The legal aspect of any business, big or small, can be fairly daunting, but we cover this in our Small Business Management course. One part of the legal system of operating a business every business owner should be familiar with is contract law, or legal agreements.
Legal Agreements and Contracts: In Brief
In common law legal systems, a legal agreement – also known as a contract – is an agreement between two or more parties that has been entered into voluntarily, and by which each party has accepted a set of legal obligations.
The different types of legal contracts are almost infinite in their number, but we thought we would look at some of the most common legal contracts you would come across in small business.
Agency agreements: Are used in a situation when one person (the principal) appoints another (the agent) to act on her/his behalf in relation to certain matters. The best example of this is when a vendor appoints a real estate agent to sell their property. However there are plenty of other circumstances when a business would use an agency agreement. You may choose to enter into an agency agreement when you hire a sales agent to sell and promote your products.
Distribution agreements: Are used when a manufacturer or supplier of a product wants to develop a distribution network. Though they’re no more common than an agency agreement, they are more visible: Nike, for example, would have a distribution agreement with Rebel Sport to sell their products.
Franchises: A legal document that binds the franchisor and the franchisee together, and explains what the franchisor expects of the franchisee and vice versa. A franchise agreement is designed to ensure that all franchisees are treated equitably. A franchise agreement should include: a contract explanation, operations manual, proprietary statements, and ongoing site maintenance. If you’re thinking of buying into a franchise, we recommend that you consult a lawyer who specialises in franchise law.
Licensing: In short, a licensing agreement means to give someone (the licensee) permission to use certain material. Licensing agreements are infinite and are generally intellectual property related, like brand licensing, software licensing, music licensing, trademark licensing, and artwork and character licensing. Again, if you intend to enter into a licensing agreement, we strongly recommend you speak with a lawyer.
Professional services: If you work in the tertiary sector – architects, accountants, lawyers, dentists, management consultants, professional writers, web designers; or basically any profession typically defined as ‘white collar’ – then on occasion you may be required to enter into a professional services agreement, where you’re providing services as a contractor. In most cases, these services are of a specific project nature – that is, they’re not continuing or ongoing – and they’re usually intellectual in nature, thus necessitating an agreement between both parties.
Partnership: Is an agreement between two or more parties that defines the nature of the business, the profit sharing ratio, capital put up by each partner, and each partner’s duties and responsibilities. If you’re going into business with anyone other than yourself – whether it’s your brother, sister or friend – it’s a good idea to have a partnership agreement to ensure there’s a written record in case of a dispute later on.
Shareholders: In companies with shareholders, a shareholders agreement is necessary to define how the company should be operated, as well as the shareholders’ rights and obligations. It should also include information on the regulation of the shareholders’ relationship, how the company will be managed, ownership shares, and the privileges and protection of shareholders.
Sales agreement: Is a contract where the ownership and possession of a good, or entitlement to a service, is transferred from a seller to a buyer in exchange for an agreed sum of money. You would enter into a sales agreement if you were buying the premises from which your business would operate.
These are just some of the more common forms of legally binding business agreements and contracts. We cover these in more detail in our Small Business Management Course. A popular business structure in Australia is the business partnership so our Business Partnership Course and Template is very important to help business partners start on the right footing.