“Brilliance at the basics.” I could have fully funded three years worth of a retirement plan by depositing a nickel each time I heard a Marine Corps leader (from corporals to colonels) say that phrase. The concept seems simple enough. If someone can accomplish the elementary tasks correctly and consistently, then they will achieve. Martial arts instructors teach the same lesson by instructing students to master a single kick or punch by executing it 10,000+ times in practice rather than fewer times than the infinite number of punch/kick variations that seem to exist on YouTube. Regardless of the sagacity of this idea, most small business owners ignore these four documents that are the true foundation of their legal existence.
Getting a business off the ground is an exciting time. You are one step closer to pursuing your dreams and your passion, you are your own boss (big plus), and you are on your way to work for your financial freedom. What seems like a giant leap of faith into the entrepreneurial world, is just the beginning on focusing on countless details to improve your business. Unbridled confidence is nice to see on the big screen, but it is important to remove the rose-colored glasses and dig deep into some of the unknowns of owning a business.
Things will go wrong, this is the inevitable truth in the entrepreneurship world. What you don’t know might hurt you. Also, getting non-lawyer legal advice from the Internet might be hazardous to your wealth. For these reasons, I advocate for building a solid foundation before doing anything else. After all, you won’t get cracks in the wall with a solid home foundation. So, before you do anything else, avoid the most common mistakes that most business owners make and establish a solid legal foundation to protect your company from unforeseen situations and circumstances.
The most effective and efficient way to provide this legal shield is by putting key legal agreements in place.
We’ve outlined the core four legal documents that a company’s founders should put into place as soon as their business “idea” evolves into a reality.
THE CORE FOUR
1. Business Entity Agreements
When starting a business, it’s crucial to select the proper business entity structure in order to maximize tax savings and minimize personal liability. Some of the most popular entity structures include sole proprietorships, general and limited partnerships, C corporations, S corporations and limited liability companies (LLC or even an LLC taxed as an S-Corporation).
Once you choose the most advantageous structure, you should—and are sometimes legally required to—draft the proper entity agreements to lay the groundwork for how the business will be governed and operated. Different entity structures require different types of agreements. For example, C corporations require corporate bylaws, while LLCs use an operating agreement.
These agreements are legal documents that define each shareholder or member’s rights and responsibilities, along with establishing the provisions for running the company, both on a daily basis and in the event one person dies or becomes incapacitated—as well as if the company dissolves. Moreover, these agreements also outline how business communications will be handled, along with how disputes will be resolved.
You may also have a shareholder’s agreement or a partnership agreement, if there are multiple owners of the business, where you want to further define the relationship among the owners.
To avoid any conflicts, these agreements should be created and signed by all parties as soon as the company is launched. As your trusted advisor, we can advise you on the entity structure that’s best for your business as well as draft entity agreements to ensure maximum protection for you and your business.
2. Intellectual Property Assignment Agreements
When launching a new business, you should make sure that all of the intellectual property (IP) brought into the company by its founders before startup, as well as any IP that’s subsequently created by owners and/or employees once the business is operational, is owned by the company, not the individuals. Transfer of IP ownership from individual to the company is done using intellectual property assignment agreements.
These agreements “assign” the company with complete ownership rights to all intellectual property assets—patents, trademarks, and copyrights—that are used to conduct business. Such agreements are typically required by most venture capital investors, and they also help protect the company from competitors and/or trolls looking to steal your ideas or products.
As your trusted advisor, we can help you draft IP assignment agreements, so you can retain total control of all IP assets that your business relies on to operate and grow.
3. Employee Contracts and Offer Letters
Unless you plan on running the company all by yourself, you should create comprehensive employment contracts and offer letters before hiring new employees. These agreements clearly lay out the terms and conditions of employment, so your team will understand exactly what’s expected from them and what they should expect from you.
Employees should be required to sign these documents, providing evidence that both parties are aware of the employment relationship’s scope and conditions. Employment contracts should also include any non-disclosure agreements (NDA) and/or non-compete agreements you require to ensure your company’s trade secrets and/or proprietary systems and products don’t fall into the hands of competitors.
4. Sales and Service Contracts
Whether your company sells products, provides professional services, or a bit of both, you should have legal agreements in place to clearly lay out the rights and responsibilities of both the business and its customers. Sales contracts typically lay out the key elements—price, payment and credit terms, tax responsibilities, warranties, and liability limitations—for the sale of products and other goods.
Service contracts, on the other hand, explain the fees, terms, and conditions under which your company provides services, along with spelling out the responsibilities and liabilities of each party. Ideally, service contracts should offer your company maximum flexibility for delivering the services, while also limiting its liability. Be sure the contract not only covers the traditional terms listed above, but also any unforeseen events or circumstances that may occur.
Contracts are put in place to protect you and limit your liability. Understanding your business needs and using legal leverage is key to making the best use of your documents. Buying document “templates” online won’t identify your specific business needs and you won’t be able to use the law as leverage. Wouldn’t you rather peace of mind than a piece of paper?
If you’re starting a new business or have already started one but still need to draft the necessary legal agreements, contact us your trusted advisor. We want you to be a hero to your business by helping you protect your business interests and limit your liability.