Launching or growing a new business is not only an exciting time, but it can also be overwhelmingly busy and challenging as multiple priorities demand your attention. Therefore, proper planning is vital. Succeeding in your new venture involves more than just focusing on your business operations and financial concerns. It’s also important to establish a solid legal foundation with the essential legal documents for a startup.

Essential Legal Documents for a Startup to Consider

There are six legal documents you should consider having in place from the beginning to ensure that you establish your business upon a proper legal foundation and head off future problems.

1. Articles of incorporation or operating agreement

One of the first things founders should do is organize their startup into a formal business entity. Different business structures carry various legal protections, such as limited personal liability for company obligations and other benefits, including important tax implications. The business formation documents you should file will depend upon which type of structure you choose for your business.

If you are creating a corporation, articles of incorporation must be prepared, while a limited liability company (LLC) may require an LLC operating agreement. These documents, among other things, set out the name, address, purpose, and basic structure of how the business will operate and the limited liability safeguards most business owners and shareholders or members seek.

2. Shareholders’ or founders’ agreement

A shareholders’ agreement (sometimes referred to as a founders’ agreement) is a contract that regulates the relationship between the shareholders (or founders in the case of a founders’ agreement) and the company. This document defines the shareholders’ or founders’ relationship to each other, including their rights and obligations, and helps prevent misunderstandings and future litigation. Shareholders’ rights include the right to transfer shares, the right of first refusal, redemption upon death or disability, and shareholders’ power to manage and run the startup. A shareholders’ agreement plays a critical role in a close corporation, which is a non-publicly traded corporation held by a small number of shareholders.

3. Articles of organization

Articles of organization are the official public documents used to create a limited liability company. Founders must file them with the relevant state authority (usually the secretary of state) for approval. Once approved, the LLC becomes a legal business entity.

This document outlines essential details of the LLC, such as the rights, powers, liabilities, and obligations between the members of the LLC and the startup. Although each state has its own requirements, the following items represent some of the mandatory information that the articles of organization must include:

• The name of the company
• The names of the company’s founders
• The business address of the company
• The business purpose of the company
• The name of the company’s registered agent
• The names of any managers and directors of the company
• The effective business start date
• The duration of the company

4. Employee contracts and offer letters

An employment contract is an agreement between an employer and an employee regarding an employment situation. Employment contracts contain important information about the employment relationship, such as the employee’s work-related responsibilities, expected work hours, salary or wages, benefits, paid time off, and health insurance. Employment contracts may also contain provisions about termination and how much notice each party must give prior to terminating the contract. Often, an employer may not want to use an employment contract. Careful consideration is necessary, and it may be to an employer’s advantage not to implement employment contracts. This analysis is situationally dependent.

Employment contracts are sometimes confused with offer letters. However, employment contracts and offer letters are not the same, and it’s crucial to understand the difference between the two documents. Offer letters are written confirmation that an employer is selecting the candidate for the job. They are typically sent to the candidate after the offer is made over the phone or by email. However, unlike employment contracts, which are legally binding when properly drafted and signed, offer letters do not typically confer legal obligations, even when signed. Companies often set certain contingencies that will still need to be met before employment officially begins, such as background checks or drug screening.

5. Nondisclosure agreement (NDA)

A nondisclosure agreement is a legally binding and enforceable document used to keep information confidential and ensure that sensitive information is only used for a specific purpose. Businesses use NDAs in a variety of situations. Some of the most common include situations where employees have access to confidential information, including trade secrets, proprietary processes, sensitive client information, client lists, and marketing strategies. Once an individual signs an NDA, they are prohibited from discussing any information protected by the agreement with any non-authorized party.

NDAs can be mutual (signed by both parties) or one-way (signed only by one party). Having a signed NDA on file will help protect your ideas and your company’s privacy, particularly when sharing information with third parties such as vendors and suppliers. Prospective employees and potential investors should also sign NDAs. Obtaining signed NDAs before any business conversations occur is vital to safeguard confidential and other valuable company information.

6. Intellectual property (IP) assignment agreement

Intellectual property refers to intangible creations and encompasses anything that can be “created with the mind.” Intellectual property can include registered IP, such as trademarks and patents, and unregistered IP, such as trade secrets. An intellectual property assignment agreement is a contractual transfer of IP ownership rights from one person or company to another. It is considered a best practice to assign all relevant intellectual property to the startup when forming a new company and to have everyone sign a contract agreeing that intellectual property developed while employed by the company using company time or resources belongs to the company. Transferring IP to the startup ensures that the startup has a legal right to the IP. Potential investors often consider this factor when valuing a company.

How to start your new business off on the right foot

Starting a new business venture entails juggling several moving parts, including various business, financial, and legal matters. When faced with competing demands, it’s easy to put certain things off until later, and often legal considerations are not at the forefront. However, to ensure that your startup gets up and running smoothly, founders must prioritize matters related to employment law that govern the relationship between employers, employees, and the company. Putting these essential legal documents for a startup into place as soon as possible will provide the startup with a legal foundation to help secure the company’s success and head off potential issues in the future.

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