Category Archives: Litigation

Why Micro-Entrepreneurs Need a Contract

Let’s dispel a big misconception among small, home-based business owners such as freelancers and other “solopreneurs”.  The misconception is that these “itty bitty” business owners don’t need to use contracts or concern themselves with the “legal” side of business.  The reasons for this misconception are varied:

  • My business is too small to bother with legal formalities
  • The projects I work on are small so don’t need contracts
  • My clients and I trust each other so we don’t need contracts
  • Only big companies need contracts
  • Formal legal agreements are overkill
  • Oral agreements are valid

Those reasons are just plain wrong.  Here are five reasons why Solopreneurs should always commit their business dealings to a written agreement.

First, not all oral agreements are binding and enforceable.  It is beyond the scope of this article to discuss which oral agreements are or are not valid.  But, even for oral agreements that are potentially valid, they are some of the most difficult, if not the most difficult lawsuits to litigate.  And they are certainly more expensive.  Memories fade, intentions are misunderstood and sometimes, people simply lie.  If your business arrangement is based on an oral agreement, then you have little more than the old “he said/she said” argument—not a desirable position to argue in front of a judge.

Second, if you think that the size of your sales/deals/projects are too small to warrant taking the time and effort to create a written contract, then doesn’t it logically follow that the deal is too small to risk spending time and money on debating the terms, lawyers and possibly lawsuits in order to collect those fees?  Or, are you saying that you’re willing to just walk away from fees rightfully earned rather than pursue any legal action?  Is that the business reputation that you want to have—that you won’t fight for your fees?

Third, reducing agreements with your clients to written contracts doesn’t mean that you don’t trust each other.   It means that you are a savvy business person who recognizes the value in committing terms to writing because people are human; they make mistakes.  They misunderstand issues…and, most importantly, they plain forget sometimes.  A written contract doesn’t signal a lack of trust.  In fact, it says just the opposite: it says that you value the relationship enough to want to avoid misunderstanding in the future.

Fourth, contracts should be viewed as a mini-disaster recovery plan for each project or sale you complete.  As long as all goes well, then carry on.  But, in the event (however remote you think that might be) that things go awry, then the relief of pulling out a disaster recovery plan for that project and having some idea of how the parties intended to proceed— is priceless.

Finally, solopreneurs are real, legitimate business owners, even if operating as sole proprietorships rather than as a corporation or a limited liability company.  Therefore, they should act like real business owners.  What do “real” business owners do?  They treat their businesses like a business, not a hobby.  They present themselves to clients, vendors, prospects and others as legitimate professionals, not as amateurs.  They likely have a website, business cards, letter head, at least one social media connection and a marketing strategy.  Why would a business undertake all of that to get clients, but not take precautionary steps to protect its reputation, assets, and hard-earned revenue by entering into contracts?

What could go wrong?  Plenty.  How much am I supposed to get paid?  When am I supposed to get paid?  Upon receipt of my invoice?  How soon after the receipt is received?  After the project is complete?  How soon after the project is complete?  Can the client terminate at any time?  Can I terminate at any time?  Who owes whom what if either party terminates?  Who owns the intellectual property resulting from the services I render?  When does the project start?  When does it end? Can I mark up expenses that are being passed onto the client?  Are my travel/lodging/food expenses reimburseable?  Are long distance phone calls reimburseable?  Can I compete with this client?

There are a myriad of terms and conditions in any given contract that are subject to misunderstanding and dispute when not committed to writing.  In fact, even with a written contract, disputes are still common.  But, at least in that case, all the parties are looking at the same language on the same page of the same book.  Without that written agreement, the parties might not even be in the same library.