Why should you use written contracts for your business?
Written agreements help to clarify the terms of your business relationships with your employees, your customers, and your business partners/associates (e.g., scope of work, payment terms, benefits, termination rights, and the protection of confidential information). Further, putting business agreements in writing should highlight any major misunderstandings between the parties and give them the opportunity to address them and/or remove ambiguities on the front end.
By relying on verbal agreements, you run the risk that even well-intentioned people will disagree on the overall meaning and details of your business arrangement. Should such differences arise, having a clearly written contract that you can point to can prove invaluable and potentially save you from costly dispute resolution processes.
In addition to being important for practical reasons, some formal business entities are required to have written agreements signed by their corporate officers. For example, generally speaking, every Texas corporation and nonprofit organization is required to have a set of bylaws that dictates how the business entity will function (e.g., how meetings are conducted, how the company/organization will be managed, what capital contributions are required from each member, voting and purchasing rules, and how profits and losses will be allocated).
(Note: Although Texas LLCs are not required to have written company agreements, there are numerous reasons to do so.)
Why should you hire a lawyer to write your contracts?
While it may be tempting to write your own contracts or simply adapt something you found on the Internet, doing so can cause more problems than it solves. For instance, there may be specific language that is required to make your agreement enforceable or have the legal effect that you were intending. Further, good lawyers will highlight potential problems during the drafting process so that you can address them before they occur and include relevant provisions in the agreement to better protect your interests.
Bottom Line: When contracts really matter (i.e., when they are being challenged or used to prove intent), you want to be confident that they are clear, thorough, and legally binding.
Do you need a written partnership agreement in Texas?
No, but having a written partnership agreement is valuable in spelling out how the partnership will operate (e.g., authority, management and control of the business, profit and loss allocation, voting rights) and having something to point to if disputes arise. Plus, without a written partnership agreement, state law determines the partners’ rights and obligations. For example, Texas law on general partnership assumes that all partners will share equally in the control of the partnership as well as in profits and losses.
Why should you consider forming a corporation or LLC?
If you have assets to protect (e.g., home, real estate, vehicle) or if you are collaborating with others on a business venture, then you should consider forming a corporation or limited liability company (LLC) for your business. As business structures, both corporations and LLCs are considered separate legal entities distinct from their shareholders and members.
Formal business entities generally shield their shareholders or members from personal liability arising from business debts and business lawsuits. Conversely, sole proprietors and members of general partnerships are typically personally liable for business debts and business lawsuits, including, in the case of partnerships, those that are the result of their partners’ actions!
Bottom Line: By forming a corporation or LLC, you may be able to protect your home, real estate, vehicle, and other assets from being seized for a business debt or liability.