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6 documents your business should not ignore [legal advice required]


Legal documents your business needs before selling to your customers
Photo by Charles Deluvio on Unsplash

Business owner with classic entrepreneurial traits can get excited about projects and sometimes avoidable mistakes can crop up, which can affect small businesses. Some of the mistakes can be resolved by some work with professionals, but other mistakes made at the start of the business can cause long-term problems that cannot be resolved. Some of these issues can be serious and might affect your entire business.


Take a look through some of the details within this post to give you a better idea of the entrepreneurial mistakes and unnecessary missteps. The easiest way to remove potential problems is to focus on the documentation of your business.


The following does not constitute legal advice. You should always seek legal advice before starting a business and selling products or services to your customers.


Company founding documents


It might not sound as exciting as working on your product, refining your service or marketing to customers. However, the correct startup legal documentation is vital to ensure your business will be around for the long-term.


  1. Memorandum of association (Articles of incorporation or similar)

  2. Articles of association (i.e. Bylaws and internal rules)

  3. Founder, co-founder and shareholder agreements

  4. Intellectual Property, Trademark and other rights

  5. Employee contracts and offer letters

  6. Non-disclosure agreements


1. Memorandum of association (Articles of incorporation or similar)


Don’t worry if you get carried away with your small business, startup idea or side-hustle. When entrepreneurs see a gap in the market or can visualise their business it’s almost certain you would jump in with both feet.


However, it makes more sense to put the correct foundations in place. The first step is to create a company. The memorandum of association (if you’re in the UK), articles of incorporation (if you’re in the US) or other similar document puts a stake in the ground for company formation.


Much of the documentation will be standard or can be downloaded from legal websites, but this is where you submit your documentation and your documents become an independent entity that is treated differently in terms of several areas, but the most important are legal, tax and money.


This is often missed by entrepreneurs who just want to get started, but it’s the stage that offers you financial and legal protection from many business challenges. A company is a stand alone legal entity and separates you from your business. If you’re providing advice, service or products to other people or other businesses, it’s essential you create a company, decide how much share the company between the founders before placing business activities within that company.


Problems and mistakes happen all the time, but your personal assets could be at risk unless you have separated your personal activities from your business activities. Unfortunately, ignorance is not a realistic way to avoid things like business taxes and legal worries.


​2. Articles of association (i.e. Bylaws and internal rules)


If you have forgotten to set up a company, it’s highly unlikely you’ve formally considered what would happen in the event of disputes or other complications that happen within businesses on a daily basis.


That’s why all of the companies big and small will have internal rules and directions to decide the best way to appoint key employees or how their voting rights are decided for the different shareholders.


If you’re looking to apply for a business loan you will need the Bylaws to describe how the loan will be handled and how your business can take on the debt. Having this information in place will ensure the bank or other legal entity offering the debt knows your business is real, exists on the company register and you have the appropriate governance in place to take on the debt.


​3. Founder, co-founder and shareholder agreements


If you’re working alone. It might seem like overkill to put structure in place, but if you have something already drafted and you need to bring co-founders on to your team. This step will make everything much easier in the long-run.


Small businesses and side hustles can be intense. It’s easy for co-founders to disagree on the direction of the business or their role. If you know how your business operates and everything is documented within a founder agreement. You can use your time to focus on the business around you rather than resolving co-founder disagreements.


That’s when a clear description (or operating agreement) of how the business, roles, responsibilities, communication plan, dispute handling and ownership rights are clearly laid out within the document and therefore making day-to-day running of your business easier.


​Shareholder agreements


You might not be in a position to hire employees when you’re just starting out. Although, when you’re hiring people to put their faith in your vision and join as employees. Certain key employees will delay their financial return in favour of working hard on your mission. In these situations it’s only reasonable for you to offer some of your business in the form of shares to those key employees. It’s a good way to motivate people if they have the opportunity to experience an outsized return after working hard, as part of your team.


​4. Intellectual Property, Trademark and other rights


There are several things that have value within your business;

  • How your business does what it does

  • What your business creates and how it was created

  • How your business is presented to the world

Capturing the essence of your business within intellectual property (IP) is something that has value within your business alongside things such as stock, cash in the bank and income generated from sales.


If you’re running a technology business and you have code that provides a product or service. This would be your IP and would have value, as this is what helps your business to make money.


Although IP is more than something nice to have, it can be the key ingredient that can allow your small business to gain investment or grants that will help your business to grow. IP could help your entrepreneurial business attract employees and top talent that are interested in something that makes you different and stands out from competitors.


As a founder, you will need to ensure that you have control over the IP needed to run your business. This ensures you’re not relying on a third party for your business to operate. This also means that you have control over your future and you can be sure that you will avoid expensive legal procedures over IP ownership or control.


You or your co-founders may have developed something innovative that existed before you created the company. This means that the company will have to formally gain control of the IP to ensure that your business is in control. The original owner of the IP will need to agree to provide the company with full ownership and control over the IP. Therefore, providing something of value to the company.


Furthermore, you would extend the IP ownership to employees and state that anything created within the same industry or similar technology, solution or process would be owned by the company unless agreed by the company.


5. Employee contracts and offer letters


Although, planning for future growth might seem a long way off. There may come a time when you must consider increasing the size of your team with key employees. When this happens you should understand employees need to have clear, concise and easy to understand employment contracts and agreements.

Some of which should include information on the roles and responsibilities, direct manager, reporting structure, working hours, Human Resources policies and other company related information.


It’s understandable if you avoid the recommendations until you’re ready to hire your first employee. It’s not worth splitting your time between employee contracts and finding your first customer to keep you in business. Although, you should be aware of the main company documentation needed when hiring talent for your business.


​6. Non-disclosure agreements (NDA)


Protecting yourself, company knowledge, intellectual property and ideas is vital when you start to work with people inside and outside your company.


A non-disclosure agreement (NDA) is there to protect your business by detailing exactly what information cannot be discussed or shared with external parties for a specific period. The time period could be anywhere from several months to indefinitely.


Company procedures for company confidential information will be included within the NDA. Helping employees and third parties make better decisions when it comes to your business data. This often reduces honest mistakes and threatens dishonesty with appropriate legal action.



​Conclusion


Starting a business is more than your idea, it involves some careful planning and preparation to put your business on the right track, so you don;t make an early mistake that can harm and reduce your future options.


You don’t know what might happen in the future and providing your business with the most options for an uncertain future would be the most sensible option.


Completing the documentation, agreements and legal structure might not be the most exciting for many entrepreneurs, as many business owners are ‘doers’ and want to get started.


However, choosing to do the work at the start could save you a lot of time, money and stress in the future.


Good luck!


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