Businesses are started, operated, and eventually hit major milestones or begin to fade. Sometimes, the difference between the two is whether the business has well-drafted, critical business and legal documents.
It’s no surprise that business owners, especially in the beginning, will forgo critical documents, self-lawyer, or use questionable legal templates they found online.
Unfortunately, this can set the stage for failure. Poorly drafted legal documents:
Have loopholes creating financial liability;
Often fail to address important aspects of the business; or
They are out-of-date and are no longer legally effective.
For businesses big and small, here are the 10 most critical legal documents:
1. Business Plan
Drafting a business plan allows owners, equity holders, board members, and any other integral team member to have a blueprint for success.
When a business is simply an idea, it’s easy to wing it and make decisions on the fly, but when that business begins to grow and bring in significant revenue, it can be less clear where profits should be reinvested or how frequently employees should be hired.
With a business plan, a three, five, or ten-year forecast can help guide the business in making decisions that will keep the growth trajectory on an upward swing.
A business plan is also important because its akin to writing down your personal goals. Like posting to social media about your fitness progress or keeping a financial savings journal, by putting words to paper, you’re memorializing long-term business goals in a way that forces you to stick with it and stay true to your original plan for success.
2. Operating Agreement, Bylaws, or a Partnership Agreement
Operating agreements (for LLCs) and bylaws (for corporations) are both foundational documents that help govern day-to-day operations and all of the what-ifs along the way. For businesses that have two members or more, these documents are crucial.
An operating agreement can be simple at 1 to 2 pages or complex at an upwards of 10 to 20 pages. Like everything related to LLCs, they are highly customizable.
LLCs were once deemed the wild-child of legal entities. States have varying degrees of default rules, which help govern LLC operations in the absence of an operating agreement. However, once an operating agreement is in place, anything contained within trumps or overrides the state’s default rules.
Because of this, lawyers tend to fall into two camps. Some believe an LLC is the best form of entity because of this flexibility and others believe the lack of state laws creates too much uncertainty.
The operating agreement is what removes that uncertainty by including percentages of equity, formalizing roles and titles, and outlining distribution of profits and losses. It also address what happens in the event of dissolution, when distributions can be made, and, most importantly, whether the entity is member or manager-managed.
Bylaws, on the other hand, rooted in well-developed long-standing law, are for corporations and can be anywhere from 5 to 20+ pages. States, and especially Delaware, have more concrete laws regarding the governance of corporations, and bylaws are, put very simply, a way to explain:
How dividends will be distributed;
The purpose of the corporation;
Naming the board members, and
The responsibilities of those running the operation.
Finally, a partnership agreement is a document governing — can you guess it?— partnerships! This document, similar to operating agreements and bylaws, help define the business, the partners, and each partner’s role and responsibilities. It also allows partners to decide how the addition or loss of a partner is handled, and how profits and losses are shared.
3. Non-disclosure Agreement (NDA)
An non-disclosure agreement (NDA) protects your confidential, proprietary information and trade secrets. It’s signed by business partners, employees, and with anyone else the business decides to share its secret sauce. This document is one of the most crucial, and if a business owner must pick and choose where to spend legal fees, this is one document worth the investment.
NDAs are also commonly used when startups are seeking funding in order to keep their business ideas confidential in a competitive marketplace. But they can also be used when entering into a collaborative working relationship with a third-party (such as a manufacturing company that will produce your physical products) and with new employees.
While it may not seem obvious at the time, employees are frequently given access to the most confidential and prized information about its employers. For this reason, an NDA helps to reduce the likelihood an employee takes all of the protected information he or she learned while on the job and sharing it publicly or with a direct competitor.
4. Employment Documents and Non-competition Agreements
Every business should have a well-drafted employment offer and a complete suite of employee-related documents that cover the entire process from hiring to firing.
These documents help limit liability and spell out employment expectations. What many businesses fail to understand is that an employment agreement and an offer of employment are two very different documents. The former outlines right and obligations of an employee and forms a binding contractual relationship whereas the latter forms a more simple at-will employment arrangement.
Unless hiring an executive with all sorts of negotiated terms and conditions of employment like stock options and severance, you’ll want to hire employees using an informal offer letter.
Beyond employees, you may hire independent contractors to fulfill short-term project rolls. A thorough professional services agreement should be kept on-hand to outline deliverables, pay and basic relationship expectations.
In addition, a non-competition agreement, or well-drafted provision that addresses non-competition in the employee agreement, is essential for businesses with major competitors.
These non-competition agreements should not, and legally cannot, be indefinite. Businesses should plan to limit former employees for a specific number of months or years and, if relevant to the business, based on geographic location. This prevents an employee who has been trained in a specialty from using all that training directly against the business once employment is terminated.
Businesses should be careful though; drafting a non-competition that is needlessly limiting or hurts an employee’s livelihood could be found unconscionable and unenforceable in a court of law.
5. Service or Purchase Agreement
A service or purchase agreement is essential when working with customers and clients. Service agreements help set expectations for clients about:
The expected deliverables;
When payment is expected;
How to terminate the relationship;
How refunds are handled; and
Title or license to use the product purchased (physical product vs. software or digital product).
Similarly, a purchase agreement outlines relevant items such as completion time, finished product expectations, shipping costs, whether the business is no longer liable once the product has been placed in the mail, etc.
These are just some of the things these sorts of agreement cover so it’s not hard to imagine why these legal documents are so important.
Similar to the NDA, these two agreements should be drafted by a licensed attorney to ensure your business is adequately protected. There are so many ways a customer or client can use loopholes and gaps in these documents to their advantage that it’s simply not worth the risk.
6. Memorandum of Understanding
Commonly referred to as an MOU; a memorandum of understanding is an agreement used when two businesses have agreed to act in a specific manner, but the relationship does not require a long, drawn out formal contract.
An MOU can be drafted as a precursor to a more formal agreement or it can be binding as a standalone agreement. Whether an MOU is binding largely depends on how it’s drafted and whether it meets the requirements for a legal contract.
An MOU is most common when two businesses have decided to work towards a common goal that is mutually beneficial, but the relationship is not intended to form a joint venture. For example, if a local paint supply store decides it will exclusively refer its customers to a specific painting company if that company buys all of its paint supplies from that store, the two may decide to enter into an MOU.
7. Letter of Intent (LOI) or Agreement to Negotiate
A letter of intent and an agreement to negotiate are both more formal in nature than a memorandum of understanding (MOU) (see #6 above). A letter of intent (LOI) is an agreement that outlines several other documents that two businesses or a business and individual are working towards finalizing.
An agreement to negotiate is similar to an LOI in that the parties agree to work towards a common goal: entering into an agreement; however, an agreement to negotiate is often used to ensure neither party works simultaneously with another company or business on a similar agreement or deal. An agreement to negotiate also typically includes a provision stipulating that negotiations will be made in good faith. This prevents one party from finding a better deal elsewhere and simply deciding to back out of the negotiation.
Negotiating can be consuming in both time and money and neither party will want to see their efforts wasted. An agreement to negotiate is smart when both parties are on the verge of entering a formal agreement or want to enter into a formal agreement but know and understand that there will first be months of discussion about the terms and conditions.
Businesses are smart to have both of these documents pre-drafted and ready in the waiting because business deals often move quickly and, depending on the situation, the business you’re working with may ask you to provide the document. If you don’t already have one, it’s an unnecessary delay that could cause you the partnership, additional business, or even profits.
8. Terms and Conditions (Website or Service)
Today it’s rare to find a business that’s not online. Whether you’re business completely virtual or your website drives physical bodies to your brick and mortar location, your website needs well-drafted terms and conditions.
Website terms and conditions are essentially house rules for your visitors. Anyone who accesses, views or uses your website, the content you post or the services you offer are bound by your terms and conditions. For this reason, website terms and conditions should, at a minimum, outline:
Who can lawfully access your website;
What visitors to your websites are permitted and prohibited from doing while access or viewing your website or its content;
What is expected of users if they are permitted to create accounts;
The terms and conditions associate with the sale of your products (regardless of whether they’re virtual or physical);
An explanation of copyright laws and provisions devoted to protecting your own intellectual property rights;
Provide how visitors can contact you.
A website without terms and conditions is like trying to drive directly into the sunset without sunglasses. You might be able to make it work, but it’s not advisable. Website terms and conditions are a great way to preserve your rights as the owner and modifier of your website to govern your visitors and their use of your content.
9. Legal Disclaimers
Legal disclaimers come in all shapes and sizes.
Most commonly, legal disclaimers are associated with the paragraph of legal jargon placed at the bottom of website or on the checkout page for purchases made online. These types of legal disclaimers are used to limit liability.
A common example is a health and wellness blog. If a business’s website has a blog, each page of that blog should have a disclaimer that the advice provided should not be relied upon and that readers should seek professional medical advice.
The disclaimer, in this case, would serve as notice, that readers should not take action solely based on the content provided on the website. With this notice in place, if a reader claims he or she was harmed by the advice on your website, you will have a significantly better chance at defending yourself against any damages the reader might have suffered.
How disclaimers are worded depends on the type of business. These tiny yet significant provisions are often the first line of defense for businesses accused by readers or potential clients who have taken steps based, sometimes loosely, on the information provided on the business’s website.
Unrelated to websites, your business may need to have a product disclaimer added to your product packaging or labels. Common instances in which this might be necessary:
The sale of furniture that’s at risk of tipping over and causing physical injury or death; or
The sale of herbal supplements, makeup or topical beauty products that require specific statements due to Food and Drug Administration (FDA) regulation.
10. Privacy Policies
Privacy policies are now an absolute essential, and especially for completely online businesses like blogs and e-commerce boutiques.
It’s predicted that in the next five years more states and countries will join with new and evolving laws to help protect consumers from unwittingly having their information collected and sold with no rights or recourse in the matter.
These 10 legal documents are critical for the success of your business and the sooner you have them implemented as part of your ongoing day-to-day operations or available for your use as needed, the better your position to take advantage of quick growth opportunities and scale with ease.
If your business needs one of the following documents drafted, Nocturnal Legal offers high-quality, customizable legal templates ready for your immediate use.
Failing to plan can be synonymous with planning to fail. Each agreement, besides the business plan, acts as a way to further limit liability and set business expectations to avoid unnecessary conflict.
The worst thing that can happen by having these essential documents drafted for your business is that you’re prepared.