When you and another party enter into a contract, you’re both legally responsible and obligated to do what is stated in it.
How Do I Create a Valid Contract?
To create a valid and enforceable contract, there are three main requirements:
- Offer: this must be clear and definite (such as, “I will buy 10 cases of your Knickerbocker perfume for $10,000”);
- Acceptance: this also must be clear and definite (such as, “Great, I will deliver the perfume by the first of the month”); and
- Consideration: this is an exchange something of value. Each party must promise or provide something of value to the other party (such as, payment of money by one party and provision of goods by the other).
There are a few other requirements:
- The contract can’t be created for an illegal purpose;
- The parties to the contract must be legally capable of entering into a contract (a 12-year-old can’t sign a legally binding contract to purchase perfume);
- Both parties must be capable of understanding the meaning of the contract (can’t be mentally incapacitated at the time of the contract);
- There must be mutual assent or a “meeting of the minds,” which means both parties must intend to be legally bound by the agreement and must agree on all the essential terms of the contract.
Most contracts can be created by an oral agreement, so they don’t need to be in writing; however, certain contracts, such as those involving the purchase of real estate, are required to be written down to be enforceable.
What Happens If a Party Doesn’t Do What They’re Supposed To?
Again, the contract states what you’re obligated to do under the agreement. In our example, you agree to give the other party $10,000 for the perfume, and they agree to give you the 10 cases in return by a certain date.
But if one of you fails to do what the contract requires you to do, the other party can sue to enforce the contract. This can mean going to court and getting a judgment that orders the other party to do what it agreed to do (such as delivering you the Knickerbocker perfume or you paying the $10,000). As an alternative, the judge may award damages and require the other party who failed to do what the contract required to pay money if their failure caused the other party to lose money.
Why Should I Have an Business Entity to Avoid Personal Liability?
A single $10,000 contract for perfume may not sound like that much money, but if you’re selling Knickerbocker perfume to customers all over the world, you’ll have a lot of contracts with customers. This will expose you, the business owner, to significant personal liability unless you’re insulated by the proper business entity.
For example, if your company runs out of Knickerbocker perfume, and you agreed to deliver it to customers by a certain date and can’t do so, you’d be in breach and may be liable for damages. If you’re liable, it means that you’re responsible. As such, you’ll have to make your customers whole.
As a business owner, you don’t want the liability to extend to your person (i.e., your own personal life) for a breach of contract. This means you don’t want a customer who’s been hurt by the company to be able to come after your personal assets (your home, your car, your retirement savings, your kids’ college accounts) if the assets in the company are insufficient.
That’s why you want to form a business entity, such as a corporation or a limited liability company (LLC), to protect your personal assets. A sole proprietorship or a general partnership doesn’t provide this protection.
So, with the creation of an entity, you have a first line of defense against claims. And this includes protection from other types of claims like accidents at work, employment issues, and many other areas.
As a New York business owner, you will be entering into hundreds of contracts a year. You should be aware of the obligations you are undertaking in each contract. LOVE LAW FIRM helps business owners draft clear and concise contracts to protect your interests. Good contracts are a first line of defense, don’t be unprotected.
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Francine E. Love is the Founder & Managing Attorney at LOVE LAW FIRM PLLC which dedicates its practice to serving entrepreneurs, start-ups and small businesses. The opinions expressed are those of the author. This article is for general information purposes and is not intended to be and should not be taken as legal advice.