Starting a business is tough, but navigating business law—especially creating contracts—can feel even more daunting. We often hear from clients struggling with contracts because hiring a lawyer can be expensive. 

But here's the good news: while I'm not a lawyer, there are plenty of resources available that can help you understand and create your own legally binding contracts without breaking the bank. In this article, we’ll break down the key elements every contract needs and show you the tools to confidently handle your agreements.

Disclaimer: I am not a lawyer and the information in this article is for educational purposes only. If you need legal assistance, consult a licensed attorney.

Before we begin our dive into contracts, I have to disclose I used a specific AI tool called perplexity to not only help with writing but also source the California law with all links to chat and case law in the article below.

The first element of a contract that you need to know is the parties. A party is an individual or entity, like a business or organization, that is entering into the agreement. Typically, the best practice for this contract element is to use legal names when listing the parties and define who the contract is referring to at the beginning. For example, the parties should be listed as John Smith (an individual) and ABC Corporation (a company).

ABC Corp., a Corporation with its principal place of business at [CLIENT ADDRESS] (the "Client"), and John Smith, an individual with its principal place of business at [CONSULTANT ADDRESS] (the "Consultant").

While not a specific element written in the contract, capacity is a legal principle when entering into a contract. Capacity refers to the legal ability to enter into a contract. What does that mean?

It generally means that minors cannot enter into a contract if they are under the legal age of 18. This is part of California law (Cal. Civil Code § 1556). Another issue related to capacity is having an "unsound mind", as defined in Cal. Civil Code §1557 meaning “without understanding.” Minors may not fully understand the terms of a contract, just as people with limited mental capacity or temporary limited faculties (e.g., intoxication) may not.

Another issue that specifically relates to businesses is when a corporation is not in good standing. California law
(Cal. Rev. & Tax Code § 23301) explains that all “corporate powers, rights, and privileges” are suspended if a corporation or LLC fails to pay its taxes. This effectively nullifies a business’s ability to enter into contracts.

Another important concept in contracting is the legality of the product or service being agreed to. Contracts cannot enforce illegal agreements. This means that a contract cannot cover unlawful purposes under Cal. Civil § 1667 including but not limited to:

- Transactions for illegal goods or services (e.g., illegal drugs or gambling in prohibited areas)
- Agreements to conceal a crime, commit fraud, obstruct justice, or commit bribery
- Agreements that create illegal monopolies or unreasonably prevent competition
- Agreements that hire underage workers or violate minimum wage requirements

Let’s return to the elements found in the contract itself. The next element is the offer. The offer is a clear proposal detailing the goods or services to be provided. The offer should be as detailed as possible regarding the scope of work in the contract.

ENGAGEMENT OF SERVICES
The Client hereby engages the Consultant to perform the following services (the "Services"): 
- Service Item 1
- Service Item 2
- Service Item 3

Another essential element of a contract is consideration. Consideration is a “quid pro quo” or exchange—this for that. It’s typically expressed as a good or service exchanged for another good, service, or money. A basic example would be a landscaping service offering to mow a lawn weekly, and the homeowner agreeing to pay $50 per week. Here’s how it could be expressed in a contract:

COMPENSATION
Fees: In consideration for the Services, the Client shall pay the Consultant as follows: [SPECIFY FEE STRUCTURE - e.g., hourly rate, fixed fee, retainer, etc.]

A contract must include the terms that the parties are agreeing to. What terms should you include? That depends on the service your business offers or the conditions you plan for when drafting the contract.

This is usually referred to as the “fine print” or, to the everyday person, unintelligible legalese—but it doesn’t have to be. There are necessary terms a contract should include, such as: the goods or services to be rendered, the compensation amount and type, the term of service, when payment is due, and how the contract can be canceled.

However, there are other terms you may want to consider, depending on the nature of the service you are offering:

- Liability/Indemnification: The client’s liability if the consultant makes a mistake that harms someone else.
- Dispute Resolution: If a dispute arises while executing the contract, how does it get resolved?
- Governing Law: What state law will the contract follow if the parties are located in different states?
- Insurance Requirements: Clients may require a consultant to carry a certain level of insurance in the event something goes wrong. 

The final element in the contract is acceptance. Acceptance is the unambiguous agreement to all terms of the contract. Remember, the terms should be clear and specific, allowing both parties to understand and agree to them. Here’s an example of the agreement section:

ENTIRE AGREEMENT
This Agreement constitutes the entire understanding between the parties and supersedes all prior agreements, whether oral or written. Any amendments to this Agreement must be made in writing and signed by both parties.

Understanding the key elements of a legally binding contract is essential for protecting your business and avoiding costly mistakes. While drafting contracts may seem overwhelming, you don’t always need a lawyer to get it right. With the right tools and knowledge, you can navigate the basics confidently. 

A pro tip: AI-powered platforms can help break down complex legal language into plain English, making it easier to grasp what you're signing. By using these tools, you'll not only save money but also gain the peace of mind that your contracts are solid and enforceable.

Disclaimer: The use of generative AI as a substitution for legal advice is not recommended. If you need legal assistance, consult a licensed attorney.