Legal Forms for Starting & Running a Small Business: 65 Essential Agreements, Contracts, Leases & Letters

CHAPTER

1

Contract Basics

Names Clause: Identifying the Parties to a Contract

Signature Clause: Signing a Contract

Signing a Contract as a Business Owner

Requiring a Spouse’s Signature

Witnesses and Notaries

Standard (Boilerplate) Clauses

Entire Agreement

Successors and Assignees

Notices

Governing Law

Counterparts

Modification

Waiver

Severability

Form 1A: Dispute Resolution Clause

Attachments to Contracts: Schedules and Exhibits

Form 1B: Contract Amendment

Instructions for Form 1B: Contract Amendment

FORMS

To download the forms discussed in this chapter, go to this book’s companion page on Nolo.com. See Appendix A for the link.

Most of the forms in this book are contracts—including promissory notes, which are just a particular type of contract. With any contract, you must understand what it says and make sure that it suits your needs. Also, you face two other important issues:

How do you properly identify the businesses and individuals who are parties to the contract?

How do the parties sign the contract to make it legally binding?

Rather than repeat the instructions for dealing with these recurring issues many times throughout the book, we discuss them in this first chapter.

Similarly, in this chapter, we also explain two other basic contract concepts that appear throughout the book. The first involves a disputes clause, which establishes a structure to allow the parties to resolve any disputes that later occur. The second deals with modifying or adding to a contract, which could arise at any time.

But don’t worry about having to memorize this basic information now in order to later complete a particular contract. Along with the instructions for each form, we’ll provide cross-references to the instructions in this chapter as needed.

Names Clause: Identifying the Parties to a Contract

At the beginning of most forms in this book, you’ll need to fill in one or more names to identify the parties (individuals or businesses) who are agreeing to the contract. While this seems easy enough, it can sometimes be a little tricky, because how you identify the parties will vary somewhat depending on the types of business entities that are parties to the agreement.

Because a sole proprietorship is not a separate business entity, the sole proprietor enters into contracts individually. When a sole proprietor operates under a fictitious business name (a doing business as name), the fictitious business name should be included in the contract. For example, Albert Vinter, dba Alvin Remodeling. (A doing business as name should also be included for a corporation, LLC, or partnership, if the doing business as name is relevant to the contract.)

When a business entity (an LLC, corporation, or limited partnership) is a party to a contract, be sure to state the company’s full legal name in the contract, including Inc., Corp., LLC, LP, or similar legal designation. A general partnership doesn’t register with the state and has no such legal designation in its name, so you would need to identify it as a partnership separately (for example, Treetop Associates, a general partnership).

It’s also a good idea to include the state in which an LLC or corporation is registered. Why? Because an LLC or corporation in one state can have the same name as an LLC or corporation in another state. You want to be clear that you’re contracting with Acme Gizmos LLC of Oregon, not Acme Gizmos LLC of Arizona.

Finally, after naming a party, you should identify who they are in this specific contract—the buyer, the seller, the lender, the borrower, the landlord, the tenant, etc.

Here’s an example of naming the parties in a business contract. Maria Jones owns and operates a food truck as a sole proprietor, doing business as MJ’s Rolling BBQ. She decides to buy a rival food truck business operated by Austin’s Tacos LLC. Maria and Austin’s Tacos would be identified this way in the contract:

Maria Jones, dba MJ’s Rolling BBQ (Buyer), and Austin’s Tacos LLC, a California limited liability company (Seller), agree to the following purchase and sale of Seller’s food truck business.

Signature Clause: Signing a Contract

For a contract to be legally binding, you must obtain the signature of the person or people with authority to legally bind each business. A sole proprietor signs the contract personally. For partnerships, LLCs, and corporations, one representative of the business usually signs the contract on the business’s behalf.

If the buyer is a corporation, an officer—such as the president or chief executive officer (CEO), a vice president, or the chief financial officer (CFO)—usually signs major contracts. For minor contracts that are part of a company’s routine, a manager, such as a sales manager or an IT manager, might sign for the corporation.

The parties can sign one original, in which case one party will have the original and the other a copy, or you can sign two originals, with one going to each party. If the parties are not physically together for the signing, they can sign in counterparts. As explained in Counterparts below, signing in counterparts means that each party signs its own signature page and then the two signature pages are attached to the contract.

Maria Jones (dba MJ’s Rolling BBQ)

A sole proprietorship

By: ____________________

Maria Jones

Owner

1234 Lucky Street

White Plains, New York

Austin’s Tacos LLC

By: ____________________

Alice Austin

President

123 Chesterfield Boulevard

White Plains, New York

Signing a Contract as a Business Owner

When a business owner signs a business contract, they need to make it clear in what capacity they’re signing—on behalf of the business or individually. Sole proprietors always sign individually—there’s no separate business entity. This advice doesn’t apply to sole proprietors, as there is no separate business entity, only the owner as an individual. Even if they include a doing business as name in the contract, they’re still signing individually and are personally liable for their obligations under the contract.

Having personal liability means that a creditor of the business can go after a business owner’s personal assets to satisfy business debts. Sole proprietors and general partners are personally liable for business debts—they don’t have limited liability protection.

When a partner in a general partnership, a shareholder in a corporation, or a member in an LLC signs a business contract on behalf of the business, they should clearly indicate that they’re signing in their business capacity. The simplest way to do so is to include their title in the signature section of the contract. For example:

Mark Pine, General Partner

Mark Pine, President (or another corporate title—never as Shareholder, which is an individual, not a corporate, capacity)

Mark Pine, Member (or Manager)

A general partner is personally liable, but it’s still important to establish the partnership as the contracting party, so Mr. Pine signs as a partner. In the case of an LLC or corporation, the owner (Mr. Pine) has limited liability, meaning that his personal assets are off-limits to business creditors. When he signs a contract on behalf of the company, he wants no confusion about the fact that the company, not him personally, is responsible for meeting the obligations of the contract. So, he signs under his corporate or LLC title.

In consideration of   [name of landlord]          

signing the above lease with [name of corporation or LLC]                                        

.

Types of Business Entities

Sole Proprietorship. A one-owner business that is not operating as a corporation or LLC and in which the owner is personally liable for all business debts.

General Partnership. A business entity formed by two or more people, all of whom are personally liable for all partnership debts. When two or more people are in business together and haven’t formed a limited partnership, corporation, or limited liability company (LLC), they’re treated as a general partnership by law even if they haven’t signed a formal partnership agreement. A partnership doesn’t pay federal income taxes; a partner’s share of the profits or losses is reported on their personal tax return.

Limited Partnership. A business entity formed by one or more general partners and one or more limited partners. Ordinarily, only the general partners are personally liable for the partnership debts.

Corporation. A business entity formed by one or more shareholders. Ordinarily, a shareholder is not personally liable for the corporation’s debts. This is true whether the corporation is organized for tax purposes as a regular (C) corporation or an S corporation; the two types of corporations differ only in terms of tax treatment. The big difference is that the undistributed income of a regular corporation is taxed at the corporate level. That’s not true with an S corporation; for tax purposes, income and losses pass through to the individual shareholders as if they were partners in a partnership.

Limited Liability Company (LLC). A business entity formed by one or more members. Ordinarily, a member is not personally liable for the LLC’s debts and is taxed in the same way as if they were a partner (unless the LLC chooses to be taxed as a corporation).

Requiring a Spouse’s Signature

When you’re personally liable for a business debt or obligation, the other party might ask that your spouse also sign the contract. Such a request might be made when you personally borrow money for use in your business, or when you personally guarantee a corporate or LLC obligation.

Be aware that having your spouse sign such an agreement can substantially increase the other party’s legal rights. For example, in most states, if you alone sign for a loan or agree to be liable for any other obligation, the creditor can get a judgment for nonpayment against you but not against your spouse. The creditor—except in community property states, explained below—will be able to reach the property that you own in your own name, but not the property that you and your spouse own in both your names.

However, when you and your spouse each sign the contract and business defaults on the obligation, the other party will be able to sue and get a judgment against each of you. In addition, the creditor can then enforce the judgment by seizing your joint assets, along with property you own in your name alone and property in your spouse’s name.

Witnesses and Notaries

Very few legal documents need to be notarized or signed by witnesses. In fact, none of the forms in this book require notarization. For business forms, notarization and witnessing are usually limited to documents that are going to be recorded at a public office charged with keeping such records (usually called the county recorder or register of deeds).

State laws require witnesses or notaries to sign some other types of documents, such as living trusts or powers of attorney, unrelated to business contracts.

Community Property States

The following are community property states:

(Also, in Alaska, Kentucky, South Dakota, and Tennessee, a couple can sign a written document agreeing that all property will be treated as community property.)

In community property states, a married couple’s property tends to be primarily community (joint) property regardless of the names in which it’s held. Each spouse might also own separate property, but—especially in longer marriages—most property tends to be owned by both. A creditor can go after the community property of you and your spouse to pay off a debt incurred during the marriage, even if you alone signed for the loan.

If your spouse does have separate property—property a spouse owned before getting married, property acquired after marriage by gift or inheritance, or property agreed in writing to be kept separate—their separate property is normally beyond a creditor’s reach. But if your spouse signs a personal guarantee, their separate property will be at risk if you default on your payments.

Standard (Boilerplate) Clauses

Most business contracts include standard clauses, often referred to as boilerplate and usually found at the end of the contract. These clauses address issues that often come up in contracts, such as:

whether the parties intend the contract to be modified in writing only

how each party will communicate with the other regarding the contract, and

what will happen to the rest of the contract if a judge decides that one part of it is not legal.

While these clauses are found in most contracts, their language and meaning can (and should) vary according to the specific agreement and the needs of the parties. In other words, don’t skip over the boilerplate clauses—think about whether and how they should apply to your contract and negotiate accordingly.

Let’s look at some standard clauses and see why they’re useful to include in your contracts. These clauses are included in most contracts in the book.

Entire Agreement

During a contract negotiation, you and the other party will discuss various terms, and the terms you agree on should be included in the final agreement. But sometimes terms are intentionally or unintentionally left out of the agreement, or stated in a way that doesn’t match up with the understanding of one party based on the negotiations. An entire agreement clause, also known as an integration clause, means that the contract consists only of what makes it into the final agreement. If other terms or different terms were discussed during negotiations, or included in written exchanges, those other or different terms are not part of the contract. They can’t override the terms of the written agreement or be used to fill in gaps in the agreement.

Successors and Assignees

After you sign the contract, you might decide to sell or merge your company. Will the new company gain your rights (and obligations) under the contract? Or, suppose you’d simply like to get someone else to take over your rights and obligations under the contract—can you do so without having to get the other party’s permission?

The successors and assignees clauses in this book contain restrictions on assignment where appropriate, usually by requiring the party seeking to make an assignment to get the written consent of the other party.

An assignments of rights under a contract is usually less problematic than an assignment of contractual obligations (or duties), because an assignment of rights by one party usually doesn’t disadvantage or inconvenience the other party. For example, if the other party assigns its right to receive payments under the contract, you simply send the payments to the assignee. Same payment, just sent to a different party.

But assigning duties is another matter. When you enter into a contract, you expect the other party to perform its obligations. You might not want a substitute, at least not without consenting to the substitution. For instance, if you contract with a specialty manufacturer to create custom goods for your company, you wouldn’t want the manufacturer to be able to assign this duty to another manufacturer without your consent. Likewise, you wouldn’t want to agree that the other side’s obligation to pay you can be assigned to a third party without having a chance to assess the creditworthiness of the third party and approve the assignment.

Notices

Because you and the other party might not be in personal contact frequently, it makes sense to exchange mailing and email addresses and agree on how you’ll send written communications about the contract. Also, if you need to deliver an important legal notice to the other party, such as a warning that the other party is in breach of the contract, or notice to a landlord that you’re terminating your tenancy, you should make sure you deliver notice in one of the ways set out in the notices clause (in person, by certified mail, or by overnight courier).

Governing Law

Although you and the other party to your contract probably won’t end up in court over your contract, it makes sense to designate which state’s law will apply to the contract before you get into a dispute. If you don’t choose a state now, you might waste time fighting over this issue later. Usually, you and the other party to the contract will be in the same state, so fill in that state. If you and the other party are located in different states, designating the governing law is even more important.

When you and the other side are in different states, try to have the laws of your home state govern an agreement. Laws vary among states, and you and your attorney will probably be most familiar with the laws of your home state.

Counterparts

As discussed above, signing in counterparts means that the two parties sign separate signature pages and then attach the two signature pages to the contract. Counterparts are handy when the parties are not physically together for the signing.

Modification

The modification clause (or amendment clause) requires that any modification of the contract must be in writing and signed by both parties. It prevents either party from unilaterally claiming that the contract has been amended, and it preserves the written contract as the entire agreement of the parties.

Waiver

Failing to enforce a right you have under a contract can sometimes cause you to lose (waive) that right. The waiver clause states that a right is not waived by failure to enforce it. For example, if the buyer is late on an installment payment and the seller doesn’t immediately try to terminate the contract for breach, this clause says that the seller isn’t prevented from taking action in the event of a future late payment.

CAUTION

Waiver clauses can be overcome by the conduct of the parties. A judge could ignore the waiver clause and infer from a party’s behavior that it has permanently waived a right. For example, if the buyer is consistently three days late with every installment payment for three years, a judge might not allow the seller to suddenly terminate the contract for breach after a given 3-day delay.

You can take affirmative steps to make it clear that you are ignoring a specific breach but not permanently waiving your right to enforce your rights. For example, if the other party misses an obligation or violates a term of the contract, you could send a letter saying you are willing to overlook the missed obligation or violation this time, but that you’re going to enforce your rights in the future.

Severability

There’s always a possibility that you’ll get into a dispute with the other party and a judge will need to interpret your agreement. Some courts, upon discovering an unenforceable or invalid clause in a contract, will make the entire contract unenforceable—which is probably not what either of you would want. The severability clause provides that any unenforceable provision will be severed from the agreement, leaving the remainder of the contract intact and enforceable.

Form 1A: Dispute Resolution Clause

Sooner or later, even the most conscientious business is likely to run into a legal dispute involving a contract. If the parties can’t negotiate a settlement on their own, they can resort to a court fight. This approach is usually a poor one, because trials are typically expensive, prolonged, emotionally draining, and, in some instances, can even threaten the survival of the business. To avoid the tangle of litigation, parties can agree to resolve disputes through non-court means, namely mediation or arbitration. Mediation and arbitration work as follows:

Mediation. The parties try to achieve a voluntary settlement with the help of a neutral third party (the mediator) who helps disputants craft their own solution. Think of mediation as assisted negotiation. If the mediation is unsuccessful, the parties can still go to court. Under the mediation clause below, you can name the mediator in advance (appropriate for short-term contracts) or agree on one when the need arises. Mediation is inexpensive, quick, and confidential, and can be effective.

Arbitration. The parties submit the dispute to a neutral third party (the arbitrator) who, like a judge in a court case, renders a binding decision. Binding means that, in almost all cases, the arbitrator’s decision can’t be appealed to a court. In other words, when you agree in advance to arbitration, you’re giving up your right to take the dispute to court. Arbitration is almost always quicker and usually less expensive than litigation.

Form 1A offers three approaches: mediation, mediation followed by arbitration, and straight to arbitration.

It also includes an optional attorneys’ fees provision, making the loser in an arbitration or court case responsible for the winner’s legal fees. Having this provision in your contract can make a party pause and think before filing a lawsuit The possibility of having to pay the other side’s costs can encourage the contracting parties to resolve their differences through a negotiated settlement.

FORM

The Disputes clause is in the downloadable form Form1A.rtf. You can add it to any contract in this book that doesn’t already include this dispute clause.

Form 1A: Dispute Resolution Clause

(If you wish to require an alternative to litigation, choose one of the following for insertion into your contract.)

Mediation. If a dispute arises, the parties will try in good faith to settle it through mediation conducted by a mutually selected mediator.

The parties will share the costs of the mediator equally. Each party will cooperate fully and fairly with the mediator and will attempt to reach a mutually satisfactory resolution.

Mediation and Arbitration. If a dispute arises, the parties will try in good faith to settle it through mediation conducted by a mutually selected mediator.

The parties will share the costs of the mediator equally. Each party will cooperate fully and fairly with the mediator and will attempt to reach a mutually satisfactory compromise to the dispute. If the dispute is not resolved within 30 days after it is referred to the mediator, it will be submitted for arbitration by a mutually selected arbitrator. Arbitration will be conducted according to the rules of the American Arbitration Association (AAA), and the decision of the arbitrator will be binding on the parties.

Arbitration. If a dispute arises, the parties will submit the dispute to a mutually agreeable arbitrator.

Arbitration will be conducted according to the rules of the American Arbitration Association (AAA), and the decision of the arbitrator will be binding on the parties.

(Optional attorneys’ fees clause)

Costs and Attorneys’ Fees. In arbitration or litigation, the losing party will reimburse the prevailing party for its reasonable costs and attorneys’ fees.

Attachments to Contracts: Schedules and Exhibits

Sometimes, lengthy material that would clutter up the body of a contract is placed in an attachment to the contract, after the signature page. Such an attachment is usually called a schedule or exhibit. For example, a list of parts for a machine you are ordering might go in a schedule. Drawings for a significant landscaping project might go in an exhibit.

Whatever you call the attachment—schedule or exhibit—you need to point to it from the place in the body of the contract where it would have appeared.

Here are some examples of clauses from different contracts, supported by attachments.

Contract clause 1: Buyer hereby assigns to Seller the equipment leases listed in attached Schedule A.

Attachment 1:

SCHEDULE A: Assigned Leases

The following leases are assigned to the buyer:

Equipment Lease dated September 18, 20xx between Racafrax, Inc., and Equipment Co.

Equipment Lease dated May 27, 20xx between Racafrax, Inc., and Packaging Machine Co.

Equipment Lease dated July 22, 20xx between Racafrax, Inc., and Fred’s Audio Visual, Inc.

Contract clause 2: Seller agrees to sell and Buyer agrees to buy forty (40) bookcases according to the delivery and payment terms set out in Exhibit A.

Attachment 2:

Exhibit A: Delivery and Payment

Seller agrees to deliver ten bookcases on the first day of each month for four months, beginning July 1, 20xx. Buyer will pay the balance of the purchase price in four installments of $900 each. The first payment will be due on July 1, 20xx; the second will be due on August 1, 20xx; the third on September 1, 20xx; and the fourth on October 1, 20xx.

We include sample attachment forms for leases and real estate purchases in Chapters 5 and 6, respectively.

Form 1B: Contract Amendment

As stated above, your contract should include a boilerplate clause requiring that any modification or amendment to the contract must be in a writing signed by both parties. This book includes an amendment of a lease (Form 5I) and an amendment of a real estate purchase contract (Form 6F). For amendments to other types of contracts, you can use the general form shown below.

Making Small Modifications by Hand

After a contract is printed, you might notice a minor error, such as a typo or an incorrect date. You can make minor corrections by hand, by crossing out language to be deleted and writing in language to be added. If you make handwritten changes, be sure that both parties initial each change.

Instructions for Form 1B: Contract Amendment

All the forms in this book are provided in Appendix B and on the Nolo website. To access the downloadable forms online, use the link provided in Appendix A.

Fill in the number of the amendment. Number amendments consecutively—that is, Amendment 1, Amendment 2, and so on.

As you read the instructions for Form 1B, you might want to refer to the form in Appendix B or open the form on your computer or device so you can follow along.

1.Names

List the parties in the same order that they appear in the contract being amended.

2.Terms of Amendment

In the first blank, enter the title of the contract being amended, such as Sales Contract. In the second blank, enter the date of the contract being amended. Then fill in the terms of the amendment.

All parties to the main document should sign the amendment, and the amendment should be dated.

CHAPTER

2

Forming Your Business

Choose a Name for Your Business

Form 2A: Checklist for Starting a Small Business

Evaluate and Develop Your Business Idea

Decide on a Legal Structure for Your Business

Prepare Organizational Paperwork

Find a Business Location

File for Licenses and Permits

Obtain Insurance

Set Up Tax Reporting and Accounting

Hire Workers

Form 2B: Partnership Agreement

Form 2C: Preincorporation Agreement

Form 2D: Corporate Bylaws

Form 2E: Stock Agreement

FORMS

To download the forms discussed in this chapter, go to this book’s companion page on Nolo.com. See Appendix A for the link.

When you start a new business, you must choose a legal structure. For most small businesses, the choices come down to these:

sole proprietorship

general partnership

regular corporation (sometimes called a C corporation)

S corporation, or

limited liability company (LLC).

Other legal structures—limited partnership, professional corporation, and nonprofit corporation—are unlikely to meet the needs of the typical small business.

If you start a one-person business or work as a freelancer or an independent contractor, your business will automatically be treated as a sole proprietorship unless you establish a corporation or an LLC. Similarly, if you start a business with two or more people, your business will automatically be treated as a general partnership unless you form a corporation, an LLC, or a limited partnership.

The most important factors in deciding which way to go are:

Personal liability. Will you be personally liable for business debts? (Personal liability means that a business creditor—a person or company to whom your business owes money—can get a judgment against you personally for the business debt. The creditor can then collect the judgment out of your personal assets such as a personal bank account or your home.) The fast answer is that as a sole proprietor or a partner, you’ll face personal liability for business debts. But as the owner of shares in a corporation or as a member of an LLC, you’ll generally face no personal liability—unless, of course, you voluntarily agree to assume it by signing a personal guarantee (such as for a business loan).

TIP

Limited liability isn’t a big deal for many microbusinesses. A great many small service and retail businesses simply don’t subject their owners to significant debt or lawsuit risk. And often, even in the few cases where they do, a good insurance policy will provide needed protection against lawsuits. This means that there might not be a compelling need to form a corporation or an LLC when you’re just starting out.

Taxes. Will you and the other business owners simply report your portion of profits and losses on your own income tax returns, or will the business itself be taxed on its profits? Sole proprietors, partners, owners of S corporation stock, and members of LLCs only have one level of taxation: All taxes are paid by the owners on their individual returns. By contrast, a regular, or C, corporation pays taxes on its corporate earnings, and the shareholders pay taxes on any dividends paid. (Also, LLCs can choose corporate-style taxation without converting their legal structure to a corporation.)

Time and expense. Will it be time-consuming and costly to form and maintain the business? Sole proprietorships and partnerships are relatively easy and inexpensive to start and keep up. Corporations and LLCs typically require more time and effort and cost a bit more—but the cost needn’t be a tremendous burden. You can handle all or most of the paperwork yourself by using one of the Nolo products listed below.

Fringe benefits. Will the business be able to provide fringe benefits (health insurance, retirement plans, and the like) to the owners and deduct the cost of those benefits as a business expense? This question is only relevant to businesses with enough income to pay fairly generous fringe benefits in the first place. But if your business is lucky enough to be in this category, the regular C corporation might offer the best tax-saving opportunities.

Form Your Entity Online

With Nolo’s online formation service, forming your LLC or corporation can be quick and easy. You’ll complete a comprehensive interview about you and your business. Then Nolo will file the necessary forms.

To start your formation now, go to www.nolo.com/products/business-suite/business-formation/online-business-formation-services.

RESOURCE

For in-depth information on choosing a legal structure for your business, and for additional information on many of the topics in this chapter, see Legal Guide for Starting & Running a Small Business, by Stephen Fishman (Nolo). You can also get lots of useful information in the Business Formation section of Nolo.com.

Choose a Name for Your Business

To guide you through the steps you must take to form any type of business, read Form 2A: Checklist for Starting a Small Business.

The other forms in this chapter help you start a partnership, a corporation, or a one-owner LLC. No formal document is required to start a sole proprietorship. However, there are several practical and legal steps you must take to put your business on the right track. (This is covered in Form 2A: Checklist for Starting a Small Business, mentioned above.)

Partnerships. If you’re starting a partnership, preparing a written partnership agreement allows you to provide a sound footing for your legal relationship with your partners and helps prevent or resolve disputes that might arise later. Use Form 2B: Partnership Agreement for this purpose.

Limited liability companies (LLCs). Many business owners who want to limit their personal liability prefer the simplicity and flexibility of the LLC over the corporation. To form an LLC, owners must file articles of organization with the state.

Corporations. If you decide to form a corporation, this book offers three useful documents for this purpose. Before forming the corporation, it’s sensible to have all shareholders agree in advance on the basic elements of the business, including the name and purpose of the corporation, how many shares each owner will acquire, and who will serve on the board of directors. Use Form 2C: Preincorporation Agreement to record this information.

To form the corporation, owners must file articles of incorporation with the state and create corporate bylaws. Form 2D: Corporate Bylaws lays out the legal rules for running the corporation and covers such matters as how