When an entrepreneurial team moves from the idea stage to actually organizing, there are legal documents every business should have.
Articles of Incorporation/Organization & Bylaws and Shareholder Agreement or Operating Agreement (or DBA Certificate)
Depending on what type of business organization you intend to form, there are certain documents you must have and certain documents you should have.
If you’re forming a corporation, you must have article of incorporation that you file with your state’s Secretary of State, as well as bylaws, a document that spells out how the corporation is going to be governed. However, for a closely-held corporation (a corporation with a limited number of shareholders), especially a startup corporation, it is recommended to have drawn up a shareholder agreement. Unlike the operating agreements of partnerships and LLCs that control both the operation of the business as well as the rights of owners vis-a-vis the business and each other, bylaws govern the operation of the corporation and to a certain extent the rights of shareholders as against the corporation — a shareholder agreement covers the rights of the shareholders in regards to each other. For example, a shareholder agreement can require that founder-shareholders must vote each other to the board of directors; without a shareholder agreement, an individual or a group of shareholders with a controlling voting interest can gang up on others and remove them from the board.
If you’re forming a partnership or LLC, you must have a certificate of formation to file with the state Secretary of State, but you should almost certainly have an operating agreement, particularly when there are multiple founders. An operating agreement may seem like an extravagance starting out, particularly if founders know each other well or consider each other friends — “If things go wrong, we’ll be able to work it out!” a founding team might say. Of course, the farther along you progress with a startup, the higher the stakes (and the dollar amounts) get and the more difficult things can become, and, unfortunately, you might not end up liking your teammates so much anymore. In that scenario, and even when things are progressing smoothly, the operating agreement allows everyone to know how the business is going to operate, settling many disagreements before they become disputes, or worse.
Similarly, if you’re simply forming a joint venture, you should definitely draft a joint venture agreement, a document like partnership/LLC operating agreements
Finally, if you’re operating simply as a sole proprietorship, you should almost certainly obtain a “Doing Business As” (DBA) certificate — in some jurisdictions you are legally required to do so. In any event, obtaining a DBA certificate as a sole proprietorship is usually necessary for obtaining business bank accounts or otherwise transacting in the business’s name.
Partner/Employee Noncompete/Nondisclosure/IP Agreements
Noncompete/nondisclosure/intellectual property agreements are very important for every business. However, it is important that your business have these agreements on hand from the very beginning, for as I have previously discussed, such agreements are creatures of contract law, and therefore require consideration in order to be enforceable. Having these agreements from the get-go often solves the consideration problem — the covenant to enter into business together as partners/shareholders (such agreements these are often baked right into an operating/shareholder agreement), or the offer of employment in the case of employees can serve as consideration for the agreement. Asking an attorney to draft up these agreements for you down the road can lead to a much more difficult and costly situation in order to have it enforceable company-wide.
Remember the story from several months ago involving Noah Kravitz, whose former startup employer, Phonedog, sued him when they argued that the Twitter feed Kravitz had set up while working at Phonedog actually belonged to the company? Cases such as this are an excellent demonstration why companies should have an employee handbook or a set of employee policies, which often include offers of employment letters and nondisclosure/non-compete/IP agreements. At the very least, having codified employee policies lets your employees know what is expected of them, and what is and what is not acceptable. Problem employees can be extremely detrimental to small businesses where everyone is in contact with each other and is expected to contribute on many, if not all, of the company’s efforts — employee policies allow entrepreneurs to help such employees improve or provide a process for termination if the problem becomes uncorrectable.
Depending on the nature of your startup’s business, you may also want to have standard purchase or sale agreements drawn up, especially if your business does more than a few deals over the course of a year. Although you may want to have specialized agreements with each of your business’s clients, having pre-drafted base agreements not only saves time but also saves administrative effort, since everyone in the company will already know many of the base terms of the agreement. And even if you want to negotiate terms with the other party, having the basis of an agreement ready to go can give your company leverage in a negotiation and allow you to negotiate on your terms.
Startups should move to secure their intellectual property rights as soon as possible. Once copyrightable material is fixed to tangible form, entrepreneurs should move to register it with the federal Copyright Office, a relatively simple process. In addition, once a startup begins using trademarks, such as the company name, logos, slogans, product packaging, store design, etc, it should also move to secure those trademarks. While attempting federal registration with the Patent and Trademark Office can be a difficult and expensive proposition for startups, it is possible to register trademarks at the state level, which can be accomplished gradually as a startup expands geographically, and is often a simpler and less expensive process than federal registration. Finally, startups who require patents must undertake to register them as soon as possible, as inventors generally have only one year from the first attempt to publicly exploit or publish about an invention to file a patent application.
Of course, many startups may not have the resources readily available to spend to have these documents professionally prepared — startups can work with legal professionals to set up a flat fee package deal that saves money and provides all of these resources for the startup from the very beginning. But for the reasons discussed above, every startup should obtain these documents at the nearest available opportunity