Running a Business Without Any Written Agreements: Key Risks

As a small business owner, establishing strong foundations for your business is vital to protect your interests and ensure smooth operations. One of the most important ways to achieve this is by using well-drafted written contracts. Legally binding agreements can protect your business from potential pitfalls and are vital for effective risk management. This article explores some of the most common types of agreements your business may need and some of the critical risks you could face without them.

Why Do Written Agreements Matter, and How Can They Protect Your Business Interests?

Written contracts (when entered into correctly) will create a clear and enforceable framework for your agreements – specifying the rights and responsibilities of all parties involved. They can help reduce misunderstandings and disputes by ensuring all terms are laid out clearly and documented.

Relying on verbal agreements may seem convenient but can often lead to arguments and legal challenges. For instance, if a key customer claims your business missed a deadline, defending your position without a written contract can become very difficult. A clear agreement specifying your deliverables and deadlines, on the other hand, can help you avoid disputes and protect your business from risk.

What Types of Contracts Should Your Small Business Have?

Your business might need various written contracts to manage relationships effectively during your business lifecycle.

Some common contracts include the following:

Employment Contracts 

Employment contracts are vital for managing your staff and protecting your business. They should lay out employee roles, working hours, pay, and termination conditions – thereby ensuring clarity for both the employer and employee. While not legally required, written contracts are far more effective than verbal agreements in reducing disputes and providing clear evidence of terms between the parties. They can also help you to document mandatory requirements, such as providing employees with a written statement of particulars regarding their role.

A well-drafted employment contract tailored to your business needs can also include vital clauses addressing confidentiality and non-compete obligations, which can help safeguard your business interests significantly.

Shareholder Agreements

A shareholder agreement helps co-founders address essential business issues about their company early on (e.g. regarding crucial matters such as voting rights, dividend policies, and exit strategies). 

Resolving these matters at the outset with a robust shareholder agreement can help stabilise your business and create a clear decision-making framework. Without such an agreement, the shareholders could be misaligned, leading to future costly disputes and business instability.

Client Contracts

Documenting agreements with your clients is critical for setting expectations and protecting your business. Contracts should cover key provisions such as the scope of work, fees, payment terms, and provisions limiting your liability. Without these vital terms, mismatched expectations can lead to costly disputes and potentially unlimited liability for your business. Written agreements also ensure clarity on payment terms and help to reduce cash flow issues, which could otherwise be devastating for a small business.

Supplier Agreements

Supplier agreements define the terms of your business relationships with suppliers (such as pricing, delivery timelines, and quality expectations).

NDAs

Protecting confidential information is vital if you collaborate with other businesses and share it. Without these key contracts, you risk misuse of your confidential data – which could be hugely damaging to your business in many ways.

In addition to the above, you may need a range of other commercial contracts during your business lifecycle—such as commercial lease agreements when you rent premises or software licence terms when your business is given a licence to use certain software. 

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What Risks Could Your Business Face Without Written Contracts?

Operating without written agreements can expose your business to significant risks.

For example:

• verbal agreements can be difficult to enforce, leading to unpredictable outcomes and costly disputes;
• you can face regulatory scrutiny in some instances. Your business must comply with legal obligations, including data processing terms in certain agreements under the UK GDPR where required. Failure to comply can result in fines, reputational damage, and customer problems; and
• you could risk losing critical intellectual property rights. Without formal agreements, freelancers or contractors may retain ownership of the work you ask them to create, which could create legal and operational challenges.

As such, it is vital for a small business to carefully consider which written agreements it needs and ensure these are implemented. If your business needs guidance on which agreements to protect your interests, you can work with a commercial lawyer to guide and support you with drafting them.

Key Takeaways

Running your business without written contracts is risky and could have serious consequences. Written agreements can bring clarity, reduce the chance of misunderstandings, and provide you with critical legal protection. If you are still trying to figure out where to start, you can seek legal advice from a contracts lawyer to guide you and help prepare contracts supporting your business needs.

If you need help preparing contracts, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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