Most business occurs without a contract. This may be because it may be a routine transaction. It also could be because you trust that the other person will treat you fairly. You go to a plumbing supply company, select the fixtures you wish to install, pay, and leave without mentioning a contract. If you are running a small business or involved in a commercial transaction, you may have to deal with a contract or want a contract. 

A contract is often called an “agreement”. The 2 words are often used interchangeably, but they do not always have the same meaning. An agreement is the broader of the two.

An agreement is reached by two or more parties coming to a mutual understanding about something, even without legal obligation. A contract is an agreement between two or more parties creating obligations and rights that are legally binding and enforceable.

In either case, there are some basic concepts that you should keep in mind. Generally speaking, a contract is an exchange of promises by one party to the other.

More specifically, a contract needs five elements:

• Mutual assent, expressed by a valid offer and an acceptance (i.e., the promise),
• Adequate consideration (something of value given in exchange such as goods, services, or cash),
• Capacity (being at least 18 years old and otherwise of "sound mind"), and
• Legality (the subject of the contract being legal).

Each party to the transaction expects the other to honor their promise. There is an expectation that if a party fails to honor their promise, they incur some legal liability. This expectation does not need to be spoken.

A casual comment like, “I usually charge $2,500 for painting a room of that size,” is not a contract. Neither is an indefinite prediction about what might happen under certain circumstances. If someone says "Later this summer, I may be able to paint that office for you,” you can't sue them for breach of contract. Imagine your neighbor's 16-year-old son was the one talking about painting your office. You could not sue him for breach of contract if he does not show up. Legally speaking, anyone under the age of 18 years old does not have legal capacity to assent, i.e., enter, a contract.

Must a contract be in writing?

Certain kinds of contracts need to be in writing. The most common are: 

• A contract for the purchase and sale of real estate,
• A contract that cannot be performed within one year, and
• A contract with certain governmental authorities. 

There is no such requirement with respect to the great majority of business transactions. However, it is generally a good idea to “put it in writing” when the transaction is complex. This is also a good idea when one party has been unreliable. There are other reasons for wanting to have a written contract, such as when the other party wants money upfront. Is it going to be a deposit? Is it is refundable if certain things do not get performed by certain dates or benchmarks? Or vice versa, will the amount owed increase if certain things happen? A contract may be difficult to prove if you only have verbal testimony about what the parties agreed to.

Must a contract be recorded?

The answer is “no,” except in very rare cases. A business contract among private parties is a matter neither a government authority nor member of the public can examine. 

The main exceptions are equipment leases, mortgages, and other kinds of  “secured transactions.” These contracts must be recorded with the Secretary of State or Recorder of Deeds. This allows third parties to determine whether the equipment or real estate is subject to a "lien."

Must signatures be notarized?

The general answer is “no,” except in special cases you will recognize immediately. The form will have a space for the signature and seal of a notary public. Otherwise, do not let the person you are dealing with talk you into having your signature notarized.

How to deal with printed forms

You may wish to use standard printed forms in your business. These can usually be:

• Downloaded free of charge from the internet,
• Purchased from an office supply store, or
• Modeled after forms being used by other companies in your industry.

Common examples include:

• A contract for the design of a web site,
• A “consignment agreement” if you are operating a resale shop,
• A professional services agreement if you are offering translation services,
• An enrollment form to be signed by the parents of children attending your pre-school program, or
• A landscaping contract, if your business offers such services.

You will be asked to sign a printed form from time to time. There are 2 important things to keep in mind when you are asked to do so: 

1. Read the form carefully before signing. If there is a concerning provision or one you do not understand, ask the company what it means. If you do not get a satisfactory answer, do not sign the agreement.
2. You may be able to negotiate for an amendment to a printed form that you find objectionable. This can be done in various ways: 
   • Cross out the provision, and have all parties initial by that change,
   • For a small change like a single word or number, write the change in the margin and have the parties initial the change, or
   • Attach a "rider" that says, for example, that “Paragraph 12 of the attached form shall be amended to read as follows: “______.” Spell out the change. The rider approach also needs specific language added as an introductory paragraph. This is called incorporation by reference language. State that the document is a rider or addendum to the existing contract. List the parties by name and date of the contract. Also list that the rider constitutes part of the contract.

How to prepare your own contract

As indicated above, there are several sources where you can get standard forms to use and adapt for your business. If there is a lot of money or important property rights involved, you should have a lawyer do this for you. For most transactions, the attorneys’ fees will be too great for you to pay. Remember, a written document is normally preferable to an oral agreement with nothing in writing. This is still true even if it is not as comprehensive and well-written as if done by an attorney.

Read more about if:

• You are unable to find a sample from which to work, or
• You feel that a formal written contract might be viewed as “insulting” or not the best way in which to establish a good business relationship with a prospective customer, supplier, or independent contractor.

1. E-mail and letter agreements 

For most transactions, an e-mail message or “letter agreement” might be enough to protect your rights. This is an example of "agreement" being used in communications to mean a contract. Either can provide the same protection as a formal contract without being considered “unfriendly.”

An example of an email message response you might send to confirm the contract may look something like this:

“It was good talking with you this morning. This will confirm our agreement that for the rest of this year I may park my truck at the southwest corner of your lot for $125 payable on the first of each month. Thanks so much.”

A very simple letter agreement would look like this:

“Dear Mr. Olson. 

I am writing to confirm our understanding about the website you asked me to design for your craft beer company:

1. The details of what you want are set forth in the attached document.
2. You will pay me $2,500 on the approval of this letter agreement.
3. A second payment of $5,000 will be made when the website is submitted to you for preliminary approval.
4. A final payment of $2,500 will be made after testing and after I have made whatever reasonable modifications are requested.
5. The design and content of the website will remain my property until the final payment is made, at which time it will become the property of your company.

If I have correctly set forth our agreement, please sign and return a copy of this letter for my file.

                    Very truly yours,

Agreed:
“_____________”

2. Leases

A lease is almost always on a printed form. A short-term arrangement of only a few weeks or months may be less formal.
Here are some things the lessee, or the tenant, might want to negotiate and set forth on an attached rider:

• A right to renew the lease on certain stated terms and conditions.
• A “first option” to rent the adjoining space if it should become available. This is a legally enforceable right to be the first person to whom the vacant space is offered.
• A waiver of the first several months of rent so that the lessee can use its limited cash resources to remodel and equip the space rather than pay rent.

If the lessee is a small company with less than an A+ credit rating, the lessor, or the landlord, may want a co-signer or a personal guaranty from the company owners. However, a personal guaranty, or any signature by you as an individual rather than an officer of your business, carries risk to you personally. This includes the risk to cover all of the lessee's rent and other payments and obligations under the lease, even if you have incorporated or organized your business as a limited liability company (LLC) or other limited liability entity.

Once you sign a lease, you or your company are responsible for the rent every single month of the lease. This applies even if you go out of business (less whatever rent the lessor can obtain from a new lessee). You cannot simply walk away from a signed lease.

Check the municipal zoning ordinance to be sure that the rental space can be used for the purpose intended. Some regulations require certain kinds of plumbing, electrical work, or special features to serve persons with disabilities. Exterior signs may be subject to local rules or shopping mall regulations.

3. Employment contracts

There are many different kinds of employment contracts. These include individual and union contracts. Some are on standard forms. Others are buried in employee manuals. Read employment contracts carefully. Special rules apply to these contracts. Each state has its own laws covering aspects of employment contracts. It is recommended that an attorney for you first review an employment agreement you are asked to sign. Some organizations, like community colleges, law schools, community legal aid clinics, and chambers of commerce provide such a review for free or a much reduced fee.

4. Partnership agreements

If you are going into business with a partner, you should have a written agreement. If you do not, the state's partnership laws apply. Corporations with 2 or more shareholders and members of a limited liability (LLC) should also have written agreements. You can try to draft this by yourself using a sample form on the internet and “filling in the blanks.” It is recommended, however, that an attorney be hired to draft the agreement. 

See Creating a business partnership.