Before you head down the road to starting your new business, step back and take a few moments to consider what you need to do to prepare to take this new journey. One important consideration that is often overlooked is the need for solid documents. The documents to which I am referring are the agreements, minutes, consents, plans, licenses, contracts, etc. that every company should create, sign, or file to get your business operating on sound legal footing and in compliance with the local, state, and federal laws that may be applicable to it. Here’s my list of 7 documents or agreements that you should have or consider having in place.
1) Business plan: I know a lot of business consultants, entrepreneurs, and other so-called “experts” are rolling their eyes at this one, but I put it first for a reason. I admit there is some measure of disagreement as to whether or not it is essential to have a business plan, but I remain convinced that a written business plan improves your chances of success. At a minimum, it can be an excellent way to organize your ideas. The process of preparing a business plan often forces you to challenge your assumptions and think about your business in new ways. The way I help clients write a business plan not only requires considering factors such as customers, competitors, marketing, costs, and revenue, but also bigger picture questions like why they are starting the business and what overall philosophy will guide them when they face tough decisions.
2) Organizational documents: Most ventures operate through business entities. Even if that business entity is a single owner LLC, there are still valid legal and practical reasons to maintain written company records. One important reason solo entrepreneurs form a business entity is to protect their personal assets from the creditors of their business. Failing to keep a core set of company documents can be one factor that courts consider in determining whether to respect the limited liability protection of your company. Anyone can fill out a form and mail it to the Secretary of State, but to have a legally sound company that will serve its intended purposes, additional documents should be kept starting on day one.
3) Operating Agreement / Shareholders Agreement / Bylaws: In addition to the organizational minutes and related documents discussed above, all companies should have some form of written rules by which the company will be governed. Depending on the form and jurisdiction of your business entity, these documents have different names and purposes. Nevertheless, it would be foolish to go into business without at a minimum having a custom drafted operating agreement (in the case of an LLC) or shareholders agreement and bylaws (in the case of a corporation) that addresses the unique structure and characteristics of your company. Addressing complicated issues in advance (such as what exactly each owner, director, manager and officer is expected to contribute to the company and what happens if a principal in the business dies) can save you a lot of time and dollars down the road.
4) Financing documents: If you are seeking funding from third party sources – regardless of the source – you must have proper documentation prepared that fits your unique situation. In some cases, you may be borrowing a little money from friends and family, in which case a simple loan agreement and promissory note it probably sufficient. On the other hand, if you are soliciting investment from angel investors or venture capital firms, it is easy for an inexperienced company to violate federal and state securities laws inadvertently. Making sure you understand the filing requirements associated with raising money and how to protect yourself against future claims by investors is essential. So whether it’s a loan from your uncle or a convertible note from a VA firm, proper documentation is needed.
5) State / federal tax registration and annual fees: Any business entity that operates separately and distinct from its owner will require its own federal tax ID. Also, it is likely that your state will require you to file an annual report and pay an annual fee to keep your company in good standing. If you have employees, there are additional state tax filings that are required. Attending to these matters and the related documentation is a major step in keeping your business on solid legal ground.
6) Business licenses and permits: Depending upon the type of business you are operating and at what location, you may need any range of business licenses and permits. For example, restaurants and bars need certain permits (such as a license from the ABC Board to sell alcohol) while furniture stores, for instance, may only need a business license. Because typically these requirements are local in nature, they change from town to town and are often enacted, amended, and removed over time. For these reasons it is important that you keep good records of the licenses and permits you obtain in the event you are ever required to provide documentation that your business is operating legally in your area.
7) Employment documents: If your business intends to hire employees, I cannot recommend strongly enough that you have at a minimum an employee manual and an acknowledgement from each new employee that they have read it and agree to abide by it. A standard employee manual sets out your expectations of employees, policies relating to absences, sick leave, over-time, etc.; and causes for termination. Another important document to consider when hiring employees is a non-disclosure agreement, particularly if the employee will have access to sensitive or confidential information. For certain key employees, an employment contract is appropriate. Employment agreements often contain non-compete and non-solicitation provisions that should be customized for your unique situation in order to help ensure future enforceability.
The documents described above are essential tools to have at your disposal when starting your new business. If you’re starting a new venture, or have an existing business that might have overlooked some of these relevant documents, please feel free to contact me at chris@chrisclark.law.
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