of the contract.
As use of artificial intelligence grows, so does the need to address its use within a contract in the development of intellectual property. A.I. may be handy in the Creative process, but there are zero copyright protections for A.I. creative works. That means… anything created by A.I. can be used by anyone else, even if it is your logo.
5. Negotiate a better deal.
Never feel powerless when it comes to contacts. Before you sign, you have more negotiating power than after you sign. If the contract is not fair… negotiate. Don’t like the price? Negotiate. Prefer to own the intellectual property… negotiate.
Negotiate and if the other party is unwilling to change the terms of the contract or work with you to find a win-win solution… be ready to walk away. It is better to walk away than sign a bad contract.
I believe you should never do business without a contract and when it comes to business contacts, these are 5 rules to follow. Following these rules can save you thousands of dollars in legal bills and lost profits because if you break these rules, the legal trouble that may follow will cost more in the end. Protect your business and your profits with these 5 Contract Rules to Follow.
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About the Author: Chayla C. Jackson, Esq. is a business attorney, business strategist, and legal coach. She is also the founder of Legacy Legal & Consulting Firm, a virtual law firm for CEOs on the go and the Legalproof Your Business Membership, a legal education membership for service-based CEOs. With her Georgetown Law teaching background, Chayla empowers business owners and her clients to understand the law without getting lost in the legalese. Chayla has practiced law for over 9 years and earned her juris doctorate from Georgetown Law.