Legal documents are the last thing you want to work on when starting a small business. Time is money and there never is enough of it. However, if you don’t prepare the proper paperwork, you leave yourself vulnerable to conflicts and lawsuits that could end your business. Make sure your hard work doesn’t go to waste and draw up these six legal documents.
1. Owners’ Agreement
A clear owners’ agreement will minimize conflict among business partners. This fosters trust, keeps co-owners working toward the same goals, and increases the potential to raise venture capital.
It should cover three crucial components:
- Roles and responsibilities. Establish distinct boundaries when it comes to reporting structure and decision making. If it’s not clear who has the authority to make decisions, you will lose time and money in the confusion.
- Equity ownership and vesting. One of the most difficult conversations to have is to determine how equity will be split among partners. However, if you don’t have that discussion on day one, you might find yourself waging a costly legal battle about ownership of the company. Yahmaie also recommends setting aside at least a 10 percent option pool for future rank and file hires. Make sure to include a buy-sell agreement as well.
- Intellectual property (IP) assignment. Make sure whatever IP you are developing is owned by the business and not the owners. Without this agreement in writing, you could find that your business doesn’t have the rights to use the product or platform you created.
2. Independent Contractor Agreement
When starting a small business, outsourcing work to independent contractors is a great solution for cost-effective help. However, without an independent contractor agreement that clearly spells out the work relationship, the government could force you to pay payroll taxes or workers’ compensation.
Nellie Akalp, CEO of CorpNet, says to “make it clear that you intend these workers to be independent contractors who are responsible for their own taxes.” The less you stipulate over how work will get done, giving contractors control over when and where they work, the less likely you will be found in violation of employment regulations.
3. Vendor/Supplier Agreement
A vendor or supplier agreement ensures that every time you make a sale, you can quickly meet customer demand. It should lay out all the terms and conditions under which your vendors and suppliers will deliver needed merchandise to your company. Chas Rampenthal, general counsel of LegalZoom, stresses to carefully draft terms like indemnification, exclusivity and limitations of liability so that they make legal and business sense.
4. Non-disclosure/Confidentiality Agreement
Before any contractors, employees, or other business partners get a behind-the-scenes look at your business operations, they should sign a non-disclosure or confidentiality agreement. Without one, information like your customer lists, financial records, or pricing plans could become public. Clearly state:
- What constitutes confidential information
- How confidential information should be handled
- Who owns that information (the company)
- The time period that the information will be disclosed
- The time period confidentiality is to be maintained
5. Company Bylaws for Corporations
Most states require that corporations draft company bylaws. However, even if your state doesn’t require them, it’s still a good idea to write them up, Akalp says. Company bylaws define how your business will structure and govern itself. They will give your business clear guidance on how to settle disputes, select leadership, and determine the rights and powers of shareholders.
6. Meeting Minutes
Another set of legal documents that most states mandate businesses keep are meeting minutes. For all major meetings, you should keep an account of everything that was said, done and agreed upon. Meeting minutes are the official record used to settle any disputes over what happened during a past meeting. Often, as far as the law is concerned, if an action is not in the meeting minutes, it never happened. They should include:
- The type of meeting
- The time and place of meeting
- All those in attendance
- All actions taken
- All votes and vote tallies
While it’s tedious work to draft all these legal documents, they are the foundation to any successful business. You might think that you’ll always get along with your partners, vendors and employees, but conflicts inevitably arise. Protecting yourself and your business early on makes it easier to weather any storms.
Need help drafting any of these legal documents? Contact an UpCounsel contracts and business agreements attorney to execute your agreement.
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