Understanding Common Contract Clauses for Business

This blog post is an overview of some common contract clauses that one should consider as part of any agreement between two small businesses. This information is only an overview. You should consult with an experienced attorney to assist you with your specific contract needs.

A basic agreement should contain the following elements at a minimum:

  • Identify the parties to the agreement
  • Detail the Goods/Service provided
  • Detail the compensation given for the Goods/Services and how it is to be paid
  • Dated signature from at least the party who is being presented with the agreement, preferably both parties though.

However, an effective agreement will require more things be considered and possibly addressed in an agreement. Here is a small list of some common clauses that may helpful in drafting an effective agreement. The text of each clause should be customized for your individual needs (There is no signal paragraph that works for all agreements).


An integration clause basically states that no matter what the two parties have discussed verbally or through other means prior to enacting this written agreement, the entirety of each party’s understanding of the agreement is within the agreement itself. By signing the agreement with such a clause, any prior considerations not mentioned in the agreement no longer exist: The document stands by itself as the whole agreement.

When contemplating whether to sign an agreement with such a clause, make sure that everything you are expecting to see in the agreement is there: an offline promise from the other party will not suffice. When drafting an agreement, this clause is helpful to make sure that the other party doesn’t try to hold you to something that you may have agreed to before the final agreement was reached. Promises are made in negotiations that may no longer be applicable when a final agreement is drafted. Also, it’s generally a good idea to state that the agreement may be amended if you are open to both parties agreeing to modification downstream. After the agreement is enacted, you are never obligated to accept suggested changes if you do not want them. However, you do have to the option to accept them if you’d like.


A limitation of liability clause will do as the name suggests: it will limit your exposure to liability. When agreements cannot be met, at least one of the parties is harmed by it. How much harm they may endure is not always limited to what was discussed in the agreement. There are numerous types of damages that the harmed party may pursue (direct, indirect, consequential, special, etc.). Defining each type of damage is complex and outside the scope of this pamphlet, so let me give you a simple example:

Supplier is delayed in its delivery to Buyer of 1000 widgets at $5/widget for a total cost of $5000. These components are critical to the Buyer in building their device for another company that will bring the Buyer $100,000 in revenue. The Buyer’s agreement with that company includes having to deliver the completed devices by a certain date. When the Supplier cannot meet the delivery date, the Buyer looks for another vendor who can, but the Buyer can’t find replacement widgets in time. As a result, the Buyer cannot deliver the devices per the terms of their agreement with the company and the Buyer loses out on $100,000 of revenue. The $100,000 is an example of consequential damages. If the Supplier did not have a limitation of liability clause on their agreement with the Buyer that limits their exposure to consequential damages, the Supplier may end up paying far more in damages than they ever would have received on the original agreement.

When entering into an agreement, think about all of the possible ways that a breach of this agreement could harm you. These need to be considered in either drafting the agreement or agreeing whether to sign the other party’s agreement. Drawing the line on how to share that risk between each party is never an easy task. If you were in the position of the Supplier, you’d appreciate knowing what you’re getting into beforehand and not want to be responsible for anything other than the $5000 agreement you committed to. If you were in the position of the Buyer, you’d want assurances that the Supplier could deliver as promised, so as not to cost you $100,000.


It is common for people to confuse these three clauses. However, each clause is very different from the others. Here’s a brief definition of each one:

Non-solicitation clause – restricts individuals and organizations from soliciting employees, customers, or business opportunities from another company or organization for a period of time. When sending your employees onsite to service another business, it’s probably best to have such a clause in place beforehand.

Non-competition clause – restricts individuals and organizations from providing services or engaging in businesses in certain markets and geographies for a period of time. The clause protects businesses from the potential that knowledge gained by an employee or business partner will be used in the future to compete against the business.

Non-disclosure clause – Commonly called a “confidentiality” clause, this clause acknowledges that the parties may have to share some information that may be confidential and restricts the other party in what they can do with that information. It may also address any damages associated with a breach of confidentiality. Imagine a disgruntled Coca Cola employee publicly disclosing the “secret formula.” The damages to the Coca Cola would be significant.

Sometimes, these clauses are added to an agreement as amendments after the agreement has been enacted, or they are enacted as separate agreements altogether. Since these clauses restrict the other party in some additional way, some form of compensation must be given in order to get the restricted party to accept these clauses when they were not part of the original agreement. If they are part of the original agreement, no additional compensation is necessary.


Litigation can be very expensive, and for many business-to-business agreements, the cost of litigation could be far more than the original agreement was worth. Providing for alternative dispute resolution (ADR) processes can be an affordable way to resolve any disputes. A dispute resolution clause often states that arbitration or mediation will be the avenue for resolving disputes.

Arbitration is similar to litigation in that the arbitration panel (often more than 1 person) will listen to both sides and make a ruling one way or the other. Mediation is generally conducted by a single mediator who does not judge the matter, but rather looks for ways at facilitating a compromised resolution to the situation. Sometimes, mediation is used first as a non-binding process, and if no resolution can be agreed upon through mediation, then arbitration is used as the binding process to resolve the dispute.


Often a business is sharing its intellectual property (copyrights, trademarks, trade secrets, or patents) with another company when there is a contractual agreement. How each party handles the other party’s intellectual property should be addressed in any agreement between them. A simple example may be hiring a web developer to create your website. You may provide them your trademarked logo and some copyrighted content, but you should make it clear that you own this material, not them (got that, Facebook). You may give them a license to use your material for the very specific purposes of the agreement, but nothing more. The web developer may have good reason to include your logo on their web page listing their past and current clients. This use of intellectual property should be negotiated up front and added to the agreement or as an addendum later, but the parameters of that use should be explicit.


This clause allows a party to suspend or terminate the performance of its obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Typically, those circumstances are considered “acts of God,” but you may negotiate just about anything for an event triggering this clause (i.e., war, riots, strikes or lockouts, etc.). A force majeure clause should be explicit by defining the events, what happens when the event occurs, which party can suspend or terminate performance, and what happens if the even continues for a longer than anticipated time. For example, you may foresee a strike and suspend performance for 6 months until the strike has settled, but what if the strike lasts longer than 6 months?


A severability clause ensures that if a court or arbitrator strikes down a statement or clause in the agreement, the remainder of the agreement is still enforceable.


These are all very similar clauses. It basically states that the agreement will be construed under the laws of a certain state, jurisdiction, or venue (i.e., state is Minnesota, jurisdiction is federal court, and venue is Hennepin County). This clause often includes a statement that the prevailing party shall be awarded all reasonable attorney fees from the non-prevailing party. Although the likelihood of a court making such an award is low, you cannot get this award unless you have asked for it, so this text is often added when drafting an agreement.

There are many factors to consider when drafting or consenting to an agreement. It is important to consult with an experienced attorney to assist you before enacting any agreement.

Which Business Entity is Right for You?

When you are starting a business, one of the first things you need to determine is how to best structure your business by choosing the proper business entity (C-corp, S-corp, LLC, etc.). There are numerous options out there and each has its pros and cons. You, your attorney, and your accountant should discuss which business entity is best for you.

Here is a very brief overview of some common business entities and their characteristics:


General Partnership: Two or more people going into a for-profit business together will generally be considered a general partnership unless they specifically choose otherwise. General partnerships are not separate entities for tax or state legal purposes, so the income from the partnership “passes through” to the partners as personal income. The general partners are fully liable for the full amount of their partnership debts even when those debts exceed their investment in the partnership, exposing their personal property to cover business debts.

Sole Proprietor: When only one person starts a for-profit business, they will be considered a sole proprietor unless they specifically choose otherwise. Sole proprietorships are not separate entities for tax or state legal purposes, so the income from the business “passes through” to sole proprietor as personal income. Like a general partnership, a sole proprietor is fully liable for the full amount of their business debts even when those debts exceed their investment in the business, exposing their personal property to cover business debts.


C-corporation: In order to become a C-corp, you must file Articles of Incorporation with the state. Additional administrative work will be necessary to maintain a corporation. Namely, bylaws should be drafted, minutes of the board of directors and shareholders’ meetings should be kept, and a shareholder agreement is strongly recommended to define the relative rights and responsibilities of each shareholder class. A C-corp is treated as a separate entity for federal and state tax purposes, so the corporation is taxed on the corporate income and when dividends are paid out to the shareholders, this amount is taxed as personal income to the shareholders. The shareholders are only liable for the corporation’s debts to the extent of their investment in the corporation.

S-corporation: In order to become an S-corp, you must file Articles of Incorporation with the state. Additional administrative work will be necessary to maintain a corporation. Namely, bylaws should be drafted, minutes of the board of directors and shareholders’ meetings should be kept, and a shareholder agreement is strongly recommended to define the relative rights and responsibilities of each shareholder class. Unlike a C-corp, an S-corp is not treated as a separate entity for federal and state tax purposes, so the corporation is not taxed on the corporate income. The income of the S-corp is taxed as personal income to the shareholders. Although an S-corp generally does not pay any tax, it still must file an annual information tax return with the IRS and report each shareholder’s pro rata share of profits and losses on a Schedule K-1. The shareholders are only liable for the corporation’s debts to the extent of their investment in the corporation.

Limited Liability Corporation (LLC): In order to become an LLC, you must file Articles of Organization with the state. If there is more than one member of the LLC, it is strongly recommended that you have a membership and operating agreement in place to define the relative rights and responsibilities of each member. With an LLC you have the option to be treated as a separate entity for federal and state tax purposes or not. In MN, the default choice is to be treated as a corporation, in which case you will be taxed like a C-corp. However, in the Articles of Organization you can elect to be treated as a partnership with your income allocations defined in your membership and operating agreement. The shareholders are only liable for the LLC’s debts to the extent of their investment in the corporation.

Limited Partnership: An Limited Partnership (LP) is formed when the partnership files a Certificate of Limited Partnership with the state. An LP has both general partners and limited partners. The general partners have the authority to conduct the regular operations of the business. Limited partnerships are not separate entities for tax or state legal purposes, so the income from the partnership “passes through” to the partners as personal income per their allocable share of the business. The general partners are fully liable for the full amount of LP’s debts even when those debts exceed their investment in the partnership, exposing their personal property to cover business debts. The limited partners are only liable for the amount equal to their share of the investment into the LP, unless there is some other contractual obligation to take on more liability.

There are many more business entities that blend aspects from all the entities above. Determining which entity is right for you should be done with the help of an attorney and/or an accountant. Please contact me if you need help setting up your new business or would just like to talk through your options.

When Should You Update Your Estate Plan?

My clients often ask me when they should update their estate plan. There are numerous life events that may require us to look at the plan and see if anything needs to be revised. Here is a short list of such events:

  • Serious or life threatening illness
  • Illness or death of a spouse
  • Contemplation of marriage or divorce (special attention to 2nd marriages)
  • Marriage or divorce of a child or grandchild or business partner
  • Birth, death or illness of parent, sibling, child or grandchild, or business partner
  • Disability of parent, sibling, child, grandchild, or a dependent or if a dependent  may require special considerations or a special needs trust
  • Significant change in the types or values of the assets you own
  • New business venture
  • Business has grown (or declined) significantly in the last few years
  • Change in business partners
  • Within 5 years of retirement
  • Within 5 years on contemplating sale of business
  • Job loss or business litigation
  • Changes to the federal or state estate tax code that impact your plan (Call me if you have questions about any such changes)

Key Points Regarding the Sale of Probate Property

  • Must be a Personal Representative’s (PR) deed, not a Warranty deed.
  • Because the PR may have limited knowledge of the property, there should be a specific disclaimer to this effect and an “AS IS” provision included in the purchase agreement, no Statement of Condition should be signed, and the statutory disclosure should be properly waived as allowed under M.S. 513.60. However, the PR is obligated to disclose known conditions affecting the buyer’s use and enjoyment of the property.
  • The PR must be careful in warranting the status of the property taxes with respect to homestead. Depending upon the length of time the decedent has been dead and the occupancy of the homestead prior to death, the taxes may be classified as non-homestead.
  • County probate court may require “sale papers” be issued by the court before the sale can proceed.
    • The PR deed needs to be signed prior to, or on the certification date of the sale papers. This requires the PR to sign the deed prior to closing.
    • The county examiner of titles should be contacted before closing to determine what documents are needed and how long the process will take.
  • Seller’s attorney should review all closing documents well before closing.

Checklist for Descendants When a Family Member Passes Away

  • Order certified copies of the Death Certificate. You will need them to transfer bank and other financial accounts, as well as to send to insurers and others who may be holding assets or benefits payable to the estate.
  • Notify Social Security of the death. If you are a spouse, or if you have minor children at home, check to see if any of you are eligible for benefits.
  • If the deceased was a member of the military, notify the Veterans Benefits Administration of the death and check for possible death benefits.
  • Notify all insurance companies and pension/retirement companies.
  • Inform any other federal/state/county entitlement or welfare programs.
  • Have all mail forwarded to the Personal Representative, if necessary.
  • Notify the employer and all former employers of deceased; determine possible pension benefits from each.
  • Notify banks and other institutions where the deceased had loans or other accounts.
  • Cancel phone, cell phone, cable/satellite, internet, or any other unnecessary monthly expenses. Do not cancel utilities required to keep a home operational (heat/electric/water), but do set the thermostat to a more economical level.
  • If a credit card or other charge account of the deceased was in the names of both of you, you are liable for the bills. Remove the deceased’s name from the account if you wish to continue using it; close the account if you don’t want to use it. If the account was in the deceased’s name only, close the account. You may not be responsible for these bills. In Minnesota, a spouse is responsible only for the “family necessary” bills, including medical bills, on the account of the deceased spouse.
  • If there was any jointly owned real estate, file an Affidavit of Identity and Survivorship with the County Recorder, along with a certified copy of the Death Certificate, to remove the deceased’s name from that real estate.
  • If necessary, file health care claims to pay expenses of the last illness.
  • If the deceased owned $75,000 or more worth of property in his or her name alone, you must check with a probate attorney. If the deceased left a Will, the personal representative named in the Will can do this.
  • Consider putting your telephone listing in your name alone or make it a non-published listing.
  • Check for double indemnities. If the deceased died in an accidental death, his or her estate might be eligible to collect above and beyond the standard life insurance benefit if the policy carried an accidental death clause. The deceased also may have carried additional accidental insurance if he or she purchased airline tickets on a major credit card or was a member of an auto or travel club.
  • Change car or recreational vehicle titles by contacting the motor vehicles registration office.
  • Don’t feel like you have to do all of this yourself. Friends and family are usually more than willing to pitch in during times of need. Your attorney can help you with the process too.

Five Common Mistakes in Estate Planning

The estate planning process can be difficult to navigate on your own. The process involves the coordination of the various assets of an individual into a cohesive, comprehensive plan to provide for family members. It requires you to analyze all assets whether held individually, jointly, and those that pass by beneficiary designations to come up with an effective overall and integrated strategy to deal with these assets. Often, assets are incorrectly titled and need to be retitled and beneficiary designations for life insurance and retirement plans need to be changed to obtain better results. An estate planning attorney should be addressing all of these issues with each client.

The following are some of the common mistakes in estate planning:


The failure to draft a will results in the following problems:

  • State determines who gets your property. The rules of intestate succession of the state of residence of the decedent will determine who receives your property.
  • State determines the Personal Representative of your estate (executor/executrix). Without a will, you have given up the right to name the person you want to administer your estate.
  • State will determine who will be the guardian of your minor children. A will allows you to name a guardian for your minor children.
  • Increased risk of estate litigation. Having a well drafted will can help avoid costly, time consuming, and often bitter litigation between family members. This is especially the case in second marriages.

It is never a good idea to delay getting a will in place because you are waiting for “the right time.” Wills can be easily changed, so it’s better to get one in place right away and modify it when you need to.


While holding assets in joint tenancy (with rights of survivorship) can be an effective estate planning tool, there are some serious drawbacks to this approach:

  • Holding property jointly does not completely avoid probate for married couples. It only delays it until the second spouse dies.
  • In a second marriage, since the property transfers to the spouse as sole owner, your second spouse may not provide for your children from your first marriage.
  • Owning too many assets jointly will not allow the married couple to utilize each of their unified credits for estate taxes.


The federal estate tax laws are constantly changing. Although it may seem like a good idea to leave everything to your spouse, that may not be wise from a tax perspective. For 2020 there is a federal exemption of $11.58 million for any decedent, but in Minnesota, there is a Minnesota Estate Tax exemption of $3,000,000, so any estate over that amount may be subject to the Minnesota Estate Tax.

For example:  Husband has an estate of $3 million in his name alone and wife owns $1 million in her name alone. Husband dies in 2020 with a will that gives everything to his spouse. He pays no federal or state estate taxes because his bequest to his wife is at or below both the Minnesota and federal exemption rules. If the wife dies later in 2020, with an estate now worth $4 million when the exemption in Minnesota is $3 million, the wife’s estate has a Minnesota estate tax issue: The excess $1 million is taxable. Her Minnesota estate tax rate may be anywhere between 13-16%, which could trigger an estate tax debt of $130,000 to $160,000. This tax debt is due to the state within 9 months of death regardless of whether the estate has yet been settled. This means it may be an out of pocket expense for the heirs until the estate can be settled and the heirs can be reimbursed. That can be an immense financial burden on her heirs. Had the couple utilized a qualified trust plan in their estate plan, they could have avoided or minimized their tax exposure. Minimally, they could have planned for this tax and provided certain assets to be immediately available to the heirs upon the wife’s death in order to pay this tax. Lastly, a simple life insurance policy with a death benefit at or above the estate tax amount that is due can be an easy way of providing your heirs with the money they will need to pay the estate tax debt. That brings me to my next common mistake.


Improperly named beneficiaries on a life insurance policy is a common mistake. Where a second marriage is involved and the new spouse is named beneficiary, these proceeds may never end up benefiting your children from your first marriage. When a husband and wife die simultaneously and small children are named as contingent beneficiaries of the life insurance proceeds, a court will have to appoint someone to administer the policy proceeds, triggering a costly and lengthy conservatorship. The person the court appoints may not be the person you and your spouse would have chosen. Even if you have a trust in place in to protect your children and intend to use the life insurance proceeds to fund the trust, unless the beneficiary designations are completed properly, these proceeds will never go into the trust as you had intended.

From an estate tax perspective, people are surprised that life insurance owned by an individual is included in their taxable estate at death. This may result in estate taxes being paid on insurance proceeds at death. To avoid estate taxes, often times an irrevocable life insurance trust is utilized to own such policies to remove them from the taxable estate.


All good planning can be undone by poor execution. If you have created a trust to protect your family, you must move the proper assets into the trust and/or update your beneficiary designations on your IRA’s and life insurance, etc. to make sure that the assets will transfer to the trust as intended. Otherwise, your assets will be transferred as if you had no plan at all. The trust is merely an empty bucket until you put something in it. If the assets are not going in the trust until after you die, then the beneficiary settings on those assets are critical in order for your trust to work properly.

Without proper planning, there are numerous other mistakes that can happen with your estate plan. Your estate plan must be tailored to your family’s needs. Sound estate planning brings together a person’s diverse assets to fit into an integrated and comprehensive estate plan that may include wills, trusts and other documents. Do not hesitate to call me to help you develop your estate plan.