The process of opening your own business can be more exciting and challenging. When starting a new business, you’re responsible for establishing a strong legal agreements structure off the bat as an entrepreneur. Having the right legal documents in place when you start is essential for your business’s success.
There is a range of legal requirements for new businesses and startups, including financial regulations, tax obligations, and employment laws. A legal agreement is a written document that includes the set of terms and provisions negotiated by the interested parties. In case of any breach of contract, the responsible party will be answerable in court.
Make sure your new business complies with all its legal responsibilities so you can get back to focusing on growing your business and avoid costly legal battles down the road. Here are five crucial legal agreements that you have to get:
1. Operating Agreement
One of the many important decisions you have to make when starting a business is to decide on your company’s legal status or structure. Your specific business structure will determine your federal tax obligations and the forms you use to report these taxes.
You can choose between forming an LLC or a corporation. However, some of the benefits of organizing an LLC over corporations are its simplicity and flexibility. If you are thinking of forming an LLC, one of the essential things you need to have is an LLC operating agreement.
An operating agreement is an internal document that outlines your business processes, the LLC members’ responsibilities and contributions, and even rules on dispute resolutions. Download an operating agreement form template on CocoSign. We have over ten different LLC operating agreement form templates for you to look at.
It outlines the following details:
- Details about the company
- Details about the member/s
- Fiscal or accounting details
- Voting procedures
- Rules on replacing or substituting members
- Grounds for dissolving the LLC
- Dispute resolution
2. Non-Disclosure Agreements
A non-disclosure agreement (or NDA) is an agreement between you and the person to whom you’re disclosing information about your business. A typical form will include clauses such as “clause relating to confidential or protected information,” or “clause relating to business property or confidential matters.” A law was enacted to help provide businesses with protection from harm, so that they can make their inventions available to the public.
From the moment your business and a prospective employee or investor get into a contract, you need to have an NDA agreement waiting for them to sign. The confidentiality agreement (also known as a non-disclosure agreement) helps you protect your intellectual property and business practices, including trade secrets, from getting into a competitor’s hand.
This ensures that whatever proprietary business information you share with your employees or business partners remains private. The document prohibits an employee or business partner from disclosing confidential and proprietary information belonging to the company.
For many startups, this isn’t something that they need until later, when the secrets are more complex and require more attention. You have the option to put it in place before starting your business, but how do you get started? Your best bet is to talk with you lawyer about getting a non-disclosure agreement in place.
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3. Employment Agreement
If you wish to be an employee or someone who is doing your business work, draw an explicit employment contract. An employment contract is a legal document highlighting the rights, duties, and employment conditions of all the parties involved. Once signed by both the employer and the employee, its contents become legally binding.
The employment agreement should clearly state:
- Terms of employment (e.g., compensation, role responsibilities, working hours, and grounds for termination)
- Reporting structure
- Required commitments
- Share vesting
- Company policies (e.g., vacation days, paid time off the structure, and dress code.
Apart from protecting the interest of both the employer and the employee, the employment contract can be used to solve potential disputes.
You’ll need to know about the laws and the ways in which you can protect your business from employee lawsuits such as discrimination or wrongful dismissal. You need to understand the ins and outs of the way that this type of law works. You can hire a wrongful dismissal lawyer to help prove evidence that your company didn’t violate any rules. However, the best way to avoid an employment lawsuit is to prepare a clear employment agreement from the very start.
4. Non-Compete Agreement
A non-compete agreement legally binds a current or past employee from the competition with an employer for a specific amount of time after termination of employment. Many business owners believe this protects them from becoming a target by competitors, as well as preventing former employees from poaching (i.e. keeping their old job without telling the new employer). A reputable law firm specializing in Non-compete agreements can explain why the restraint period is important and what are the implications for the future of the employment relationship in general.
In recent times, more corporate fields where competition runs high and the companies are fighting shoulder to shoulder use non-compete agreements to keep their edge over their competitors. A Non-compete agreement is an important document used by companies to protect their interests, proprietary and confidential information against the competition.
It is essential for protecting a company’s interests, even when the employee or service provider has completed the terms. The agreement typically restricts an employee from working against the competing business within a specified geographical area for a specific length of time.
If you are considering using a non-compete agreement, consult with an attorney with knowledge of your local area employment law. The laws that govern non-compete agreements are different from state to state.
5. Buy or Sell Agreement
As a startup business in today’s competitive market, you can’t afford to have any problems. Lack of a buy/sell agreement is one thing that causes a tremendous number of issues for a business. A buy/sell agreement is an agreement between a minimum of two parties, such as a business and its owners or heirs. It’s useful in various situations.
Say you or your partner decide to leave the business or a new partner joining the board. The agreement sets the arrangement up in advance for a smooth transition. It will also determine ahead of time the price for which a share of the business can be sold, thereby reducing stress and headaches for all parties.
Other instances include when you want to retire or pass away suddenly or when you want to pass it to your heir. The sell/buy agreement will help you determine what will happen in case of these scenarios and whether or not the heir will take over.
Whether you want to start a large or small business, a general partnership, a limited company, or a corporation, having the right legal documents in place when you start can be a huge advantage. When you have the correct legal documents, you can avoid many of the problems that derail new businesses before they establish themselves.
Plus, the legal agreement helps you avoid misunderstandings and disputes that will otherwise lead to expensive lawsuits.
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