When you own a business, one of your major considerations is how to limit your risks. Having the proper legal documents in place plays a major role in protecting both a business and the business owners. Tackling legal work seems like a daunting task to most business owners, but it doesn’t have to be. Start protecting your business from the beginning, and every step of the way, that way you can be proactive and manage your legal needs without leaving yourself exposed to a substantial amount of liability down the road.
Almost all small business owners should consider having the following legal documents on hand to limit potential liability.
Organizational Documents: What constitutes “organizational documents” will vary depending on what type of business entity you have. The most common types of business entities for small businesses are limited liability companies (LLC’s) and corporations. These are very important legal documents for a business; for an LLC, it’s an operating agreement and for a corporation, it’s bylaws. These are typically internal company documents that spell out individual roles, management and governance issues and business structure. They can also address how potential disputes will be handled and what happens when the owners don’t see eye to eye on a decision or course of action for the business. They can also address how profits and losses will be allocated, when dividends can be authorized and the rights and obligations of owners in the event one wants out of the company.
Contracts: This can be a catch-all as it’s not a single document that’s needed, rather, it’s a number of documents that your company will use in various situations. In general you should have a contract for every relationship you have in business, both internal and external. That means vendor or supplier agreements with the companies that supply the goods or services your business needs to deliver its own goods or services. Service agreements with your clients if you company is the business of providing a service, or if your business sells a product, then you might need a sales contract that lays out the details of the sale. You’ll also need agreements with your workers (employees, independent contractors, interns) that lay out the details of that arrangement - salary, part-time or full-time, at-will employee, benefits, vacation policies, etc. Not having contracts is one of the biggest risks that businesses voluntarily expose themselves to.
Business Licenses, Permits and Registrations: Depending on your type of business and where it’s located, you might need specific business licenses and permits from the federal, state, city or county government. Licenses and registrations can vary greatly depending on industry and location. For example, you may not be required to have a business license in the county where you operate, but because of your industry you need both federal and state permits. Certain industries also have governing bodies that will require you to have a license in order to operate the business. The possibilities are numerous, but make sure you check into any requirements early on, ideally before you start, to avoid major complications down the road.
Non-Disclosure Agreement: All businesses have some information that they don’t want to get out and keeping it private should be a major consideration. It could be your pricing strategy, your business plan, your sales list, your marketing strategy, your secret recipe, whatever, the point is you don’t want this information getting out to the public. This is where a non-disclosure or confidentiality agreement comes into play. They can be very flexible and favorable to the business. Use them with anyone who will get a look at your private information: employees, contractors, business partners, service providers, etc. Make sure to cover:
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- What’s considered confidential information
- How long the information has to be kept confidential
- Who owns the information (it’s your company)
- How confidential information should be handled
Terms of Service/Privacy Policy: Terms of service/use and privacy policies are becoming more and more common documents in the world of business, mainly because most companies have some sort of website or application they are using in the course of their business. Terms of use/service lays out the terms that visitors to a website or mobile application must follow. Privacy policies let users know how information is collected, what’s done with that information and how your company protects personally identifiable information that may be collected from users. These terms and policies can limit your liability for information, ads or other links placed on your site, and are especially important if you’re allowing comments and user generated content to appear on your website. They are a key component to protecting your business, whether or not you are selling services or products on your site.
Need help drafting any of these legal documents, or have other questions about legal and risk management? Contact us for a free consultation.