New businesses are often unsure of which legal documents they need. The answer really does depend on the business structure (company, partnership, sole trader), what the business sells, and how it operates.
But while there isn't a definitive list of documents that you definitely need, there are documents that are more likely to be needed than others. In this article, we'll run through what we would look for.
Where there is a contractual relationship...
Start by looking at the relationships you and your business will have with each other and other parties. If you form a contract, there are benefits of having the terms in writing (verbal contracts are binding - its just difficult to prove what was agreed). You can assess whether a legally binding contract will be formed if the following are present:
- an offer
- clear acceptance of that offer
- intention to enter into a legally binding contract
- an exchange of value by both sides (not necessarily money and goods - services and goodwill are also valid)
...and a risk that is worth protecting
To be worth the cost and time of writing up the deal, there also needs to be something at stake - a downside risk to be mitigated or an advantage to be locked in. If the outcome is low value, or the probability of the outcome minimal, then you can probably conclude that you won't need a written document.
For example, if you run a newsagent, you wouldn't insist every customer signs a legal document before they buy a newspaper from you. But if you were selling your news agency business, you hopefully would record the sale agreement in writing - the value and risks are much, much greater.
But remember that the value and the risk to you might be more or less than the other side places on the outcomes, or than you place on them in the future.
You should also consider that some deals are regulated by statute law to give one side automatic protection in certain circumstances. If you or the other side have given legal rights, it is often best to record these in writing as evidence that you acknowledge them.
When documents are inexpensive, there are fewer reasons not to use them
In the past the only source of legal documents was a lawyer (unless your bookshelf contained a volume of legal precedents). Nowadays, legal document templates can be obtained inexpensively compared to hiring a solicitor to write one for you. Neither the value or risk of the deal has to be high to use a written document.
Just make sure you use a good template: written by someone who knows that area of law; that fits your deal as closely as possible before editing; that has been recently written or reviewed; and for your own legal jurisdiction. If the value or risk is high, and you are unsure, do take advice from a lawyer.
Be the one to choose the battlefield
Being the party to 'present' the draft agreement to the other side has a benefit that many people overlook or undervalue. That is that by being the party to draw the document, you have the opportunity to set the terms first, allowing you to frame the deal in such a way that gives you the advantage.
For example, the concert promoter is unlikely to include provision of kittens, puppies and bunnies in the dressing room if they were writing the contract, but if the pop star's agent draws it, the promoter is more likely to overlook the request and concentrate on getting the appearance fee down.
Whoever draws the agreement gets to choose what to negotiate on.
So what might you need as a start-up?
Documents that set out ownership and control of the business with respect to other founders
For partnerships, the document is a partnership agreement; for companies, you should use a shareholders' agreement.
These documents are private agreements between the founders about how decisions are made (usually at a strategic level), and how the value of the business to a particular owner can be preserved if one of the others later wants to sell or raise finance. You will also need articles of association (or articles of organisation if you are forming an LLC in the USA). This is a document that is available to the public to view, that sets out who makes day to day business decisions. A default version is commonly used for most companies, but we highly recommend that you use a template to write your own, more suitable ones. Read about why the model articles are likely to be unsuitable for your company. |
Documents that set out your relationship with the business
In a partnership, you are the business, so no further documents are required.
A company, however, has its own legal identity. In legal terminology, it is a "person". If you work for the company as well as own it, you will need an employment contract.
Directors' service agreements are employment contracts that contain additional clauses relevant to someone running to the business. If you are a non-executive director, you aren't employed and the services you provide should be set out in a service contract for a non-exec.
If you've lent the business money to start, then a business loan agreement should provide evidence you need to establish that repayments shouldn't be taxed as income.
Documents that set out terms for supply of goods and services by third parties
Exactly what goods and services your new business will need will depend on what it does. You'll need supply agreements of some sort, although these might have more specific names depending on what is supplied. For example, you may need manufacturing contracts to have your products designed and produced.
It is likely that the other party will want to present their agreement rather than take yours. If so, you can strengthen your position by using legal document templates to check whether the terms are unfavourable, unfair or incomplete. Of course, legal advice from a solicitor is a safer means of protecting your business, but not all start-ups have the budget to have every agreement reviewed, even with a lower cost service such as Net Lawman's Lawyer Assist service.
Documents that set out the agreements with other people who build the business with you
You'll probably bring in one or more people to help you start up. If they are not a third party contractor and they work for you only, they are likely to be an employee. If so (and it is sometimes difficult to know whether the relationship is one of employment), you must provide the employee with an employment contract.
For many start-ups, remunerating highly skilled staff with share options can compensate for lower than market average salaries. You might consider setting up an employee share scheme. However, be aware that paying in shares can be expensive for founders in the long run and can reduce or complicate control of the company later - perhaps when important decisions about expansion or sale are needed.
Documents that set out your terms of sale with your customers
Just like supplier contracts, agreements to supply goods or services have many names, depending on what good or service is being supplied.
If you have a website, you should link to an acceptable use policy and a privacy policy. The first should contain terms to help protect your intellectual property on your site, and the second is required to comply with law that requires you to tell visitors how data about them is collected, used and stored. The two policies are usually covered in a single document (or on a single page of your website).
If you trade on the Internet, then your acceptable use policy will probably be part of your terms and conditions on your website that also cover the formation and terms of your sales contract.
Don't forget to check existing commitments
If you are starting your business up part-time, while you continue to work full time, make sure that you check whether your employment agreement allows this.
If your new business is a hobby business that doesn't need a large time commitment, your employer may be willing to overlook any employment restrictions about working for another business. However, if it is clear that the new business might compete with your employer's, your employer may be more likely to enforce your employment terms, including those related to confidentiality and non-competition.
Summary
The answer to the question of what legal documents a start-up business needs is difficult to answer without knowledge of the business. But hopefully, this article will give you ideas as to how to identify what you might need.
If you need further help, do contact us and ask.