Business contracts and agreements: Essential legal documents guide

Published Thursday 2 July 2026

Table of contents

• What is a business contract?
• Types of business contracts small businesses use
• What to include in a business contract?
• How to write a business contract
• Tips for storing and managing business contracts
• Organize contracts and cash flow with Xero
• FAQs on business contracts

Key takeaways

• A business contract is a binding agreement between a business and 1 or more parties that sets expectations, protects rights, and outlines how to resolve disputes.
• Small businesses frequently use service agreements, independent contractor agreements, purchase orders, commercial leases, and loan agreements.
• Every contract should include the parties involved, scope of work, payment terms, termination clauses, dispute resolution processes, and signatures.
• You can create contracts yourself using a template or work with an attorney, and electronic signatures are legally valid under the ESIGN Act.

What is a business contract?

A business contract is a legally binding written agreement between a business and one or more other parties that defines each party's rights and obligations in a transaction or ongoing relationship. For a contract to be enforceable, it generally needs three core elements: an offer, acceptance of that offer, and consideration (something of value exchanged between the parties).

Businesses use contracts to govern relationships with customers, employees, contractors, business partners, landlords, lenders, and many others. Contracts give you a clear record of what everyone agreed to, which helps prevent misunderstandings and protects your business if a dispute comes up.

Types of business contracts small businesses use

Businesses rely on many different types of contracts. Here's a look at some of the most common ones for small businesses.

• Sales agreement: terms and conditions for the sale of products, services, or real estate
• Service agreement: between a service provider and recipient
• Statement of work (SOW): expectations for work on a project
• Master service agreement (MSA): an agreement between a client and a service provider, usually reserved for long-term engagements
• Purchase order: a request from a buyer to a seller, which becomes contractual once the seller agrees to fill the order. You can use purchase order management tools to track these digitally.
• Independent contractor agreement: defines the relationship between an independent contractor and a business. The IRS has guidelines on when workers qualify as independent contractors vs employees.
• Non-disclosure agreement (NDA): a contract where 1 party agrees not to share certain confidential information about the other party
• Employment agreement: specifies the terms of employment between an employee and an employer
• Partnership or LLC operating agreement: a document that outlines the rights and responsibilities between the partners or owners of a partnership or LLC
• Commercial lease: a rental contract between a lessor (property owner) and a lessee (renter)
• License agreement: an agreement between a licensor (owner of intellectual property such as a copyright or trademark) and a licensee using their intellectual property, typically in exchange for royalties or fees
• Franchise agreement: a legal agreement between a franchisor and a franchisee, giving the franchisee the right to use the franchise's brand name in exchange for a franchise fee after meeting specific guidelines related to products, services, and operations. Understanding the franchise buying process can help you evaluate this option.
• Terms of use: defines rules and guidelines between a website owner and its users
• Bill of sale: a contract that transfers ownership from 1 party to another, including sales of products, services, real estate, or even businesses. The IRS provides guidance on sales and dispositions of assets that may apply.
• Loan agreement: businesses sign these when they take out mortgages, short-term business loans, working capital financing, and similar arrangements

What to include in a business contract?

When drafting a legal contract, you'll want to cover several key areas. Here's what to include:

Parties and scope

Who's involved in the contract? Clearly define all parties with their correct legal names. Then lay out the responsibilities and obligations of each party, or the scope of work involved.

Price and payment terms

The contract should clearly explain all prices and payment terms. Cover the total price, when payment is due, whether installments are allowed, and what the other party needs to do to get paid.

Also address late payment penalties or early payment discounts. You can link contracts to invoicing software to keep payment records organized.

Timeline and milestones

List all relevant dates. Sales contracts typically have a deadline for each party to request changes. Leases have a start and end date. Employment contracts may exist indefinitely until either party decides to terminate the agreement.

Contracts about projects should outline milestone due dates and associated payments.

Confidentiality and intellectual property

Protect your business's privacy as needed with confidentiality clauses or a non-disclosure agreement (NDA). Make sure intellectual property rights are clearly defined, especially when working with creatives or anyone who has access to business processes or proprietary information.

Liability and indemnification

Outline each party's financial responsibilities (or limits to their responsibility) in case of a disagreement or lawsuit. An indemnification clause specifies that 1 party agrees to cover the other's losses or damages under certain conditions.

For example, if you provide IT services to another company, you may want to limit the damages they can seek against you if they get hacked or their system shuts down.

Force majeure

A force majeure clause protects both parties if unforeseeable events, such as natural disasters, pandemics, or government actions, make it impossible to fulfill the contract. Including this clause helps clarify what happens to each party's obligations when circumstances are beyond anyone's control.

Termination and dispute resolution

Who can terminate the contract, and how? Are there any additional fees or costs? Make sure that's clear from the start.

Also cover dispute resolution. For example, the contract can require mediation or arbitration before allowing either party to take the other to court. This can save time and money compared to litigation.

Notices

Define how each party must notify the other if they're exercising a right in the contract. For example, if a rental agreement has a renewal option, it should explain exactly what the renter needs to do to renew and the deadline for taking that action.

Signatures

The contract must be signed to be legally binding. Include a signature line with each party's printed name below it. For business-to-business contracts, include the business names, the names of the authorized signers, and their titles in the company. As needed, include details about notarization.

How to write a business contract

Now that you know what goes into a contract, it's time to draft it, review it, and sign it. To guide language and formatting, look at a simple business contract example, use a template, or work with an attorney.

1. Define the arrangement clearly

What are you agreeing to? The contract should clearly lay out each party's obligations and responsibilities. For example: "I agree to rent you this building, and you agree to pay me a set amount by a set date every month."

2. Set payment and invoice schedule

Explicitly outline payment amounts, invoice schedules, and payment due dates on contracts that involve an exchange of money. Connecting your contracts to accounting software can help you track payments and due dates in 1 place.

3. Add protective clauses

Use protective clauses to safeguard yourself and your business. For example, a non-compete in an employment contract or an indemnification clause where the other party agrees to cover damages if they breach the contract. Protective clauses should also outline what happens if there's a dispute.

4. Review with a professional

Writing something down and signing it doesn't necessarily make it legally binding. Contracts can't supersede local or federal law. They may need to be worded a certain way or meet other conditions to hold up in court.

5. Sign and store

Finally, get the contract signed. Both wet signatures and electronic signatures (e-signatures) are legally valid. Under the Electronic Signatures in Global and National Commerce Act (ESIGN Act), e-signatures carry the same legal weight as handwritten ones, as long as all parties consent to signing electronically.

Digital signing tools can simplify this process, but make sure you use a method that verifies each signer's identity. Simply typing a name in an email or text won't meet the standard.

Tips for storing and managing business contracts

The contract is proof of your legal relationship, and you should store it in a safe and easily accessible spot to protect yourself.

Centralize your contracts

Keep all your contracts in the same system, whether that's a filing cabinet or a digital storage platform. Having everything in 1 place makes it easier to find what you need quickly.

Name files consistently

Use a consistent naming system so you can find files easily. For instance, you may want to use the other party's name to label all contracts. Or you may want to use the type of contract (sales, lease, statement of work) followed by the party's name.

Track dates and renewals

If you use digital storage, set reminders. For new contracts, set up alerts related to review periods or signature due dates. For active contracts, set reminders for renewals or expirations.

Connect contracts to quotes, invoices, and purchase orders

Link contracts to supporting documents such as quotes, invoices, or purchase orders. Then you can easily access contracts and related documents whenever you need to review them.

Organize contracts and cash flow with Xero

Use Xero to store contracts, notes, and documents easily. Save contracts along with invoices, bills, or purchase orders, or even link them directly to transactions. Never worry about losing them, and easily access them as needed.

Xero makes it easy to stay on top of your business: reconcile bank accounts, send invoices, run financial reports, store legal agreements, and more. Connect with apps that handle payroll, file sales tax reports, and anything else you need. Don't wait: give your business an advantage and get one month free today.

FAQs on business contracts

Here are answers to some common questions about business contracts.

Is a contract enforceable without a signature?

No. An unsigned contract isn't enforceable because a signature proves that someone has agreed to the terms. However, the signature alone doesn't make the contract enforceable; it also must comply with applicable laws.

Can an email or text act as a business contract?

No, emails and texts don't serve as business contracts on their own. However, you may be able to use these forms of communication as evidence during a contract dispute. You can also use email to send and submit signed contracts.

Is a purchase order a contract?

Yes, a purchase order becomes a contract once the seller confirms the order or ships the goods. Buyers issue purchase orders specifying which products they want and when. When the seller agrees to fulfill the order, it becomes a binding agreement.

What's the difference between a master service agreement and a statement of work?

An MSA defines the overall service relationship between 2 parties, while an SOW defines the terms for a specific project. A business may use an MSA to set the ongoing relationship with a freelancer or service provider, then attach individual SOWs for each project.

How long should you keep business contracts?

It depends on the contract type, but generally 3 years to indefinitely. Keep copies of all active contracts, and for expired ones, check the statute of limitations for the contract's terms. Store contracts related to intellectual property indefinitely, and keep asset-related contracts as long as you have the asset.

A good rule of thumb: if you could potentially face a dispute related to that contract, keep it. The cost of an attorney reviewing your retention policy is typically a deductible business expense.