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One of the most costly legal mistakes we see small business owners make is operating without proper written agreements.

In many cases, businesses begin with informal arrangements between friends, family members, or long-standing business contacts. At the outset, everyone is optimistic, and verbal agreements or brief email exchanges may seem sufficient. However, problems often arise later when expectations differ, relationships change, or financial pressure increases.

Unfortunately, by the time a dispute arises, the absence of clear documentation can create significant legal and financial risk.

Why informal agreements create problems

A common misconception is that a verbal agreement is “just as good” as a written contract. While verbal agreements can sometimes be legally enforceable in New Zealand, they are often difficult and expensive to prove. Disputes frequently arise over key issues such as:

• Who owns the business or intellectual property;
• How profits are shared;
• What happens if one party leaves;
• Payment terms and scope of work;
• Responsibility for debts or liabilities; and
• Whether one party was acting as an employee, contractor, or shareholder.

Without clear written terms, resolving these disputes can become time-consuming, stressful, and costly.

The risks for growing businesses

As businesses grow, the risks increase. A business may take on employees, enter commercial leases, invest in branding, or develop valuable customer relationships — all without adequate legal protection in place.

Some of the most common issues include:

• No Shareholders’ Agreement: Where business owners operate through a company without a shareholders’ agreement, there is often no clear process for decision-making, dispute resolution, or what happens if an owner wants to exit the business. This can lead to deadlock situations that seriously affect the operation and value of the business.
• Poorly Drafted Client Contracts: Businesses sometimes rely on generic templates downloaded online or copied from overseas websites. These documents may not comply with New Zealand law or adequately protect the business. Important terms relating to payment, liability limitations, cancellations, and disputes are often missing or unclear.
• Unclear Contractor Arrangements: Another frequent issue is confusion between contractors and employees. Calling someone a “contractor” does not automatically make them one under New Zealand law. If the working relationship operates like employment in practice, businesses may face claims for holiday pay, leave entitlements, PAYE obligations, and unjustified dismissal.

Prevention is less expensive than litigation

Many legal disputes could be avoided with relatively straightforward upfront advice and properly prepared documentation.

For most small businesses, key legal documents should include:

• Terms of trade or service agreements;
• Shareholders’ agreements;
• Employment and contractor agreements;
• Privacy policies and website terms;
• Commercial lease reviews; and
• Succession or exit planning documents.

Having these documents prepared early can provide clarity, reduce misunderstandings, and protect the long-term value of the business.

Legal health check

Business owners often review their accounting and tax arrangements regularly but overlook legal risk until a problem arises. Conducting a periodic legal “health check” can help identify gaps before they become expensive disputes. As businesses evolve, legal documents and structures should evolve with them.

If you would like assistance reviewing your business agreements, structures, or legal processes, our team would be happy to help.