5 Critical Legal Documents Every New Business Owner Needs (Beyond Just Articles of Incorporation)

Starting a new business can be an exciting experience. It’s a way to establish your place in the world and share your innovative ideas with the public. It’s also an opportunity to be your own boss and build a stable financial future. Those are only a few of the advantages of being an entrepreneur as long as you approach the venture in the right way.

Of course, as you’re building your business, you have a seemingly endless list of factors to think about. Deciding which products and services to offer customers and determining the best way to tailor them to consumers’ needs are certainly among the most important. Getting the funding you need to get your company off the ground is likely a consideration. Hiring the right employees to foster productivity, customer satisfaction, and growth is also crucial. But these aspects barely scratch the surface.

Looking at the Legal Side of Business Ownership

In the midst of the many elements new business owners need to think about, many overlook the importance of legal protection. In truth, quite a few admit that they don’t really understand the legal side of business ownership. With that being the case, far too many ultimately leave themselves vulnerable to any number of legal and financial problems.

Several legal documents are essential for businesses. Articles of incorporation are among them. They serve a range of purposes for companies, including formally and legally establishing business’s existence and defining its official purposes. These documents also state where businesses are located, who owns them, and other significant details.

Exploring Five Additional Essential Legal Documents for New Businesses

While articles of incorporation are must-haves for business, they’re only the beginning. To truly protect your business and yourself, you’ll need to go well beyond the basics. Not all companies’ needs are exactly the same, but the following five legal documents are among the most common and critical for new businesses. Hiring a business entity formation attorney in Texas to handle these documents will ensure you get all the protection they’re designed to provide.

1)  Operating Agreements or Corporate Bylaws

First, let’s delve into operating agreements and corporate bylaws. While the former are generally for LLCs, the latter are for corporations. These are basically a company’s internal rule books, and each one has its own distinct features.

Operating agreements are contracts among owners of a business. They detail each owner’s responsibilities. They also cover each party’s percentage of ownership and the company’s management structure, decision-making processes, and other crucial points. They explain how losses will be allocated and how the business will be dissolved if the need arises as well.

Bylaws work in similar ways. They define corporations’ management and operating procedures. They lay out the roles of a company’s board of directors and their term limits. They likewise cover a business’s procedures for issuing and transferring shares, holding meetings, voting on various matters, removing board members, and certain other factors.

While operating agreements are not necessarily required in Texas, corporate bylaws are required by law. Regardless of whether they are required or not, these documents can help owners avoid potentially detrimental disagreements. If drafted properly, they can also protect you by limiting your personal liability for legal issues and financial hurdles. At the same time, they can give you a clear exit strategy if you need to leave the company.

Operating agreements and bylaws contain some of the same information as articles of incorporation. One of the main differences here is that articles of incorporation are public records while operating agreements and bylaws are internal documents. Though you’re likely to need both, your articles of incorporation primarily establish your company as an entity whereas your bylaws or operating agreement delve deeper into its structural, operational, and legal aspects.

2)  Buy-Sell Agreements

If your business has more than one owner, a buy-sell agreement may be necessary. Sometimes referred to as succession planning, a buy-sell agreement dictates how ownership interests can be transferred. It also covers how an owner’s shares of the company will be redistributed in the event of their death, a permanent disability, or another occurrence that leaves them unable or unwilling to participate in the company.

Two main types of buy-sell agreements are commonly used: cross-purchase and entity-purchase agreements. With cross-purchase agreements, the remaining owners purchase the shares that are left behind. In entity-purchase agreements, the business itself purchases the shares in question. In many cases, business partners take out life insurance policies on each other to provide the funds to purchase a deceased owner’s shares.

A business’s buy-sell agreement should include the names of the owners, the portions of the company they own, and how buyouts should be funded. It should also include an up-to-date business valuation. The business valuation will be used to determine the value of each partner’s interest in the company.

Furthermore, a buy-sell agreement needs to explain the acceptable events that may trigger a buyout. Those may include, but aren’t limited to, a partner’s death, disability, or retirement. Tax and estate planning considerations and additional crucial points should also be covered in this legal business document.

Buy-sell agreements protect businesses in a few key ways. For one, they can prevent any disputes that might otherwise arise over who is allowed to buy a deceased or exiting partner’s shares and for how much. They can also prevent outsiders from buying that partner’s shares and taking over the business. These documents can help protect owners’ best interests and those of their family members and other beneficiaries.

3)  Employment Agreements

Employment agreements are also vital legal documents for new businesses. They explain the terms of employment for your workers. Those might include their salaries, job responsibilities, work hours, and your grounds for termination. They can also cover paid time off, health insurance, retirement plans, and other benefits.

Employment agreements can be exceptionally valuable for businesses. They aid in preventing misunderstandings and disagreements about job duties, pay, and terminations. In doing so, they can thwart the potential legal problems that can come along with them. From a different perspective, they give employees added peace of mind by protecting them against unexpected changes in their terms of employment.

4)  Independent Contractor Agreements

Not all employees are part of a company’s in-house team. You may need to hire outside contractors for certain services or projects. If so, independent contractor agreements will give you an array of benefits.

These legal documents are contracts between employers and outside parties that perform work for them. They clearly define the relationships between you and any contractors you hire. They also cover the types of work they’re expected to perform, payment terms, and who gets credit for their work among other details.

Independent contractor agreements can safeguard your company by stating in advance that you own any work the contractor completes for you. They also clearly define your expectations of contractors and what they can expect from you in return. That helps prevent costly legal disputes, losses from uncompleted projects, and many other potential issues. These legal documents can also help you avoid tax penalties and additional financial setbacks.

5)  Intellectual Property Agreements

Finally, let’s discuss intellectual property agreements. Intellectual property includes your business’s intangible assets. Some examples here are your company name and logo, customer databases, trade secrets, and creative works to list a few possibilities. You might need intellectual property agreements between your co-owners, employees, contractors, and other people or organizations you do business with.

These critical legal documents ensure your inventions, ideas, and proprietary information can’t be used by unauthorized people for their own benefit. They’re also essential for licensing your intellectual property to others. They can allow you to profit from selling certain IP to companies or individuals without forcing you to give up your rights to them.

Without intellectual property agreements, an employee, contractor, or partner could share your ideas with competitors. Contractors may sell items they created for you to other companies, which might take away your competitive edge. In either of those scenarios, you’d have no solid foundation for taking legal action against them and protecting what’s rightfully yours without IP agreements in place. 

Why Generic Legal Document Templates Aren’t the Answer

It’s no secret that a vast range of legal document templates are now available online. Many of them are free to download as needed. As such, you may be asking, “Why can’t I just download those free templates online instead of paying an attorney to handle them?” Actually, there are several reasons why it’s better to trust your business’s legal documents to an attorney rather than relying on general templates.

Overly General Language

Generic templates tend to be written in extremely general language. Sometimes, they include clauses that negate each other or even contradict certain laws and regulations that may apply to businesses. They’re often too vague to truly hold up in court, and they may be altogether unenforceable. It is not uncommon for these documents to cause more problems than they prevent.

Lacking Important Details

Templates you’ll find online are general documents that cover a variety of basic business needs. They don’t actually cover a company’s more specific needs, though. With that being the case, they’re bound to leave out certain clauses and stipulations that may be important. Those may seem like minute details on the surface, but they can leave your business vulnerable to countless risks.

No Customization

Generic templates aren’t customized to suit your business’s unique circumstances either. Each type of business is held to specific standards and regulations. On top of that, the laws that apply to different types of businesses can vary by state as well as other factors. General templates don’t take that into account. As mentioned, they’re generic documents with cookie-cutter information that just don’t cover a company’s specific needs.

Working With an Attorney to Protect Yourself and Your Business

Entrepreneurs have to keep countless details in mind and shoulder an endless list of responsibilities. If you’re like most business owners, legal matters may seem a bit intimidating. Ignoring them can leave you vulnerable to any number of risks, and inadvertently leaving out even seemingly minor details can cause major problems for your company.

Having the right legal business documents in place can protect you from costly and detrimental problems. Using generic downloadable templates for those documents may seem like an effective way to save time and money. In reality, though, they give business owners a false sense of security and can cause a range of unexpected problems in their own right.

Working with a business entity formation attorney will protect you and your company against those risks. An attorney will create legal documents that are specifically tailored to your distinct needs and circumstances. In doing so, they’ll ensure you’re fully covered against disputes, misunderstandings, and other potential problems. They’ll give you peace of mind as well as ongoing support as your needs grow and change.

Disclaimer:

Ruelas Andino Law, PLLC makes no claims as to the accuracy of the information contained within the external links in this blog article nor does it endorse any of the businesses contained in the links. Information contained in this blog is for informational purposes only and may not be construed as legal advice.