What Are the Most Important Legal Documents Every Small Business Owner Needs?

Most small business owners focus on developing products or services and attracting customers, but pay little attention to the legal structure of the business until something goes wrong or until a compliance audit is conducted. Such an approach is foolish and can result in serious consequences.

Entrepreneurs who are smart for business understand that quality documentation is business insurance, protecting you from catastrophic loss and clearly setting forth rules of engagement in the event of conflict. Smart entrepreneurs want to get past documentation being a hassle of doing business and understand that with a few key documents in place, you’ll be prepared for anything. Let’s start with the minimum set of documentation that all small businesses should maintain.

Business Formation Documents

Once your formation documents have been completed your business will be recognized by the state and the fed as a separate and distinct legal entity from the owner(s). LLC’s require the filing of the Articles of Organization with the state in which the company is incorporated or organized and the creation and adherence to an Operating Agreement. Corporations require the filing of the Articles of Incorporation with the state in which the company is incorporated and the adherence to and development of bylaws.

Most people believe an LLC Operating Agreement is unnecessary so long as the LLC is properly formed and maintained. While it is generally true that most people do not believe that an Operating Agreement is required unless it is mandated by the entity’s state of formation, the document does serve several purposes including preventing disputes among LLC owners and insuring the LLC operates precisely as intended and not according to the state default rules on LLCs when those rules are applicable. LLC Operating Agreements generally should contain the specific terms and conditions of the ownership percentages (and how those affect profit sharing) and the corresponding voting powers associated with each member or group of members. It would be wise to include language and procedures for addressing and resolving disputes which may arise, and the processes by which any member may voluntarily withdraw from the ownership and operation of the LLC.

The Operating Bylaws of a homeowners association outline the structure of the association, the roles and responsibilities of the board of directors, the duties of the association officers, and the schedule of board meetings, etc. Like the bylaws of a corporation, they serve to organize and guide the association’s business, and to head off confusion and conflict in the absence of a clear decision-making process.

These sample organizational documents should be used in conjunction with properly maintained formation documents to create an operational entity that separates your personal assets (your home and savings) from risk. However, if you fail to comply with the terms of the formation documents, the liability shielding may cease to exist.

Customer Contracts and Service Agreements

For every transaction your company conducts with a customer, whether buying or selling, there should be some written terms and conditions under which you agree to conduct that transaction. These terms and conditions may not be formal sale contracts, but rather terms and conditions that are published on your Web site, or included with invoices, and are a part of your customer service efforts.

Before a contract is signed, the customer agreements will cover off items such as the scope of work, completion time and payment. The customer agreements will also cover off liability. An effective customer agreement can substantially reduce your risk and ensure that any liability is restricted as much as possible. Of course, it’s rare that a lawsuit actually goes to trial. But if it does, a limitation clause can save your company from financial ruin. It’s a fair buffer to have in place.

Contracts. You need them for every project. As a professional service provider, scope creep can quickly erode your profits. But a good contract can help you manage the scope of a project and control the bottom line. Make sure your contracts have language for change orders, and procedures for resolving disputes.

Employment Documentation

As soon as you hire an employee the tables turn and suddenly it is you versus the law. Employee handbooks depict the type of work environment that both you and your employees can expect. Even the smallest of businesses need to have written job descriptions, employee wage agreements, and formal confidentiality agreements.

A common misconception about at-will employment is that documentation of termination actions and a termination procedure are unnecessary since wrongful termination claims are not recognized. However, in order to avoid claims of wrongful termination, even in at-will states, it is wise for employers to have agreements such as non-compete clauses with key employees in order to protect the employer’s legitimate interests, including trade secrets and customer contacts.

Vendor and Supplier Contracts

Quality suppliers are an important component of a healthy business. Verbal agreements with your vendors are good until they cease to function. That’s when things start to collapse.

When establishing a supplier agreement, the terms of this agreement should include specific quality requirements, delivery terms, and payment terms and conditions. The agreement should also include a force majeure clause to account for events which are beyond the control of both parties. Online legal document software such as LegalNature includes sample supplier agreements that can be customized to fit your specific business needs.

Note the payment terms. While Net 30 may be standard, there can be a discrepancy if the supplier expects you to pay cash immediately but you pay the bill in 30 days. This is one of the easy ways to get into cash flow problems.

Intellectual Property Documentation

Most businesses are unaware of the IP they create. Your company name and logo are the obvious forms of intellectual property, but your website copy, marketing collateral and business processes all have value whether protected or not.

Trademark applications can take months to be registered, and the application cost is approximately $300 to $500 per mark (i.e. business name, logo, etc.). However, this process of registration provides significant protections to the owner (including protection throughout the state and a basis for a lawsuit against an infringer). It is often worth the investment.

In addition to using free copyright release agreements, Contract agreements and employee conduct policies can also play a role in IP protection by clearly stating in a work-for-hire agreement that only materials created for your company under contract will be considered works for hire, and that the contractor or creator of original intellectual property for your company has no ownership or copyright claim to such work. Employee conduct policies and agreements should clearly state that any content created by employees during work hours that is related to your company is property of your company.

Compliance and Regulatory Requirements

Licensing and permits for a business license can vary based on the industry of the business and/or the location where the business will be conducted. Professional services, for example, require a license but many have ongoing education requirements as well as annual license renewal periods. Again, a business information filing is required with the state for businesses that are organized as corporations or LLC’s. Although business licensing requirements have many deadlines, it is imperative that these deadlines are met in order to protect both you and your business. Liability shielding afforded by the corporate or LLC structure only exists if the proper annual filings have been made.

Financial record keeping is not optional. The IRS requires accurate documentation of income, expenses and credits and deductions. Accurate financial record keeping will help prevent problems during an IRS audit. Inaccurate or incomplete financial records will increase the time and cost required to complete your tax returns.

Insurance Policies

Insurance for a business is an insurance contract under which a company agrees to pay a premium to an insurance company for certain coverage of risk. Legally binding, commercial insurance covers a business against unexpected events which could potentially cause financial loss such as a fire or theft, in addition to loss caused by accidents, operations, mishaps and illegal or wrongful acts. In addition to coverage for property damage, many different types of liability insurance exist. For example, business liability coverage can pay claims for injuries caused by slips and falls on a business’s property, as well as claims for damage to other property. Another example of liability insurance is professional liability insurance, which is often known as errors and omissions insurance. It insures small businesses against certain types of losses resulting from errors and mistakes in services that a company offers.

As your business grows in revenue each year, your business review and coverage must grow as well. What may have been sufficient in your startup phase is not sufficient for your more mature company.

Getting the key legal documents set up correctly at the start of your business is crucial. Often it is less expensive and less painful in the long run to get them right initially rather than allowing errors to grow and become more expensive to rectify.