Agreement Definition

A negotiated and usually legally enforceable understanding between two or more

legally competent parties.
Although a binding contract can (and often does) result from an agreement, an
agreement typically documents the give-and-take of a negotiated settlement and
a contract specifies the minimum acceptable standard of performance.
What is the Importance of Contracts to a Business?
The business environment is full of agreements between businesses and individuals.
Contracts also are legally enforceable in a court of law. Contracts often represent a tool
that companies use to safeguard their resources.
Facts
Business contracts typically include a negotiation process in which various terms to
which each party must abide are stipulated. The negotiation process may take days,
weeks or months, depending on the contract and the contractual responsibility of each
party. Contracts also can include a process for making changes or addendums to the
agreement. Businesses frequently use contracts to ensure that a certain level of service is
maintained or that competing companies do not have access to specific economic
resources
Fix Resource Costs
A common use of business contracts is the creation of an agreement or company that
agrees to sell economic resources to another at a fixed cost. These contracts ensure
manufacturing or production businesses can obtain economic resources at a specific
price for a defined time period. Businesses also use these contracts to hedge against the
potential cost increase of economic resources. Fixed cost contracts may backfire on
companies if a decrease in economic resources occurs in the future.
Related Reading: What Makes a Written Contract Legal?
Limit Obligations
Service contracts outline the specific duties a company will perform in a contractual
agreement. These contracts typically are used when companies contract with other
businesses to perform services such as maintenance, technical support or call-center
operations. Service contracts usually include information relating to prices for each
service and the frequency at which the company will perform the services. Businesses
use these contracts to ensure that they do not complete work without being
compensated.
Non-Compete Agreements
Businesses often use contracts to enforce non-compete agreements. Non-compete
agreements prohibit individuals or other businesses from offering goods or services in
the economic marketplace. These contracts create strategic relationships between two
companies and allow them to provide unique goods or services to consumers.
Companies also can use non-compete agreements to limit the type of services offered by
former employees who have specific knowledge about the companys specialized
business services.
Expert Insight
Legal advice should be sought before entering into any binding contract. Small
businesses may be susceptible to larger businesses taking advantage of the
entrepreneurs willingness to complete business functions. Contracts often include
difficult legal terms that many business owners fail to understand. Attorneys can
provide clear information on the benefits of business contracts and whether small
businesses should agree to specific contractual terms.

Owner Agreements
When starting a business, it doesnt matter if you are a corporation, LLC, or partnership.
If you are in business with another person, you need a written agreement with all coowners. These can be:
Operating agreement
Shareholders agreement
Founders agreement
Partnership agreement
All share a similar function, which is to ensure the deal between co-founders is set in
stone so everyone can focus on building the business. A good agreement outlines
ownership percentages, capital contributions and disbursements/salaries. It also acts as
the company prenup, detailing what will happen to the business if you decide to part
ways.
Related: How a Handshake Can Destroy Your Business
Several years ago, I mentioned this to a distant friend when he was starting up a new
company. He noted he didnt want to spend the money on a shareholder agreement and
believed all the business partners were on the same page. Unfortunately, one wasnt, and
a few years later he was over $40,000 into litigation with one of his former partners. He
paid a huge price in the end for not having an owner agreement and eventually folded
his businesses when the legal bills became too much.
Remember, if you fail to implement a formal agreement, there can be costly
consequences in the end. Be sure to put it in writing and save the hassle down the road.
Worker Agreements
If you dont have employees, you might be skeptical, but this agreement includes
independent contractors as well. These are the people designing your website, managing
your database, or performing your legal and accounting work. Even if they are not your
full-time employees, they are still working for you and you need to have the terms of
the deal fully fleshed out before work commences.
Numerous times Ive seen over-anxious business owners hire a designer or development
company without a formal agreement, then came to me upset noting they didnt perform
to the right standards, were taking too long, or even worse they took the money and
did nothing. Without an agreement, you might win a court battle, but not without
spending a lot of money and time.
Customer and Vendor/Supplier Agreements

When starting and growing a business, customers are the all-important source of
revenue, with the vendors and suppliers used to fulfill customer demand next in line.
Every time you make a sale, you have contracted with your customer, and that contract
needs to be designed to help frame the relationship with them and provide all parties
with the legal protections bargained for. In e-commerce, these contracts are generally
click-wrap agreements like terms of service and privacy policies that set the service
level and expectations for the consumer.
For vendors and suppliers, you must have a way to ensure that your needs are met and
by proxy, the needs of your customers. Terms like indemnification, exclusivity and
limitations of liability all need to be carefully drafted to make legal and business sense.
In general, the agreements outlined above are a really great place to start to ensure you
and your business are protected. Be sure to put these agreements in place early to
mitigate any future legal risk.