The Initial Legal Documents For Your Startup Business
By Tiffany Wagner, Last updated: 2023-01-13 (originally published on 2020-04-16)
When starting a new business venture, it is not all about the starting capital, the investment, and other monetary funding. Aside from the budget, it is imperative to know that businesses start and run formally and legally with proper documentation. In all states, even with different laws, securing the necessary documents is essential before an entrepreneur can run his business officially.
But what are these legal documents that we are referring to? Read the article to find out the five legal documents required for you to secure and have your business run smoothly.
Business Formation Document
Entrepreneurs must know that their business should be registered as a formal business entity. Other startup businessmen often make mistakes when establishing a sole proprietorship. This action results in them facing substantial income tax returns and other legal abilities.
Because of this, a business formation document is required, and it varies from what type of business structure your business has. There are two types you can choose from:
(1) Form a C Corporation – if you want to establish a business with multiple shareholders, or if you are looking forward to attracting outside financing, forming a corporation would be a great choice. You need to secure an Article of Incorporation if you decide to choose this option.
(2) LLC or Limited Liability Company – registering your business as an LLC will remove the heavy burden of tax obligations. With LLC, you can also avoid vast and unnecessary fees in the future. Also, a business registered as an LLC has more flexibility when it comes to its management. As a business owner, filing Articles of Organization with the state is required.
Fact: Businesses that have a solid business structure have more chances of loan approval in the future. Financial institutions perform a soft check, and seeing a good business in your record can help to increase your chances of approval.
Governing documents vary whether you register your business as a corporation or an LLC. This is the reason why it’s crucial to have your business structure laid out first.
If you want to establish a corporation, you need to lay out the governing document in the bylaws carefully. As for the LLC registered business, an Operating Agreement is necessary.
This type of governing document consists of the roles and responsibilities of the corporate officers and directors. The bylaws also bind the management on how the election of leaders commence, settle differences and disputes, and be a threshold when making important decisions and actions that will affect the corporation.
For a business registered as an LLC, an Operating Agreement, also known as Founders Agreement, is a necessary document. This legal document states the rights and responsibilities of all the LLC owners. It also includes a proper definition of the relationship of the founders, and a conflict-resolution clause to settle internal disputes.
Intellectual Property (IP) Assignment Agreement
In these modern times, where innovation and creation are consistent, protecting your ownership of a particular property is highly imposed. This where the IP Assignment Agreement plays an essential role. An IP Assignment Agreement contains statement either of the two below:
Intellectual property created before the company’s formation is called a Technology Assignment Agreement. The inventor, developer, or creator retains their IP rights, or they can sell their rights to different entities in exchange for money.
Properties created after the company’s formation is called an Invention Assignment Agreement. All creation that is a work product created by the employees all belongs to the company. Another agreement is signed during this, which is called confidentiality and invention assignment agreement. This states that the company owns all the rights of the IP portfolio.
NDA (Non-Disclosure Agreement)
This is by far the most popular type of legal document a company can possess. An NDA or a Non-Disclosure Agreement might just be a piece of paper, but it contains legalities that protect your company’s confidential information and properties.
Presenting a well-structured NDA to a potential investor or any client is a wise action as a business owner. This means you are not only protecting your company’s confidentiality but the other party as well.
However, NDAs are not limited to being presented to clients and investors; it is also helpful for employer and employee relationships. It is common for companies nowadays to have their employees sign up an NDA form when they are accepted for work.
Employees that are not bound for any employee contracts can always leave their position at work anytime. However, the employee contracts hold them in place. This is why, to a business that seeking early success, putting in place an employment contract will help a lot.
The employee contract provides clarity to the terms of employment; some employee contracts also include an NDA form. Lastly, a well-written employee contract can be a great reference when an unexpected dispute arises in the future.
Starting a business is not an easy feat, and essentially it is not just all about the money investment. Legal documentation regarding the management of your business is required if you don’t want to face any trouble in the future. Settling and securing these necessary documents firsthand will help you manage your business smoothly. It might not be easy in the beginning, but in the long run, it will highly benefit you and your business.
Tiffany Wagner is a professional content writer that specialises in credit and financial management. Other than content writing, she does yoga and climbs mountains in her free time. She is a mother of two who loves cooking and baking.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.