When getting a business off the ground, one common mistake business owners make is not establishing a solid legal foundation to protect their company from unforeseen situations and circumstances.
The most effective and efficient way to provide this legal bedrock is by putting a set of key legal agreements in place.
Gleaned from years of business experience and advice from seasoned and highly successful entrepreneurs, we’ve outlined the core four legal documents that a company’s founders should put into place as soon as your business “idea” evolves into a reality.
Business Entity Agreements
When starting a business, it’s crucial to select the proper business entity structure in order to maximize tax savings and minimize personal liability. Some of the most popular entity structures include sole proprietorships, general and limited partnerships, C corporations, S corporations and limited liability companies (LLC or even an LLC taxed as an S-Corporation).
Once you choose the most advantageous structure, you should—and are sometimes legally required to—draft the proper entity agreements to lay the groundwork for how the business will be governed and operated. Different entity structures require different types of agreements. For example, C corporations require corporate bylaws, while LLCs use an operating agreement.
These agreements are legal documents that define each shareholder or member’s rights and responsibilities, along with establishing the provisions for running the company, both on a daily basis and in the event one person dies or becomes incapacitated—as well as if the company dissolves. Moreover, these agreements also outline how business communications will be handled, along with how disputes will be resolved.
You may also have a shareholder’s agreement or a partnership agreement, if there are multiple owners of the business, where you want to further define the relationship among the owners.
To avoid any conflicts, these agreements should be created and signed by all parties as soon as the company is launched. As your Family Business Lawyer™, we can advise you on the entity structure that’s best for your business as well as draft entity agreements to ensure maximum protection.
2. Intellectual Property Assignment Agreements
When launching a new business, you should make sure that all of the intellectual property (IP) brought into the company by its founders before startup, as well as any IP that’s subsequently created by owners and/or employees once the business is operational, is owned by the company, not the individuals. Transfer of IP ownership from individual to the company is done using intellectual property assignment agreements.
These agreements “assign” the company with complete ownership rights to all intellectual property assets—patents, trademarks, and copyrights—that are used to conduct business. Such agreements are typically required by most venture capital investors, and they also help protect the company from competitors and/or trolls looking to steal your ideas or products.
As your Family Business Lawyer™, we can help you draft IP assignment agreements, so you can retain total control of all IP assets that your business relies on to operate and grow.
3. Employee Contracts and Offer Letters
Unless you plan on running the company all by yourself, you should create comprehensive employment contracts and offer letters before hiring new employees. These agreements clearly lay out the terms and conditions of employment, so your team will understand exactly what’s expected from them.
Employees should be required to sign these documents, providing evidence that both parties are aware of the employment relationship’s scope and conditions. Employment contracts should also include any non-disclosure agreements (NDA) and/or non-compete agreements you require to ensure your company’s trade secrets and/or proprietary systems and products don’t fall into the hands of competitors.
4. Sales and Service Contracts
Whether your company sells products, provides professional services, or a bit of both, you should have legal agreements in place to clearly lay out the rights and responsibilities of both the business and its customers. Sales contracts typically lay out the key elements—price, payment and credit terms, tax responsibilities, warranties, and liability limitations—for the sale of products and other goods.
Service contracts, on the other hand, explain the fees, terms, and conditions under which your company provides services, along with spelling out the responsibilities and liabilities of each party. Ideally, service contracts should offer your company maximum flexibility for delivering the services, while also limiting its liability. Be sure the contract not only covers the traditional terms listed above, but also any unforeseen events or circumstances that may occur.
If you’re starting a new business or have already started one but still need to draft the necessary legal agreements, contact us as your Family Business Lawyer™. We’re experienced in helping entrepreneurs protect their business interests and limit their liability by drafting comprehensive legal agreements. What’s more, as your Family Business Lawyer™, we can also help you establish sound legal, insurance, financial, and tax systems for your business, to ensure it experiences maximum growth and minimum hardship.
This article is a service of Sky Unlimited Legal Advisory PC, Family Business Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Call us today at (650) 761-0992 to schedule.
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