Top 10 Legal Documents For Small Businesses
So, you’ve got the idea and are all psyched to get going! But one thing holds you back every time you try to get the ball rolling; where do I start? do I have all the right documents to ensure I have a working business?
These are the 10 most important legal documents a small business will need:
1. Memorandum Of Understanding
When you are ready to start your own business. The very first thing you need to do is to ensure that you and your business partners are committed to a common course of action. A memorandum of understanding, although not legally binding is the first stage, before a formal contract. It is a way of solidifying a deal and is often used to make sure all parties are on the same page. This document establishes your intentions and will spell-out the essential terms of your agreement.
A memorandum of understanding will also help ensure that expectations are aligned between business partners. It makes clear what you can and cannot expect from one another.
2. Memorandum Of Association & Articles Of Association
When your business idea is on track it is time to officially set-up your business. You will need a Memorandum of Association and Articles of Association, both of which are essential founding legal documents for every business in the UK.
The Memorandum of Association sets in stone your intention to form a company, while, the Articles of Association establish the rules about running and owning it. They also define the purpose of your business as well as the basic rights and obligations of Directors and shareholders.
Both are standard legal documents and may be easily amended to add any provision that you may wish to include to better reflect your vision. Don’t worry about getting these drafted by a lawyer from the very start, because, when you incorporate a private limited company in the UK, you will automatically be provided with model articles.
3. Shareholders’ Agreement
The most important legal document for any business regardless of size; is the Shareholders’ Agreement.
To ensure the smooth running of your business, a well-drafted Shareholders’ Agreement is required to outline the relationship between shareholders and to establish their respective rights and obligations. Among other things, it defines each party’s proportion of shares, profit sharing and the company’s decision-making procedures. Without one, in the event of a dispute or simple doubt you will have to rely on the narrowly-drafted constitutional documents, namely, the Memorandum of Association and Articles of Association (see above).
A Shareholders’ Agreement serves the purpose of safeguarding shareholders’ interests in various circumstances. It allows you to protect your investment in the business by including clauses that force shareholders to sell their shares back to you in certain sets of circumstances.
4. Non-Disclosure Agreement
A non-disclosure agreement creates a trusting relationship between the signatories. You may use it to protect any kind of information that you may want to share but wish to remain confidential.
It is always useful if your business involves an innovative idea or know-how. This legal document is also commonly used when presenting a new idea or product to investors, or when dealing with third parties i.e. contractors, distributors.
If you do not have a non-disclosure agreement in place, you may risk losing your intellectual property rights to your product and brand name. The people or businesses you share your business ideas with, may share them with others, or even implement them themselves. You may as a result be exposed to competition and face information leaks that could lead to loss of potential investment opportunities.
5. Directors’ Service Agreement
Directors are responsible for running a business and this is why their authority needs to be clearly defined to avoid any complications. Think of a Directors’ Service Agreement as an employment agreement which deals with the Directors core duties towards the company.
It outlines the rights and obligations of Directors that go beyond the basic duties that are imposed on them by law. The document will typically include a definition of the Director’s role in the company, the salary, working hours as well as provisions regarding termination of employment.
It is a legal requirement to have some form of written agreement between your business and its directors within 2 months of a director beginning work.
6. Employment Agreement
Needless to say that once your business starts expanding you will need an employment agreement for any new recruits. An employment agreement will specify the employee’s role but most importantly, it will limit the employer’s liability.
It is necessary to put one in place as in the absence of a written agreement, default legal provisions will apply which tend to favor employees.
Do not forget to consider the types of staff you may want to hire (i.e. intern, consultant, contractor) as a different type of employment agreements will be needed in each case.
7. Terms & Conditions For The Supply Of Goods Or Services
It is fundamental to define the terms on which you trade with your clients when supplying goods and/or services. Your business will need to have a comprehensive set of terms and conditions both when acting as a supplier and as a buyer during its lifecycle.
This essential legal document includes information on contract formation as well as product and service specifications. It deals with payment process, delivery, cancellations and returns issues. As a business owner it is important to include provisions to limit your liability and to account for the event of insolvency as well as to determine the applicable laws in case of a dispute.
Your terms and conditions will be the main point of reference in case of dispute and therefore will have a great impact on your business. You will find that standard terms and conditions will usually apply, however, they can be industry specific. So, it is well worth getting tailor-made legal advice.
8. Website T&Cs
You might be wondering if anyone actually reads those, but, terms and conditions are essential for any website owner. They form an online agreement between the client and the business that outlines each party’s rights and obligations and it also provides basic guidelines on how to use the website.
So, why are website terms and conditions needed? Without them you risk being exposed to liability for your website’s content and any fault that may arise as a results of its use. They also help safeguard your own intellectual property as well as your user’s data.
This legal document will highly vary depending on the type of business in question, it therefore is essential to get terms and conditions that reflect your business and do not expose you to any uncertainty.
This is particularly important in light of the forthcoming General Data Protection Regulation which will come into force in May 2018 and will impose fines of up to 20 million on businesses for privacy breaches.
10. Software Development Agreement
Lastly, you may need a software development agreement if software is being developed as part of your business. This agreement will outline your relationship with your developer and will map out the overall development process. Typically, the developer working for your will develop the specified software and will transfer the IP created back to you.
This technical legal document will set the scope of the project, the payment for the work and will address any confidentiality concerns. One cannot stress enough the importance of having in place a software development agreement as in its absence you may risk getting an unusable or faulty software. Even worse, the developer could run away with valuable information about your business.
Have in mind that you will need to create a new contract for every new software as they may vary considerably due to their nature.
Getting the right legal documents drafted by specialist lawyers is a must for your small business. They are essential for a successful business to kick-off and ensure all you hard work does not go to waste.