You would be surprised how few businesses actually get the most fundamental legal documents in place before starting up. However, having the right documents in place when you start is essential to your business's success.
What are the most important legal documents needed?
There are nine fundamental legal documents you need to have in place before going into business. This article discusses each of these documents separately and explains why they are important to your business's success.
Almost every business needs a little funding to get started. A business plan can help you attract the investment you need and is usually a requirement when you seek finance.
When you are creating your business plan, you should be sure of three things:
A business plan, is a structured way to present this information and should cover everything a potential investor would want to know, chiefly:
In short, your business plan is a clear statement of why you need the money, how it will be spent and how it will be earned back. This way, your potential investors can swiftly make an informed decision whether or not to invest in your business.
Starting a business is often easier when you do it with a partner with whom you can share responsibilities and split the startup costs. On the other hand, there are many issues that can arise from a business partnership, whether it is between two individuals or more.
Therefore, everyone involved needs to understand the terms of your partnership and agree to them ahead of time. Otherwise, legal disputes may arise, which are always a drain on business resources and from which most business startups will not recover.
By addressing the following issues, a partnership agreement will allow you to clearly define the terms of your partnership and avoid costly legal problems in the future:
While there are no formal requirements for entering into a partnership agreement, certain steps must be taken to comply with registration, filing, and tax requirements. Check with your local Secretary of State’s office for more information.
Setting up your business as a limited liability company (LLC) offers some advantages that are not available to sole proprietors or partnerships. These advantages relate mostly to limiting personal liability as much as possible. However, there are also significant cash flow and tax advantages, which make operating your business as an LLC even more attractive.
You can form an LLC easily enough. Just go to your local Secretary of State’s website and file your articles of organization, which are usually pretty straightforward and easy to do. However, if your LLC has two or more owners, you will want to create a limited liability company operating agreement to define how your LLC will operate and how it should be taxed.
State laws (and the IRS) have established a variety of standard rules and regulations by which you must operate your LLC. With an operating agreement, you can adjust or customize some of these rules and regulations and set a standard for the way you want your business to operate.
Your operating agreement is critically important to your LLC as it defines, amongst other things:
If you file your articles of organization with the state, but do not create an operating agreement, you may be open to financial liability and civil penalties if someone sues you or you are audited by the IRS.
In today's competing business environment, small businesses and startups cannot afford to have any problems. One thing that often causes a tremendous amount of problems for a business is the lack of a buy/sell agreement.
A buy/sell agreement is an agreement between a minimum of two parties, such as a business and its owners (and their heirs) and is useful in the following situations:
Business relationships change all the time. You or your partner may choose to leave the business, or a new partner can be brought on board. A buy/sell agreement sets the arrangements up in advance and makes the transition easier on everyone involved.
At some point, you or your partner may want to retire, or one of you may pass away suddenly. If you have an heir, you may want to pass your business on to them. A buy/sell agreement can help you plan ahead and determine:
It will also determine ahead of time the price for which a share of the business can be sold, thereby reducing stress and headaches for all parties.
Situations in your personal life can affect your business as well. You or a partner can get divorced or declare personal bankruptcy. A buy/sell agreement can predetermine the business arrangements should one of these situations arise and can protect everyone from the legal complications involved.
If you or your partner becomes ill or gets injured, you may no longer be able to work or contribute to the business. Creating a mechanism by which the remaining partners can buy you out quickly can be beneficial. Often, this is facilitated by taking out an insurance policy on each partner in your business. This insurance will cover the financial cost of buying back that partner’s share of the business if and when that person becomes critically ill or passes away.
Anytime you have an employee or someone who is doing work for your business, you have an employment contract. It may be oral or implied, but there is a contract.
However, in the absence of a written agreement, the terms of the employment are subject to miscommunication and misunderstanding.
A written employment agreement can clarify what is expected of both employee and employer and help to avoid future conflict by addressing important aspects of the employment arrangement such as:
Other advantages of having a written employment agreement are as follows:
Regardless of how large or small, running your business without policies and guidelines will be challenging. Having a well-written employee handbook can be extremely beneficial in communicating to your employees their rights and obligations as employees of your company.
Furthermore, an employee handbook can lay out your workplace dos and don'ts and help to establish the relationship between you and your employees.
Business owners are also required to inform their employees of certain rights and obligations as mandated by state and federal regulations. Having these regulations communicated through your employee handbook can help you meet these obligations and avoid civil fees and penalties.
A well-written employee handbook should cover topics related to the following issues:
Your employee handbook will allow you to avoid misunderstandings between you and your employees that can potentially lead to lawsuits. For this reason alone, you should make an employee handbook a business priority and not wait until you are sued to create one.
Every business needs to be concerned with protecting its competitive advantage. This means ensuring that whatever proprietary information you share with your employees or business partners will not become public.
A non-disclosure agreement (also known as a confidentiality agreement) can help you protect your business practices and intellectual property, such as trade secrets, from getting into the hands of your competitors.
Non-disclosure agreements prohibit an employee or business partner from disclosing confidential and proprietary information belonging to the company.
Before sharing any confidential information with your employees, you should put your confidentiality expectations in writing so that your employees understand both the duties and privileges of having access to this knowledge.
If an employee breaches your non-disclosure/confidentiality agreement, they may be sued for damages to compensate your business for any lost profits.
These days, more businesses are requiring non-compete agreements and other restrictive covenants for both their existing employees and new hires. In competitive industries, these agreements, when well drafted, can help a business protect its proprietary and confidential information.
Non-compete agreements typically restrict an employee's ability to work for a competing business within a specified geographic area, for a specified length of time.
For example, a person who is bound by a non-compete agreement and quits their job in Dallas might be restricted from working for a competing firm in Texas for up to two or three years.
The rules governing non-compete agreements vary from state to state, but most state courts will enforce a non-compete agreement if it is valid and reasonable.
When determining if an agreement is valid, one of the factors the court will look for is the existence of a bargain for promise or performance.
This bargain for promise or performance is referred to as consideration, and the general rule, with respect to new hires, is that consideration may exist if an employee enters into a non-compete agreement when he or she is initially hired. In other words, the employer's promise to compensate the employee for his or her work may be sufficient consideration.
In contrast, requiring an existing employee to enter into a non-compete agreement may require additional consideration, such as an increase in wages, a promotion, or a bonus. Courts do not find continued at-will employment to be sufficient consideration.
A non-compete agreement signed by an existing employee may be unenforceable where there is no extra benefit to the employee for signing the agreement.
To determine if such restrictions are reasonable, three fundamental questions must be asked:
How and whether you should use a non-compete agreement are not simple questions. If you are considering the use of a non-compete agreement, consult with an attorney who has knowledge of employment law in your area.
Terms of service and privacy policies are two of the most commonly prepared legal documents today. They govern the terms and conditions for using a business's website or mobile application.
Whether your business is large or small, a general partnership, a limited company, or a corporation, having the right legal documents in place when you start can be a huge advantage. The right legal documents can help you avoid many of the problems that derail new businesses before they get a foothold on the market. Furthermore, they will allow you to comply with federal and state regulations, and avoid misunderstandings and disputes that can drain your business of its resources and lead to expensive lawsuits.
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