Importance of Contracts for a Small Business Owner

 The importance of a contract for a small business owner

In any ordinary course of business, contracts are what keeps the business together. A contract is formal agreement between parties agreeing to certain terms. A contract can present itself in many forms ranging from employment offers, purchase orders, settlements, etc.

Why do I have to use contracts?

You may ask yourself “why do I need a formal contract? Why not just an agreement between two friends?” In a perfect world, an oral agreement would be sufficient. However, what if one of the parties goes back on their word and claims that’s not what was originally negotiated. Therefore, having a contract on paper can protect you.

Let’s take an easy example, let’s say Bob wants to buy five shipping containers from Gary at 5$ each and to be delivered in 3 days. Let’s Pretend the Bob and Gary are lifelong buddies and they don’t form a written contract and they just orally agree and shake on it. So now let’s fast-forward a week and the shipping containers still haven’t arrived for Bob, the buyer. Bob is going to be mad because he lost business because the product was never delivered as it was agreed upon by Gary. Now Bob calls Gary and says, “hey buddy I thought we had an agreement you were going to send me the shipping containers in 3 days.” Gary says, “we didn’t say 3 days we said 30 days, so I’ll send it to you within 30 days.” They only had a handshake and no formal contract with the terms written down, therefore it would be very difficult for Bob to sue Gary for breach of contract.

Breach of Contract

The benefit of having a contract is if there’s ever a dispute you can just look at the contract and see what the terms are. The party that has violated the contract can be liable for breach of contract. Breach of contract is a simple claim where the person who feels the other person violated the terms of the contract, can sue the other party. In the example above had Bob and Gary signed a contract with delivery in 3 days, Bob could sue Gary for breach of contract.

That is why we recommend all small businesses no matter how small the purchase is to get it in writing so that you could protect yourself and your business. I have dealt with previous people in the past who the moment I say let’s sign a contract they either get scared or suddenly they don’t want to go through on the contract. They may respond with “oh why don’t we just agree upon it without a contract.” This should raise a flag to you because a contract is there to protect both parties. In law school they called it a meeting of the minds which essentially means two parties are coming together to meet, agree on something and sign on it. If someone does not want to be bound by a contract they may not be someone you want to do business with and you should proceed with caution.

Contact a Small Business Attorney to help you with your current situation. We can walk you through and make sure you are doing what is best for your company.

 

Advantages and disadvantages of forming an LLC, limited liability company, in Texas

Advantages and Disadvantages of an LLC

Whenever someone’s decides to form a business, one of the very critical decisions will be what business entity to form. There are many entities ranging from a Corporation, S Corp, LLC, general partnership, limited partnership and others. However, being a business owner and knowing which business entity to form could be a very confusing question. This blog is going to tell you the advantages and disadvantages of an LLC here in Texas.

 

Advantages of an LLC

 

Liability protection

One of the biggest perks of having an LLC is that you are protected from liability if something were to happen. Only the LLC is liable for debts and liabilities. When you form an LLC, the LLC essentially becomes its own person therefor if somebody wants to sue you, they must sue the company instead. So, let’s assume an LLC accumulates debt and the creditor wants to sue you. They cannot sue the business owner, only the LLC itself. This protects your personal assets from being at risk.

Flow through taxation

With tax laws changing very often one of the perks of having an LLC is you deal with what’s called pass through taxation. What this means is that the LLC itself will not be taxed, it’ll essentially flow right through the business to the individuals who will be taxed at their normal personal income level. Let’s pretend I own and am the only employee of company ABC LLC. ABC LLC, makes $100 a year but because of pass through taxation the company won’t get taxed on those hundred dollars. Instead it will flow through to me, its only employee, and I will be taxed on those 100$ at my personal income level. This is beneficial to the business owner because the owner only must pay taxes on the profit he makes from the business. If he pays employee salaries, the employees pay their own tax, not the business.

 

Disadvantages of an LLC

 

Self-Employment Taxes

When you are an LLC, because of the flow through taxation, the individual is responsible for paying the self-employment taxes. Regularly when one works for a corporation, the business withholds your Medicare and social security tax from your paycheck. With an LLC, none is withheld which usually leaves you having to pay the self-employment taxes at the end of the year. It is very important to plan for this so that you don’t get stuck with a large tax bill at the end of the year you didn’t expect.

Filing with the Secretary of State

This isn’t a disadvantage but is required to form an LLC. You must register the business entity with the Secretary of State and make sure all your filings and documents are in order and valid.

 

If you are considering opening a business in Texas, feel free to reach out to Zavala Texas Law to speak with one of our small business attorneys. They can help you get started and make sure you run your business effective and within the rules.