Contracts with your co-owners, investors, employees and independent contractors are important to establish the guidelines and protect the relationships within your company.

1. Business Structure and Buyout Agreements

The documents establishing your business are themselves contracts among the owners. Articles of incorporation, by-laws, operating agreements of limited liability companies — all are contracts establishing the terms of the investment, and dividing profits, losses and responsibilities.

Whatever your form of business, if there is more than one owner, you should consider a “buyout agreement.” This will help avoid an unwanted and often disruptive change in ownership. Such crises can occur when a co-owner decides to sell to satisfy financial needs, or involuntarily is forced to sell in a divorce or creditor claim, or upon his or her death or disability.

A buyout agreement also provides liquidity — a guaranteed buyer — for otherwise unmarketable interests in a company, which can be helpful to an estate after an owner’s death, disability or retirement.

Often called “shareholders’ agreements” or “buy-sell agreements,” these documents provide the business and its owners a first right to buy back shares (corporation), membership interests (LLC), or partnership interests before a third party can acquire.

2. Employment Agreements

While many businesses typically have oral employment agreements with their employees, it’s advisable to present to the prospective employee for their signature, an “Offer Letter” spelling out the details of employment (salary/wage, benefits, start day, vacation, etc.).

Some states (California, Georgia, Maryland, among others) require written agreements for employees paid on a commission basis.

The letter should include “at will” language, meaning that both the employer and the employee can terminate employment at any time.

You’ll also want to include clauses requiring the employee to: i) protect your confidential information, ii) transfer to the company inventions he/she created during employment, and iii) refrain from competing and soliciting your principals and customers. Non-compete/solicitation clauses must be carefully written, and in California, are rarely enforceable.

3. Independent Contractor Agreements

Over the last decade, the IRS has increasingly attacked independent contractor status.

A person you claim to be an independent contractor who has permanent, full-time duties for your company, to whom your company provides tools/facilities, and over whom your company maintains control and issues mandates could be challenged. The cost would be back payroll taxes and penalties.

For this reason, it makes sense to prepare an independent contractor agreement which explicitly defines the relationship between your company and the independent contractor. Make it clear you intend the worker to be an independent contractor responsible for his or her own taxes. The agreement should not exert control over how work will get done; for example, don’t set specific hours for when they need to work, or where.

While having this agreement is no guarantee you won’t have an IRS audit or misclassification ruling, it provides evidence that your company intended to hire an independent contractor.

Contracts Outside Your Company

4. Independent Sales Representative Agreements With Principals

These agreements have been extensively discussed in Agency Sales magazine. However, I’m struck with the frequency with which sales agencies either don’t have contracts with their principals; or if they do, the contract is silent on issues the agency knows can become and have been major problems.

You’ve probably experienced one or all of these situations where your principal unilaterally: i) changed the commission rate on a transaction or moving forward; ii) deleted an account or a product from your territory; iii) changed your territory; and/or iv) terminated the contract on the eve of a large customer order.

Addressing these issues in the contract is no guarantee that disputes will be avoided. But, they help set the tone of the relationship and provide the sales agency with legal protection if there is a violation.

5. Non-Disclosure Agreements (NDAs)

In addition to having non-disclosure clauses in employee and independent contractor agreements, whenever you share confidential information to anyone outside your company, you should have them sign an NDA. This includes your principals.

Although you might think only manufacturers, software developers, and Coca-Cola Company have valuable trade secrets that need legal protection, all businesses, including sales agencies, have information they bought, created, developed, improved, enhanced, and hopefully benefited from. These could include your financial statements, business plan, marketing plan, forecasts or financial numbers, as well as your customer list.

My experience is that sales agencies either: i) underestimate the value of those items that constitute confidential information and/or ii) fail to give consideration to this issue on a company-wide basis.

Contrary to what some people think, simply marking a document with the word “Confidential” or “Proprietary” does not automatically impose an obligation of confidentiality on the recipient.

6. Agreements for the Sale of Products

If your company is serving in a distributor capacity for your manufacturers’ products, you should insert terms and conditions of sale of goods on all documents you give your customers, including your proposal/quote, acknowledgement and invoice.

Ideally, you’d present these terms to your customer in a contract for their signature.

Realistically, many customers will refuse to sign. In fact, there will be a percentage of customers who insist that you sign their contract. (There are techniques to protect you!)

If you don’t provide your customer with your sales terms, you could be agreeing to your customer’s purchase order terms — even if you didn’t sign their document.

The MANA attorneys have the legal knowledge and experience to assist sales agencies in preparing and negotiating these and other business contracts.