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Signature or handshake: Which contract is best for you?

You probably make business agreements on a daily basis without a contract. When you order food at a restaurant, drop off your dry cleaning or get a haircut, you don't feel the need to negotiate terms. Even if you buy or sell a car to a family member or ask a good friend to help with a home repair, it may never occur to you that a signature on paper is necessary.

Perhaps you have conducted your small business this way too. The familiar, trusting method of reaching an agreement and sealing it with a handshake may seem sufficient for your clients. However, what happens if something goes wrong?

The safety net of a signature

Contracts, whether verbal or written, are the summary of the way you and your customer, vendor or client agree to conduct business. A valid contract contains four important elements:

  • An offer of service
  • An exchange of money or other consideration for that service
  • An agreement to the terms of the service and the compensation
  • A mutual understanding between the parties involved

While these elements may sound simple enough that a verbal contract will work, a written contract provides proof of the agreement that is more likely to stand up in court if a dispute arises.

Despite your best intentions, a disagreement or misunderstanding is always possible. As a business owner, you know how expensive such disputes can be if you can't resolve them quickly. Having a written contract with clear terms may preempt those disagreements and allow you to conduct business more efficiently.

How do I know if I need a written contract?

Some advisors suggest that a good rule of thumb is to ask yourself whether you would be willing to go to court over the transaction if something should go wrong. For example, if your customer fails to pay the amount agreed upon or your vendor fails to deliver the product you ordered, would you feel that breach of an oral contract is worth taking the matter to a California court? If you feel it may be, advisors suggest you consider using a written contract.

Additionally, if the transaction is crucial to your business, risking it with a potentially unenforceable verbal contract may have devastating results. Written contracts can be as simple or complex as your business requires, and you may learn by mistakes or seek professional legal advice about what elements make a sound contract.

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