Basic business law: The need to make a contract

The one thing you have to be sure about: Contract-Making


Okay first of all, why do we have to make one? Most entrepreneurs are so neck-deep on their startup idea, they might forget to consider the most important asset that can protect him when he goes out to the market. Let’s face it the business world is unforgiving. So if you don’t have the right weapon to guard you, you can loose everything that you’ve worked so hard for. Consulting with legal partners is a very important step to secure your company before building it. They will all tell you to duly comply with the contract-making even if it may seem unnecessary in the beginning of your startup.

We interviewed one of our partners who specializes in corporate law and asked him for a legal advice and vivid definition of contract-making.



Q: Why make a contract?

Mainly, there are three reason why a contract is very essential:

1. It’s a proof of evidence in legal proceedings.

2. A precautionary measure

3. Standardizing your operations

Q: what is the importance of a contract in running a business?

As an entrepreneur we do not entertain being prosecuted as the first thought because entrepreneurship is all about creating something good for public consumption. We do more good than harm right? However, the importance of contract in running a business is like electricity to a lamp. You cannot operate your business smoothly without one.

Veteran owners know this very well. Court trials are very clear possibilities more than one can expect. Frequent cases involve employee compensation, labor violations and all. Primarily with employees who demands more reparation in bad cases of dismissal so the employer will have to consider a trade off between the cost of going to trial and the amount of compensation to pay. If you don’t have time to spare for unnecessary disruptions, this can be a pain. But if you have clear stipulations and an ambiguous contract , then you won’t have to go through all the hassle of these complaints.

Second pointer is to prevent possible future problems and worst case scenarios. Prevention is better than cure am I right? Before furthering negotiations, both parties have to agree on a common ground. “ I had a client who was a running a cloud service company, they had a major server breakdown due to hacking that caused their clients to loose all data. But they have defined on their Terms of Use that in cases of unforeseen hacking, they will only compensate the same amount that their clients have paid to them. So instead of a possible million-dollar loss, they were able to control the damage. Had they not made a clear contract, they would have been bankrupt by now. “

Third pointer is once you make a contract, you can also reduce future cost. When you have a typical kind of business, you can use a similar contract and regulation practice, as other companies and it will be convenient for your administration and management team. Accounting department can also organize their rules and operations according to the contract regulations. Of course it takes time to create the first version of your contract but you can revise it as your business evolves. You have to discuss with co-founders and set definite rules that will be time-consuming at first but will save a lot of money and reserves in the long run. If it is your first time, you can refer to online samples and download them as a point of reference. There are also books that can help you. But it would be ideal to ask a lawyer to draft those articles for a more polished documentation.


contract signing
Making a paper contract is an investment for your company’s future. If you intend to succeed and maximize your company, legal and proper documentation is a mandatory requirement. It would also be hard to negotiate for partnership professionally if you don’t have one. It can even discredit the reliability of your character if you fail to present with such.

As a lawyer, there are 2 things you have to bear in mind when drafting your business contract. One is to include all items of worst-case scenarios and choose a business model that can be smoothly applied to your partners and clients.

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