Start up legal documents and why you need them.
When starting up your business, you probably feel that there are a million more important things to start trading quickly than dealing with legal documents. Most of those tasks will certainly be more exciting. However, if you want to protect your investment in your business, then having the right agreements in place early on is crucial.
Why do you need start up legal documents?
Most legal agreements serve two purposes: to provide a record of what was agreed; and to create “rights” of each party that are enforceable in law.
A conflict arises only when two people disagree. They cannot both be right. So by setting down what has been agreed in writing, either can refer to that agreement to remind himself what was agreed. So if your agreement is recorded in a document, it leaves little room for the other party to challenge it.
Occasionally, if something has been left out of an agreement, or if circumstances change, one party may decide to ask a judge for an opinion. That means going to court. For any small business, a court case is a distracting, stressful, time consuming, and expensive. If your agreement is comprehensive, i.e. covers the areas that might later be challenged, it will help keep you out of court.
Because the document defines the terms agreed, it is an important tool during negotiation of terms. If you are the party that ‘presents’ the agreement and if your draftsman is good, you should be able to get terms into your agreement that are far more favourable to you than the other side might realise or than the law would afford you by default. Those advantages might be commercial (such as reduction in cost), or might give you better legal protection (such as limiting your liability).
In certain transactions, such as those between a retailer and a consumer, one of the parties may have rights under law. A well written legal document should ensure that the terms of your transaction comply with the law.
What legal documents will every start up need?
The needs of each business are different. Which legal documents your business will use will depend on its legal structure and how it interacts with suppliers, customers, lenders, borrowers, and other stakeholders.
Agreements with suppliers and customers
The most frequent transaction that happens in business is trade. Whether you are the buyer or the seller, and whether the trade involves goods or services, you should use a legal document to record it. Sometimes that document will be unique for the deal and most likely be negotiated (such as an arrangement to manufacture components for your products, or an agreement to provide specialist consultancy services) and sometimes one party will present terms to the other on a take-it-or-leave-it basis (such as when you buy or sell online).
Agreements between stakeholders in your start up business
If you choose to set up a company (that is, if you incorporate), or form a business partnership with someone else, you’ll need documents that set out the relationship between the stakeholders in the business.
If you incorporate, you should replace the default articles of association with a customised version. Articles set out administrative processes (such as how shareholders’ meetings are called) and the powers the shareholders give the directors. The default “model” Companies House version is unlikely to reflect how you want your company to be operated. You will also need template notices and meeting minutes in order to follow the procedures required by the companies acts.
Once you have articles edited as you want them, the most important document on your list is a shareholders’ agreement. This is a private agreement between the owners that records “Who must do what” and “Who is allowed to do what”. It must be within the framework of company law, but that gives you a great deal of scope.
Just a few of the many matters covered in a shareholders’ agreement are: what actions require the consent of all the shareholders? How to limit the freedom of the chief executive, even though he owns most shares? Without an agreement, shareholders have voting power in the same proportion as their share ownership. With an agreement you can change that, so other shareholders have more or less say on important matters.
You will also need a director’s service contract for each director. If the director is employed by the company, his service contract should also be his employment contract. If the director is a non-executive, his service contract should make clear that he is not an employee. The distinction is important, both for tax reasons and because employees have greater rights in law than self employed service providers.
If you start up your business with someone else, you automatically form a partnership. The law on partnerships dates from 1890, and it is rather archaic. For example, any partner is liable for the actions of any other, so if your partner spends your business loan on a holiday then declares himself bankrupt, you are liable for his share of business debts. Using a partnership agreement allows you to override the default law, and allows you to set out the limits of power and responsibility of each partner.
Legal documents on your website
If you sell via your website, or provide a site with which visitors interact you will need website terms and conditions. Your T&C document should cover how visitors may use your website, terms of your contract, protection of your intellectual property and your website and many more subjects.
Protecting data, ideas, know how & other intellectual property
It is easy for a startup business to overlook protection of intellectual property. IP isn’t just designs and ideas, it includes things like the content of your website, or your customer database or the way you work. A good legal agreement should cover keeping secrets secret, but if in doubt, or if you are exploring options before a contract for the deal is signed, a confidentiality agreement (also called a non disclosure agreement or NDA) can be very useful.
Unfortunately there is no standard checklist of documents you might need. Instead, consider whether you should use a legal document every time you enter into an exchange with another person or business. That exchange might be one of physical goods, services, time, rights or ideas. The other party might be a co-owner of your business, a manufacturer, a shipping company, a customer, an advisor or someone else. If something is at stake, there should be an advantage to record the deal in writing. When you do, whatever the source of the document you use, check it covers all the points thoroughly, both relating to the deal and relating to the law around the deal.
Blog supplied by Thomas Taylor of Net Lawman Limited
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