3 Essential Contracts Every Start-Up and Business Needs

We can name over 10 contracts your business may need during its life cycle. Nonetheless, when it comes down to the essentials – every business in every industry needs these 3 basic contracts: a shareholder agreement or partnership agreement, an employment agreement and/or independent contractor agreement and a service contract or a sales contract. Having these 3 basic contracts will ensure that your business runs smoothly and is not consistently opening itself up to litigation.

Please note however that depending on the nature of the business you are running, you might require other contracts as well. Nevertheless, we have attempted to draw up a short list of what is needed for almost all businesses in their life cycle.

(1) Partnership Agreement or Shareholder Agreement

Partnership agreements and shareholder agreements are essential for any businesses that have two or more business partners. By signing a partnership agreement or a shareholder agreement early on in the relationship, the business partners can ensure that they are protected if something were to happen to the business or to their partner.

The type of agreement you will need will ultimately depend the legal structure of your business. If you have a general partnership, limited partnership or joint venture, you require a partnership agreement. If you have a limited liability corporation, you require a shareholder agreement.

What is a Partnership Agreement?

A Partnership agreement is a contract between two or more partners in a partnership. The contract will outline the terms and conditions of the relationship between the partners. Notably and primarily, partnership agreements deal with the “what if” questions that might occur during the business’ life cycle and details how they will be dealt with.

Additionally, partnership agreements will also cover matters relating to, namely:

1. Name of the Partnership
2. Nature of the Business
3. Ownership of the Business: The partners will establish their percentage of ownership in the business. (ex. 50/50, 25/75)
4. Contributions to the Business: The partners will establish how much each partner will contribute into the business. For instance, one partner might contribute more in equity while another contributes in their effort, time and work.
5. Distributions of the Profits and Losses of the Business: The Partners will establish in the agreement how the profits will be distributed (ex. who will be paid first and by how much) and how the losses will be shared.
6. Disputes: Most importantly, the agreement will cover how disputes will be regulated within the partnership. The dispute resolution clause should set out a resolution process in order for the dispute navigate process to run smoothly should any problems occur during the partnership.
7. Death or Disability: The partnership agreement will establish what should happen if one of the partners dies or becomes incapacitated or disabled. Who will get their share in the business?
8. Dissolution of the Partnership: The Partners will need to establish how the business can be terminated and if they can withdraw from the partnership. This clause will provide for the exit strategies of the partners.

Other Clauses that can be found in partnership agreement are, namely:

1. Purpose of the Partnership
2. Types of Partners
3. Capital contributed by each partner
4. Admission of new partners
5. Rights and responsibilities of the partners
6. Description of management powers and duties of the partners
7. How decisions will be made
8. Term (length) of the relationship
9. Who will take care of tax and accounting affairs
10. Partner time off (ex. Sick leave, vacation…etc.)
11. Sale of a Partner’s share in the business
12. Exclusion of a partner from the business
13. Adherence to provincial laws
14. Severability of the agreement

For more information on partnership agreements, please visit our partnership agreement page.

What is a Shareholder Agreement?

A shareholder agreement (also known as a “stockholder agreement”) is an agreement made between all the shareholders of a corporation. The agreement will outline how the company will be operated, what rights and obligations the shareholders will have and how certain matters affecting the shareholders will be dealt with.

Moreover, shareholder agreements will also cover matters relating to, namely:

1. Name of the Corporation
2. Nature of the Business
3. Contributions to the Business: The shareholders will establish how much each shareholder plans to contribute to the corporation both in terms of time and money.
4. Ownership of the Business: Depending on their contributions, the shareholders will establish the percentage of ownership in the business (ex. 50/50, 25/75)
5. Distributions: The shareholders will establish how the profits, losses and expenses in the business will be split and who will be paid first. If the shareholders expect to receive dividends or a payout, the agreement should state so.
6. Pre-Emption Rights: Pre-Emption Rights are rights given to an existing shareholder of the corporation to purchase newly issued shares from the Corporation before they are offered to third parties. This right exists in order to allow shareholders to retain their percentage in the ownership and control of the corporation. It also prevents the corporation from selling shares to a potentially undesirable third party.
7. Shot Gun Clause: Shot-gun clauses are part of the dispute resolution process. They allow a shareholder to offer to purchase the shares of another shareholder at a certain price. The shareholder will have the option of either accepting the offer or buying the offering shareholder’s shares at the same price.
8. Right of First Refusal: Right of first refusal clauses will allow shareholders to purchase the existing shares of a shareholder before they are offered to third parties. In this case, the shareholder who wishes to sell their shares will provide notice in writing to all the other shareholders in the corporation who will then have the first chance to purchase or refuse the shares.
9. Piggy-Back Rights: A piggy-back clause (also known as “tag-along” clause) protects minority shareholders in the event of a third party buyout. In this case, the minority shareholder can force other majority shareholders wishing to sell their shares to a third party to also sell their minority shares at the same price and on similar terms.
10. Disputes: The shareholder agreement will establish how disputes will be resolved internally. Will there be mediation, compensation…etc.
11. Death or Disability: The agreement should state what should happen if a shareholder dies or becomes incapacitated. Who has the right to their shares in the business?
12. Dissolution of the Corporation: The agreement should establish how the corporation can be dissolved and how a shareholder can withdraw from the business.

Other clauses that can be found in a shareholder agreement are, namely:

1. Management and Operating of the Company
2. Voting Rights
3. Roles of any shareholders that are not directors of the corporation
4. Deadlock
5. Calculation and payment of dividends

For more information on shareholder agreements, please visit our shareholder agreement page.

(2) Employment Agreement or Independent Contractor Agreement (also known as a freelancer agreement or consultant agreement)

As a start-up or growing business, you will begin hiring new employees and working with independent contractors to further expand your growth. It is a common myth in the business world that a handshake deal suffices here. It absolutely does not, and we do not recommend it.

Contracting under an oral employment or oral independent contractor agreement can be problematic in the event that there is a dispute between the parties. In the event of a dispute, the court will have to hear evidence from both parties regarding the terms of the employment, among many other elements. Proving the terms will be an arduous task if no written contract exists between the parties to establish the said terms.

Employment agreements and independent contractor agreements are essential for any businesses that is in its growing stages. Both these contracts outline the terms and conditions of your business relationships with your workers (i.e. employees and/or contractors) and ultimately, ensures that your business is protected should the contract be terminated.

Employment Contract

An employment contract is an agreement that is signed between an employer and an employee. It establishes the rights and responsibilities of the employee and the company during the employer-employee relationship.

The employment contract will normally cover various clauses, namely:

1. Job Position: The agreement will indicate the job title and the tasks and responsibilities associated therewith.
2. Term of employment: The agreement will indicate the term (length) of the employment. (ex. one year, indefinite, until termination…etc.)
3. Compensation: The agreement should clearly stipulate how the employee will be compensated for their work. Will they be receiving a salary, commission or paid by the hour?
4. Benefits: The agreement should state if the employee will have the rights to certain benefits and what those benefits are. It should also cover holidays, vacations and stock options, if any.
5. Non-Disclosure: The agreement should prohibit the employee from disclosing any business trade secrets or confidential proprietary information to any third party without the written consent of the employer.
6. Non-Solicitation: The agreement should prohibit the employee from soliciting other employees of the employer or clients of the employer during or after termination of the employment.
7. Non-Competition: The agreement should prohibit the employee from working within a certain km radius of the employer for a competitor in the same industry.
8. Disputes: The agreement should state how disputes will be resolved internally. Will there be mediation, arbitration, court…etc.?
9. Termination: The employment agreement should state how the relationship can be terminated and what the possible grounds of termination are.

For more information on employment contracts, please visit our employment contract page.

Independent Contractor Agreement

An independent contractor, on the other hand, works as a service provider to a business and does not reap any employment benefits. The independent contractor agreement will outline the terms of the service that will be provided by the independent contractor along with the compensation that will be received. In most cases, since the independent contractor will be privy to confidential proprietary information, it is important to have an agreement that protects both your business and your business relationship with the contractor.

The independent contractor agreement will normally include clauses on, namely:

1. Relationship: The independent contractor agreement should clearly state that the relationship with the contractor is of individual-business and not employee-employer.
2. Duties & Terms: The agreement should describe the service that the independent contractor will be performing and the terms of the service, if any.
3. Payment: The agreement should clearly state the compensation that the contractor will be receiving. Will the contractor be paid a flat rate, by the hour…etc.? The agreement should also state when the contractor should expect to be paid (once, every two weeks, every month…etc.)
4. Expenses: The agreement should determine who will cover the expenses or the costs required to complete the service (ex. Materials, supplies…etc.)
5. Termination: The independent contractor agreement should outline how the contract can be terminated and under what terms.
6. Protections: The agreement should include a non-disclosure, confidentiality and non-compete clauses to ensure that the business is well protected.

For more information on independent contractor agreements, please visit our independent contractor agreement page.

(3) Service Contract / Sales Contract

The last essential contract that any business needs is a service contract or a sales contract depending on the nature of the business. These agreements will typically outline how a service will be rendered and at what cost or, on the other hand, what good is being sold and under what terms. Depending on the nature of the business, your company will most likely need one or the other.

Service Contract

A service contract (also known as a “professional services contract”) is an agreement whereby an individual or business provides a professional service (ex. consulting, legal, technical, administrative, management…etc.). In this agreement, the service provider is exchanging advice, work and academic experience in lieu of payment.

A service contract will typically include some of the following clauses, namely:

1. Service: The contract will stipulate the type of service that the professional will be providing. The agreement might also include details on the specific file that will be worked on.
2. Term: In some cases, the agreement will include a term (length).
3. Compensation: The agreement will establish how the professional will be compensated for their work. Will they be paid by the hour, with a flat rate…etc.? The agreement should also detail who will be responsible for the expenses and disbursements that are made in the file.
4. Confidentiality: The agreement will most likely contain a clause indicating that the service provided is confidential and will not be disclosed to a third party without written consent from one of the parties.
5. Conflict Interest: Depending on the work being provided, the agreement may stipulate that the professional will not enter into a file whereby there may be a conflict of interest with its present or future clients.

Sales Contract

On the other hand, if the nature of your business is the sale of goods, products, software…etc., then you will require a sales contract to establish the terms of the sale.

A sales contract is an agreement that is concluded between the buyer of a good and the seller of a good which covers the sale and delivery of a good and the securities attached therewith. Now, depending on the type of good being sold these contracts can present themselves as full agreements or invoices with terms.

Typically, in a sales contract, you will find the following clauses, namely:

1. Identity of the Parties: The sales contract should clearly state both the names and addresses of the buyer and the seller.
2. Description of the Good: The contract should include a detailed description of which good is being sold, the quantity of the good and any other industry standard of the good that should be met.
3. Payment: The agreement should state the exact price of the good along with the modalities and terms of the payment. (ex. installment, lump sum…etc.). Additionally, the sales contract should state the forms of payment accepted by the seller (ex. credit, debit, cash, cheque…etc.)
4. Delivery: The agreement should establish how the good will be delivered and the different aspects involving delivery, if any.

Additionally, depending on the nature of the good being sold, some other clauses may be included in the contract, namely:

1. Warranties
2. Breach of Contract
3. Confidentiality
4. Severability
5. Legal Provisions