The priority of having the proper legal documents in place is often overlooked by entrepreneurs.
Sometimes entrepreneurs feel that there are many other things they have to do, so they simply feel like there is no time. At other times entrepreneurs are unsure of which legal documents their startup need.
However, the importance of having the key legal documents in place early on cannot be stressed enough. Legal documents give entrepreneurs the security required to protect their investments, ensure their long-term success, and provide the foundation and business structure that a startup needs.
Why should you use legal documents?
When running the business, you will be dealing with other people and businesses.
Every time you deal with them, you will be open to certain risks. As a new business, you want to be focused on progressing your business and limiting the chances of disputes when you deal with other people or businesses (which can lead to lengthy arbitrations and court battles).
Having legal documents helps mitigate those risks and protect your business and investment.
For example, the business will have employees. So you will need an employment contract template. You can then customise the template according to your needs. The employment contract will govern your relationship with your employee and it can be referred if there is ever a dispute, helping you avoid courts and tribunals.
Oral contracts are legally binding but easily disputable
While whether an agreement is binding depends mostly on the terms of the agreement and not whether the agreement was written down. Oral agreements have the significant disadvantage of being easily disputable.
Protect your interests
Think of legal documents like insurance against the risk involved in dealing with that person.
For instance, if there is any dispute with the employee regarding his employment terms, you can pull out the employment contract to remind the employee of what was actually agreed.
Further, as you go on to build your business, you will come across numerous situations where the stakes are high, and there is a chance of something going wrong. You can protect yourself and your business against such risks using the proper legal documents.
Complying with law
Another very good reason to use legal documents is that the law requires it.
For example, when you hire an employee, you must provide them with a written statement of employment particulars (also called the principal statement).
However, a principal statement only contains terms that favour the employee. Therefore, you need to add terms that favour you.
Using an employment contract, you can comply with the law (by including all information required in a principal statement) and have terms in there that protect your interests as well.
Which key areas you should consider for document agreements?
While it is not possible to compile a checklist of legal documents you will need, there are some essential documents that you will require more than others.
Business ownership and structure
The first question every entrepreneur should ask themselves concerning the business is what the business structure should be. For example, do you want to set up as a company, partnership, or operate as a sole trader?
Which documents do you need to set up a company?
Companies are formed and regulated under a number of Companies Act. This structure allows the company to be a body corporate, have shareholders, and manage the company affairs through company directors.
Articles of association
To set up your company, you are required to adopt articles of association. While you are free to use the model articles, you should be aware that they are not model in the sense that they are flawless or ideal. Rather, they need to be modified.
Articles of association of a company are public documents as they have to be filed with the Companies House. They are the legal constitution of the company that set out important matters relating to how the company will be run by the directors on behalf of the owners.
Therefore, consider it as a rule book of your company.
Some matters relating to the company should remain private (such as employees incentive scheme) amongst the shareholders. A shareholders’ agreement is a private agreement that has a great deal of scope.
Matters such as what actions require the consent of all shareholders and limiting the discretion available to the chief executive, even though he may own most shares, can be dealt with in a shareholders’ agreement. If you did not have an agreement in place concerning this, all shareholders would have voting powers in the same proportion as their shares.
Director’s service contract
If the company directly employs the director, his service contract should also be his employment contract.
For a non-executive director, use a service contract that clearly states that the director is not an employee. It is important to maintain this distinction for tax reasons and because employees have a significant statutory right (whereas self-employed service providers are excluded from the protection of employment law).
Using partnership as a business structure
If you start your business with someone, then by law, you will have formed a partnership. It is up to you whether you write that partnership agreement down or have an informal arrangement.
The law of partnership dates from 1890 and is not suitable for you in light of modern business practices.
It sets out some default positions concerning ownership, control, day to day management, and termination. These default positions apply when such issues come into contention and the partners either do not have any agreement in place, or their partnership agreement does not override the default positions.
For these reasons, you need a modern partnership agreement that overrides these default positions and regulates every aspect of the partnership business.
Short forms are not likely to be suitable for you. The purpose of a partnership agreement is best served when it is comprehensive and detailed.
Contracts with customers
If your customers are consumers, by law, you are required to give them certain information and to provide cancellation or return forms.
Modern business practice is to provide the information in your terms and conditions. You will be significantly advantaged by using it as it can be used to limit your liability if things go wrong. Further, you lay down your procedures (such as for delivery and return) to maximise your efficacy.
Contract for supply of services by others
For new businesses, cash flow at the start is often tight. In such cases, they are likely to hire people temporarily. You can hire people on contracts for services for a specific job (such as site design or shopfitting).
You need to use a written agreement, so you are protected against the risk of the contractor not completing the work by the time it is required.
Further, if the contractor is given any personal data (such as customer name or email addresses), then you are required by law to provide a written contract that includes terms to protect that personal data.
Contracts of employment
You can hire someone permanently or you can hire a causal worker. Both will have the same basic employment rights (employees will have additional rights).
You have to provide your employees with a written statement of employment particulars before the start of their employment. This document contains some important terms of employment.
Statement of employment particulars
You do not have to provide the principal statement separately if all the information required is contained in a contract.
Modern startups require employment contracts that are strong in protecting their business interest. They should include all the standard terms and additional provisions to protect your confidential information, business secrets, and intellectual property.
Further, modern startups should use restrictive covenants that restrict the ability of their employees to set up in competition against them.
Important legal documents for your website
Most businesses collect and process personal information, even if they are not using that information within the business.
Further, if you are selling through your website or have a website that users can interact with, you will need website terms and conditions. This document should cover, amongst other things, how visitors can use your website, terms of your contract, provisions to protect your intellectual property and your content on your website.
A Few last words
Think of legal documents as taking proactive measures against the risks you face when establishing your startup.
While it is not possible to compile an exhaustive list of legal documents you may need. You should think about using a legal document whenever you enter into an exchange with someone or a business.
Every time there is something stake, you will be significantly advantaged if you write that deal down into a legal document.