Key Elements of a Contract

The purpose of contracts is to mitigate risks. That’s why it’s so important for small business owners to understand a few key elements before entering into a contract of any kind. A contract is only as good as the sum of its parts and its ability to be legally enforced. These elements must be present in order for a contract to be viable for the sake of your business and in the eyes of the law.


Identification of Parties


It’s important that the contract identifies all people responsible for meeting the terms of the contract. It may include either the names of individual people in positions of responsibility or businesses that are responsible for meeting the contractual obligations.


The Offer


This is the expression of interest or willingness to enter into a contractual situation with another business or individual. In business settings contracts are often offered in exchange for goods or services and almost always involve some form of compensation for those goods and services. The obligations of both parties needs to be spelled out clearly and succinctly in the contract in case there are any disagreements at a later date.


The Acceptance


The contract is the document that all disagreements will revisit. Both parties must accept the terms of the contract and any counteroffers that have been levied before the contract is considered legal and binding. Any changes made to the original contract once work begins, must be amended and agreed to within the contract as well.


Legal Purposes


Contracts for illegal activities cannot be enforced. The very fact that they revolve around illegal activities renders them invalid.


The Competency Factor


It is also important to note that all parties signing the contract must be competent to do so in order for the contract to be legally valid. Drugs and/or alcohol can nullify competency so don’t pop the champagne cork to celebrate until after the contract has been signed.


Terms and Conditions


You should always identify a state at which the terms of the contract are considered complete and a timeframe for the completion of the contractual obligations. Make sure to include payment amounts and payment deadlines as part of the terms and conditions too.




This is particularly important when creating contracts that cross state borders. The contract needs to clearly state which state laws apply to the contract in case claims due arise at a later date.


Contracts can be extremely complicated, especially for business owners that aren’t accustomed to dealing with them. It’s always in your best interests to have a lawyer look over them for you in order to ensure that your business interests are protected. You should also invest in business insurance – particularly professional liability insurance – in case there are ever issues arising concerning breach of contract.