Defining The Three Types Of Business Contracts

Laying out the terms of a business contract can be difficult for budding entrepreneurs. Fulfilling the terms of the bargain can be even harder. But before the pen is even put to paper, the parties involved must decide which type of contract is required. There are three types of business contracts that are common: general business, sale-related, and employment. Every good business person knows that the difference between “binding” contracts and verbal agreements can make or break a business.

General business contracts include partnership agreements, indemnity agreements, nondisclosure agreements, and property and equipment leasing agreements.

Sales-related contracts include the oft-needed bill of sale, a purchase order, or a security agreement.

Employment contracts include general employment, noncompete agreements, and independent contractor agreements.

Let’s start with the latter. Everyone knows what a general employment contract is. This is a written handshake between employer and employee. It details expectations of both parties. 

A noncompete agreement isn’t for everyone. It’s important for businesses with IP. These types of business contracts mean that a former employee cannot move to a competing business for a specific amount of time (thereby competing with the business where the employee formerly worked). An independent contractor agreement is required for certain services or projects, dependent on federal law.

Regarding sale-related contracts, a bill of sale provides the new owner of an asset with legal proof that the sale was made. These are common for big-ticket purchases, such as motor vehicles. A purchase order requires that a business owner make a specific purchase once signed. Basically, a restaurant owner might make a contract with a supplier to order a specific amount of merchandise every so often. A security agreement stipulates collateral. For example, a business owner might use his home as collateral for the approval of a loan. The lender would receive the collateral if the borrower defaulted on a loan.

General business contracts are the most common for business owners. A partnership agreement is made when there are multiple owners or additional members with stake in a particular company.

An indemnity agreement is normally made on top of another agreement. In essence, it gives one party a pass in case there are damages resulting from the other agreement. According to AVVO, this might occur in the following situation: “A kennel owner might ask pet owners to sign an indemnity contract to prevent lawsuits if a pet is hurt by another animal at the kennel.”

Everyone knows what a nondisclosure agreement (or NDA) is. These contracts prevent specific parties from releasing company secrets — or anything else. Justin Bieber used to use NDAs to prevent partygoers at his home from revealing what exactly happened there.

A property and equipment lease is used when a business owner needs a piece of equipment for the business to function, but does not buy it outright. These agreements often outline terms related to monthly payments, security deposits, who performs maintenance, etc.