Legal documents are crucial to protecting business interests, and those of the owners during a company’s lifetime. Surprisingly, however, not many businesses put in place the most vital documents when starting up. In this article, we will discuss the most common legal documents that you should know and why they are essential.
Business Plan
Most businesses require funding before starting up. A well-crafted business plan is indispensable to attracting investment to your business. The three key things you should consider when creating a business plan include the problem you intend to solve, how you intend to solve it, and why your business is in the best position to solve it.
Ideally, a business plan should be structured in such a way that it comprises all the details that a potential investor would like to know about the business. Some of these details include the products or services you are selling, your sales and marketing strategies, who manages the business, requirements for effective operation, your target market and how you intend to reach it, and how you will deliver your product or services to your customers.
In a nutshell, your business plan is a statement of why you need funding, how you will spend it, and how you will earn it back. This enables potential investors to make an informed decision about whether they should invest in your business or not.
Partnership Agreement
It is often easier to start a business with a partner to share the risks and costs involved in starting a business. When creating a partnership, you and your business partner need to set the terms of your business partnership ahead of time. This sets the ground rules for how to go about issues that may arise in the course of your partnership. Without such a framework in place, legal disputes may occur and drain the company’s resources in a way that the company is unable to recover.
Ideally, a partnership agreement should include the partners’ names, their contributions in terms of business equipment, money, or land, the division of authority and labor, the partnership’s duration, how to add new partners, and what happens to the partnership when a partner leaves the business or dies. You can obtain information about the necessary steps for registration, filing, and tax requirements from your local Secretary of State’s office.
LLC Operating Agreement
Limited liability companies provide some benefits that are not enjoyed by partnerships or sole proprietorships. Most of these benefits involve reducing personal liability as much as possible. Other benefits that make LLCs more attractive than partnerships and sole proprietorships include tax and cash flow benefits.
Forming an LLC is relatively easy. All you need to do is visit your local Secretary of State’s website and file your articles of organization. If your LLC comprises two or more owners, it is essential to set up an LLC operating agreement that defines how your company will operate and how it should be taxed.
There are various rules and regulations that have been put in place by state laws and the IRS concerning the operation of LLCs. An operating agreement allows you to adjust some of these rules to how you intend to operate your business.
An LLC operating agreement should include the name of the owners of the LLC, division of labor and authority, how responsibilities are distributed among the owners, and whether the company should be taxed as a corporation or as a partnership. Filing your articles of organization without creating an operation agreement leaves you vulnerable to civil penalties and financial liabilities in the event that you are audited by the IRS or someone sues you.