The 5 Different Types of Contracts in Business (With Examples)
Contracts are the heart and soul of all commerce; they are a mutual agreement between two (or more) parties that, upon signing, creates legal obligations that each side must adhere to.
This can be as simple as buying a product or selling a service.
Without legal agreements and contracts, operating any substantial business would be nearly impossible; considering the volume of increasingly complex contracts organizations has to manage every single day, it is crucial to fully understand the different types of contracts used.
So, based on the popularity of entrepreneurship in the modern world, it is important to know the types of contracts in procurement, different types of contracts in business, types of contracts in business law with examples, and, of course, how they work.
It truly doesn’t matter whether you operate a one-man sole proprietorship or a multi-million dollar corporation, the need for contracts remains the same. They are the only way we can make deals and agree to enter into sales – without them, commerce would simply not work.
Contracts are not just between two businesses, either; what most consumers don’t realize is that they enter contracts almost every single day. For example, whenever we buy a product at a store or go grocery shopping, we are entering into an agreement to purchase whatever it is we are purchasing. When we get a new job, we sign an employment agreement to start work – that’s a contract!
For the business owner and entrepreneur, contracts involve customers, vendors, staff, partners, and others – all of these legal agreements differ in how they are created and executed, which is why it’s so essential to know the different types of agreements and contracts.
Certain contracts are very complex and difficult to construct, while others are very simple – it all depends on the type of contract, the products or services the agreement involves, and other factors.
What Are the Different Types of Contracts in Business?
The list of types of business contracts is as follows:
- General business contracts (partnership agreement, indemnity agreement, non-disclosure agreement, property and equipment lease)
- Bill of Sale
- Employment agreement
- Licensing agreement
- Promissory note
Please note that there are many types of contracts and legal agreements in commerce, but these are the five main ones that are most important to understand.
So, without further ado, let’s go over these five main types of legal contracts in business and give examples of each:
General Business Contracts
These types of ‘general business contracts’ refer to legal agreements that involve a business internally.
In other words, when a business is being structured they use the following contracts to organize the terms and how it will operate:
- Partnership agreement (this involves not only what each partner will bring to the table, but also the relationship between partners and their stake in a company).
- Indemnity Agreement (this contract protects a person from legal damages if something bad happens – both parties agree that there will be no harm done if something goes wrong).
- Nondisclosure agreement (this is a very common contract – this provides businesses the ability to ‘seal’ sensitive information from getting out by making others agree that there will be legal repercussions if they release this info).
- Property and equipment lease (these agreements involve the terms of a lease for a property or equipment – this contract will include payment terms, conditions, etc.).
There are many other types of ‘general’ business contract, however, these are the main four.
Example of a General Business Contract
The types of general business contracts vary greatly; we could provide anything from a sample of an agreement to sell/purchase a business to a typical nondisclosure agreement.
For this example, here is a partnership agreement:
Let’s say two people – Jim and Jessica – want to start a business that sells coffee; this will be a partnership agreement.
So, before they start operating, they need to determine the following:
- percentage of ownership (what is each partner going to offer to the business? for example, how much money will each partner invest for startup costs and equipment?)
- profit/loss division (how much profit will each partner get to take, and how much loss? this is usually determined by their stake in ownership)
- partnership duration (will this agreement continue on forever, or will it end at a certain point?)
- authority (which partner has the ultimate authority to ‘bind’ the company in case of debt?)
- withdrawal or death (what are the terms when a partner either dies or leaves the company?)
- decision making/resolutions (what is the decision-making process in case of disputes?)
Partnership agreements occur whenever two partners enter into a business together, and this is just a sample of the terms that will be included in their partnership agreement.
This is similar to how other general business contracts operate as well; before two or more parties go into business with one another, they draft a contract that outlines the terms necessary to protect all sides.
Bill of Sale
A ‘Bill of Sale’ contract is a sale agreement that transfers a piece of property from one party to the other.
With this type of contract, the agreement states the two parties involved, who is selling and who is the new owner of the piece of personal property, how much the contract is for, among other details.
A Bill of Sale is typically used by owners to show that they own that property, whenever a situation arises that might require that type of information.
Example of a Bill of Sale
A ‘Bill of Sale’ contract is one that is quite simple and used often.
A situation example where this type of contract would be used is a used car purchase.
So, if a car-buyer finds a vehicle they like online and decide to purchase it, they contact the seller. When they agree to a price and the sale goes through, they also sign a Bill of Sale – this officially transfers the ownership of the vehicle to the buyer.
Without the Bill of Sale, the buyer has no proof that he legally owns the car.
This type of contract is only used for big purchases that require registration (such as a car) – this contract is not needed if, for example, one party is buying a coffee mug from another party.
As the name suggests, an ‘Employee Agreement’ covers all employee relationships and offers both sides legal protection if needed.
The contract might state how long the employee contract is for, the rate of pay, conditions, and other details. It will usually also cover the terms of bonuses, the amount of time the employee is expected to work, and the reasons why the employee may be fired.
An Employee Agreement is a broad term used to categorize any contract that involves a business and an employee. More specifically, there are three types of employee contracts.
They are as follows:
- General employment contract (this is your typical employee/business contract you sign when you get a new job – this outlines how long the employee will work for, the pay, benefits, reasons for termination, conditions, etc.).
- Independent contractor agreement (not all work contracts are strictly business/employee – sometimes, it is an agreement between a business and an independent contractor who offers a service to a business but is not being hired as permanent staff).
- Noncompete agreement (this is a contract that outlines how long an employee must wait to ‘compete’ against a business once they are leaving or are terminated from a staff position).
Not only do these employment agreements protect the employees in terms of legal protection, but it also protects the business as well; when both parties know exactly what their ‘partnership’ will entail and what is expected of them on both sides, this allows for much better cooperation and experience.
Example of an Employment Agreement
Here is a basic example of a general employment contract:
Let’s say ‘John’ applies and gets the job of Dishwasher at a restaurant. Now, before John works, he will sign a contract with the restaurant that outlines the following:
- rate of pay (for example, $15/hour)
- duration (for example, 6 months before renewal)
- benefits (for example, 20 vacation days a year and 15% off food at the restaurant during shifts)
- grounds for termination (for example, 2 missed shifts or 5 late clock-ins results in termination)
The employee agreements can include as many terms or details as the employer (or employee) wants – this protects both sides so that they each know what is required of them and, if something goes wrong, they have the agreement in writing.
A ‘licensing contract’ is an agreement that allows the inventor or owner of a product (or invention, service, software, etc.) to allow other parties to use their ‘thing’, usually for a certain percentage of profits or other monetary figures.
This contract will also include how the inventor/creator/owner will get paid, what the limits are to using their ‘thing’, and other details.
Licensing agreements are crucial for these owners who want to let other businesses use their ‘thing’ but still get compensated fairly and limit how their ‘thing’ is used.
Example of a Licensing Agreement
Licensing agreements usually cover intellectual property, such as trademarks, patents, or copyrights.
Terms may include the countries the property can be used in, how long it can be used for, exclusivity, royalty percentages, etc.
So, for example, let’s say a new piece of ant-virus software is invented – the owner wants to let others use it instead of just keeping the business to himself. So, he goes about advertising this software, and then, when other businesses want to enter an agreement with him to use his software, they draft a licensing agreement.
This way, both sides know the exact terms of their new business agreement.
A ‘promissory note’ is a type of ‘legal IOU’ – if a business wants to lend money to another party, this type of contract is proof of the agreement, how much money is involved, terms of repayments (such as interest rate and late fees), and more.
Example of a Promissory Note
A common promissory note is a student loan; with this agreement, a private lender exchanges tuition fees for a student in exchange for a written promise (contract) that they will pay back the loan.
The agreement will outline the terms of payments, such as how long the student has to pay it back and the fees associated with lending.
Different Types of Contracts in Business (Table)
|Type of Contract||Summary||Who Is Involved?||Relevant Terms?||Sub-set||Example|
|General Business Contracts||How a business is structured.||Business owner and partne|
|Duration of contract, terms, conditions, etc.||Partnership agreement, indemnity agreement, nondisclosure agreement, property and equipment lease.||Two partners open a business and sign a partnership agreement.|
|Bill of Sale||Transfer piece of property.||Seller and buyer.||Property, payments terms, dates, etc.||.N/A||Private selling of car|
|Employment Agreement||Document employment terms.||Employee and employer.||Pay rate, conditions, benefits, termination details, etc.||General employment contract, noncompete agreement, independent contractor agreement.||Any new job contract.|
|Licensing Agreement||Owner provides rights for others to use his invention.||Owner and other business owners.||What is being licensed, payment terms (royalties), geographical locations permitted, etc.||N/A||Antivirus software being licensed to North America and Europe for a percentage of profits.|
|Promissory Note||A ‘Legal’ IOU.||Lender and borrower.||Amount, interest rates, deadline, etc.||N/A||Student loan.|
How to Manage All Types of Business Contracts/Agreements Effectively
Managing contracts effectively is a task in and of itself – although you now know the five main types of legal contracts in business, there are still many others and each type of contract varies greatly.
Contract management software is the best way to manage contracts in the modern business world; ParleyPro is a solution for tracking contracts effectively and allows businesses the benefit of streamlining and automating the entire contract lifecycle.
ParleyPro also offers useful features such as business sale contract templates and standard business contract templates, among others.