As a service-based business owner, you know you need contracts. But which ones do you really need? I received this question when I asked a handful of service business owners what they most wanted to know about legal. And it’s a good one, so I dedicate this week to answering it.
For this episode, I focus on contract needs for service-based business owners. Even if you don’t categorize your business that way, you’ll probably still need a few of these agreements too. I discuss the necessary contracts and some of the most important terms to include in them.
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In this episode:
[02:05] – For the purpose of this episode, Danielle discusses how she defines a service-based business.
[03:11] – The first agreement is essential for all service business owners.
[04:43] – Not every service-based business needs subcontractor agreements, but here’s what you need to know about them.
[06:58] – Make sure you include these terms in your subcontractor agreement.
[08:18] – Danielle illustrates the difference between contractor and subcontractor agreements.
[09:25] – What terms should you cover in your contractor agreements?
[10:30] – Danielle talks about ongoing service contracts and why they need to be considered separate from contractor agreements, despite some similarities.
[11:24] – What should you look at in ongoing service agreements?
[12:20] – This last contract type may not apply to every service-based business, either.
[13:51] – Danielle provides today’s action steps to end the episode.
Links & Resources:
- Episode 8: “When Do You Need a Contract?”
- Episode 18: “Client Agreements for Service Business Owners”
- Episode 43: “Working with Subcontractors”
- Liss Legal
Welcome to the Simplifying Legal podcast, brought to you by Businessese. I’m your host, Danielle Liss.
Many years ago, someone told me I was the least lawyer-y lawyer she’d ever met because I helped make legal easier to understand. To this day, it’s one of the best compliments I’ve received in my professional life.
If you've ever felt legal was too scary, too overwhelming, too complicated, or just plain incomprehensible, you're not alone. The Simplifying Legal podcast was created to help.
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My goal is for you to walk away from each episode thinking, oh, that was easier than I thought it would be.
Let’s get started.
Hey there, I’m Danielle. Welcome to Episode 55 of Simplifying Legal for Small Business Owners. Today, I’m talking about 5 contracts service business owners need.
Disclaimer: As always, before we get into today’s topic, a quick disclaimer. This podcast is meant to provide you with legal information only. It’s not legal advice and does not create any type of attorney-client relationship between us. Please don’t take any action without consulting your lawyer first.
Recently, when I was planning my podcast schedule, I asked a handful of service business owners what questions they have about legal so I could make sure I wasn’t missing any big topics that were on people’s minds.
One person said, “I know I need contracts, but which ones do I really need?” And I think this is such a good question and I’m going to do my best to answer it today.
Way back in episode 8, I answered the question when do you need a contract. There’s a little bit of overlap with that episode, but today, I’m focusing specifically on the contract needs of service business owners.
What Is a Service-Based Business?
Before we talk about the 5 contracts, I first want to address who I’m including in the definition of a service-based business.
When I refer to service-based businesses, I’m talking about those companies who provide a service directly to their clients. There are so many kinds of service-based businesses that fall into that definition, as you can imagine.
For example, there are creative service-based businesses, like copywriters and designers. There are wellness service-based businesses. Coaches and consultants. I’m a service-based business owner through my law firm. The list goes on and on.
But, if you’re listening and you don’t self-categorize your business as service-based, that’s okay. You probably still need a few of these agreements in your business too.
What Contracts Do Service-Business Owners Need?
Now let’s dive into the big question for this episode: what contracts do service business owners need?
For the rest of the episode, I am going to concentrate on the contracts you need and what some of the most important terms are. Then we’ll move into today’s action steps.
The first agreement I want to cover is the one I consider absolutely imperative for service business owners and that’s your client agreement.
A client agreement is a contract between your business and your clients. This contract sets out the scope of your services and provides the terms that govern the relationship.
As a service-based business owner, your client agreement is one of the most important foundational legal documents in your business. Since services are likely driving the bulk of your revenue, you want to make sure you are protecting yourself.
Your client agreement should cover all of the most important terms for your relationship. Typically, you will want to include:
- How you’ll get paid
- How to terminate the agreement early if needed
- And, one of the most important pieces is the scope of work, which will define the services you are performing for the client.
If you’re in a creative done-for-you service-based business, like a designer, for example, you will also want to make sure you clearly address ownership of the deliverables as this can vary by business.
I can’t stress enough how important I think a strong client agreement is for service-based business owners. If you want to learn more, I recommend you listen to episode 18, which is all about client agreements for service business owners. In that episode, I talk in-depth about the types of clauses you may want to include in your agreement.
The next agreement you should have is a subcontractor agreement. But, not every service business will need this. If you’re using independent contractors to perform services for your clients on your behalf, these are subcontractors. And, if you use subs, you need to put the terms of the relationship into writing.
Before I talk more about the agreement, I do want to say that the laws regarding classification of contracts vary, so please make sure you understand your state’s laws. And, if you are hiring someone remote, you will need to check their state’s laws too. As always, if you aren’t sure, please talk to your lawyer.
Now, let’s get back to the agreement. In some ways, a subcontractor agreement has similar terms to your client agreement since it talks about things like payment terms, confidentiality, termination, and deliverables.
However, you should also consider what other terms you may need because the relationship is different. For example, a subcontractor may learn a lot of confidential information about your clients as they complete their deliverables. If that is the case, you may need to broaden the scope of your typical client confidentiality provision in a subcontractor agreement to ensure it treats your client’s information as confidential.
Another aspect that you will want to address is the relationship between the subcontractor and your clients.
Many service business owners want to remain the primary contact for their clients and they limit client interactions with the subcontractor. If that’s how you handle things, please make sure you address what type of communication is permitted between the subcontractor and your client. In some cases, I’ve seen businesses prevent their subs from having any direct contact. But, if you do allow your subs to communicate directly with clients, does your agreement specify what the subs should do in terms of documentation to ensure you are aware of what’s happening?
Intellectual property is also an important term if you are working with subcontractors. First, you want to make sure that you address the ownership of the deliverables since you will need to dictate your client’s ownership of anything the subcontractor creates for them.
But, you will also want to protect your own intellectual property. For example, let’s say you use an exclusive methodology with your clients that involves your intellectual property. If you’re teaching that to your subcontractors who are then completing client work on your behalf, you need to ensure that you are clear about what they can and can’t do with your intellectual property.
When it comes to subcontractor agreements, make sure you look at it from both sides – the relationship between your business and the subcontractor and the relationship between the subcontractor and client. While it’s similar to a client agreement in some ways, the agreement is different since it has to consider both relationships.
If you want to learn more, listen to episode 43 which is all about working with subcontractors. In that episode, I talk more about some of the contract clauses you may want to consider.
The third agreement that you will need as a service business owner is a contractor agreement. And, if you’re thinking, wait, didn’t we just talk about this with subcontractors, I want to clarify how I am defining them so you can see the difference in the agreements.
A subcontractor is someone who is completing client work on your behalf. For example, if you are a designer and you hired another designer to help you with overflow work because you can’t complete it yourself, that’s a subcontractor agreement.
A contractor agreement, for our purposes in this discussion, is an agreement for an independent contractor who is completing services directly on your behalf. For example, if you are a business consultant and you’ve hired a social media manager to help you create graphics and schedule them on social media, that’s not a subcontractor. They’re working directly for you, not your clients.
Your agreement with them will also have some overlap with a client agreement. And, this makes sense, because, if you think about it, you’re hiring that contractor as your service provider, so this is essentially their client agreement with your business.
You’ll want to ensure that you cover payments, termination, confidentiality, and the scope of the deliverables that they are completing on your behalf. If they’re doing creative work on your behalf, like creating copy or designs, please make sure that the agreement covers ownership of the deliverables. Who will own that original content that they create? If you need to own it, make sure the agreement says so.
Depending on the type of work the contractor is completing for your business, you may also want to be aware of things like how many drafts are included in the services or data security, if they’ll have access to your accounts.
And, in the termination provision, make sure you are aware of any minimum-time commitments. For example, are you required to complete a 90-day engagement before you’re able to terminate?
If you work with multiple contractors, I also recommend finding a way to ensure you’re carefully tracking and managing the various contracts. That way, you don’t accidentally breach the terms of one contract because you had it confused with another.
Ongoing Service Agreements
The fourth type of contract I want to address is an ongoing service agreement. A common example of this is a website maintenance agreement where you pay a set fee each month and you receive a set group of tasks. That might include updates to your website, backups, or the ability to submit help requests for assistance with the site.
These could also fall under the umbrella of a contractor agreement, but I think they are important to list separately too. One of those reasons is because they sometimes aren’t separately signed contracts and, instead, you agree to the contract as terms and conditions at the time you enroll in the service plan. In that case, you wouldn’t have a copy of the agreement to save and you should make sure you have the key details tracked somewhere.
I think sometimes service-business owners forget to track and include these as part of their contract management process and they are still a type of contract.
Some important things to look at in these agreements are payment terms, the scope of the deliverables, the ability to terminate, and how pricing changes are handled. Check to see what type of notice you will receive in the event of a change in price.
I honestly think these are fairly easy contracts to deal with, but because we check a box to agree to terms, we don’t always give them the same weight as other agreements. And there are still important terms to be aware of.
And, since this is an episode about contracts that service business owners need, I do want to say that I think these are an agreement that you should make sure you have in place if you enter these relationships. If there are no terms and you’re about to enter an ongoing service relationship, ask if there are terms that you should be aware of before you sign up. Know exactly what you are agreeing to before you obligate your business.
The last contract I think service business owners need may not apply to every business, and that’s employment agreements. If you have employees on your team, I strongly recommend an employment agreement.
For some businesses, this turns into three signed documents, with a signed offer letter, an employment agreement, and an employee handbook with a signed acknowledgment.
But, for now, I’m looking at employment agreements only. For most businesses, the most important clause is to state that the employment is at-will, but at-will employment laws can vary by state, so please be aware of that.
Employment agreements often include confidentiality and ownership too. Some companies include a separate inventions agreement, but most businesses will state that the work created by the employee in the scope of the employment belongs to the business, rather than the employee.
Depending on the role and the state where you’re located, your agreement may also include a non-compete or non-solicitation clause. Before including these types of provisions, please look carefully at your local laws because there are some states that have very strict rules on when they are allowed.
Typically, when a business is ready to hire employees, I often say that it’s a good time to talk to their lawyer to make sure they have what they need in their employment agreements. Especially if you’re also using a handbook, make sure that you’re covering what you need to on the legal side and have an additional legal review completed.
This wraps up today’s episode on the five contracts service business owners need. Now let’s talk about today’s action steps.
- First, do an inventory of what contracts you’re currently using in your business. Did I mention anything that made you think, oh, I should probably get that one added? If yes, definitely consider what steps you should take to add any needed agreements.
- Next, if you have the agreements that you need, did I mention any terms that you need to address in your agreements? If so, consider making updates to ensure that you’ve got agreements that will best serve your business.
- Next, if you’re using the agreements that you need in your business, are you managing those agreements somehow? In other words, do you have a way to keep track of the agreements that you’ve entered and the key terms? For some businesses, this can happen through a CRM. For others, a simple spreadsheet will do. For a bigger business that handles a lot of contracts, there are a lot of software solutions that will help you easily manage your contracts.
- Last, as always, if you have questions about the contracts you need for your business, please contact your lawyer for advice. I regularly work with clients on this through my law firm, Liss Legal, and I’d be happy to see if we would be a good fit to work together. If you’d like to learn more, visit LissLegal.com.
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