When starting up your business, you probably feel that there are a million more important things to start trading quickly than dealing with legal documents. Most of those tasks will certainly be more exciting. However, if you want to protect your investment in your business, then having the right agreements in place early on is crucial.
At the early stages of starting your new business, you’re unlikely to be thinking about legal documents. They can be expensive, and when there are so many things to do to get your business off the ground (and so many other expenses), legal agreements quite understandably fall by the wayside.
But there are reasons why you should use at least some documents. And you can get these for free.
Why legal documents should be on your radar
A document is simply a means of recording an agreement. Whether the agreement is legally binding (a contract) depends on the terms of the agreement rather than it being written down. A verbal agreement can be binding. The problem is proving who agreed to what, if it's not recorded. That becomes a bigger problem as time goes by.
A legal document can be thought of as insurance against the risk that the person you’re dealing with disputes what you agreed.
Just like all insurance, having it becomes important when there is something of high value at stake, or if it is likely that something will go wrong. High value could mean high financial value, but it could be the amount of time you’ve invested (your opportunity cost).
So, as you build your business, if you come across a situation where there’s a lot at stake or a high chance of something going wrong, think about using a legal document to protect you.
There is another very good reason to use a document. That is because the law requires it. Where the person you are dealing with is considered by the law to be vulnerable, the law often gives that person rights to have the agreement in writing. In business, your employees and your customers might be protected by the law.
Key areas to consider for documenting agreements
Your aim in starting a business is most likely to create something of worth. You might intend to build and sell, derive a good income from it, or use the profits to benefit others.
If the business is owned with anyone else you should put in place documents that set out at a minimum what each of you bring to the business, how the business will be run, and what happens when one of you wants to sell it or leave. If you don’t, then the law states what happens. This is unlikely to be as favourable to you as terms you agree yourselves.
Many founders start out with a shared vision of what the business should do and where it should go. It is common though, for that to change as the business grows. One of you might want to change the business model in response to an opportunity that you hadn’t foreseen, someone else might find that he or she can’t put as much time or money into the business as originally thought.
You will put a lot of work into your business, so you should protect that input with an agreement.
Every company adopts a set of articles when it is formed. If you incorporate online (as most companies are), then your company will already have what are called model articles. But these aren’t model in the sense that they are perfect, but rather that they need to be modified.
Your articles are a public document, so that everyone can see how you run your company. A shareholders’ agreement is private – only the owners know what has been agreed. Anything that isn’t required in the articles should be recorded in this document.
If you don’t form a company, then the business is by default owned as a partnership and you should use a partnership agreement.
This agreement covers similar matters – how decisions are made, who makes which decisions, how profits are shared, who contributed what to the business, and how the business is divided if the partners leave. It is a private document.
Supply of services by others
If cash flow is tight, you’re likely to build your business by hiring in skills you need on a temporary basis as you need them. Contracts for specific jobs, such as website design or shop fitting, are known generally as contracts for services. Consultancy agreements are a type of contract for services.
The risks that a written agreement protects here are those that the contractor doesn’t complete the work as required or on time. When starting up, resources are tight. The contract might not be for a lot of money, but sorting a botched job takes your time away from doing other things. A written contract supports your claim that the work wasn’t done as required and that therefore you shouldn’t pay full cost.
If the contractor sees personal data, then by law you must have a written contract that includes certain terms that protect that data. The personal data might belong to your customers (for example, names and e-mail addresses), or it might belong to employees or other suppliers.
If you employ someone, then by law you must provide him or her with written terms of employment.
You can’t reduce the rights of employees (even if they agree), but you can make them clear so that if a rule is broken, you have recourse to act. Because employment law favours the employee to such an extent, you’ll want to make sure that you comply with the law exactly.
Usually the owners of a company take on the role of directors. Being an owner doesn’t necessarily mean you are a director though. You can be an owner without any management role in the business and be a manager without being an owner.
A directorship is a specific position with legal responsibilities. Usually directors are employees (even if they are also shareholders), and as such they should have an employment contract, which for directors is called a service agreement.
If you’re selling to consumers (individuals not acting in the course of business) then the law requires you to give your customers certain information and to provide cancellation or returns forms to them. The best way to do this is to provide the information in a document known as your terms and conditions.
Be aware that many businesses don’t comply with the law. The law isn’t well known by either businesses or consumers. Many customers dislike accepting long contracts, even if the purpose of those contracts is to strengthen their rights. But that doesn’t mean that the rights don’t exist.
The consequence of non-compliance is often that your terms are not enforceable, which may mean, for example, that the customer is not liable to pay you. This may not be so important if you sell low-value goods or services that you can write-off but becomes more so if you sell higher value items.
There are other advantages to using written customer contracts. You can limit your liability if things go wrong. You can also set the procedure your customers should follow for delivery or returns, so that you maximise efficiency.
Be aware that all advertising to consumers forms part of the contract. If an advert claims benefits that the product doesn’t deliver, then the customer could claim breach of contract.
You are required under the Data Protection Act (which incorporates the General Data Protection Regulation) to tell individuals about the information you collect, use and hold about them, and on what basis you do that. The best place to do this, if you operate online, is through your privacy notice on your website.
Website terms and conditions are non-negotiable contractual terms that are displayed on your website and to which your visitors and customers agree. Like other written agreements, terms don’t prevent visitors from acting badly, rather they give you a basis on which you can take action.
If you sell from your website, you might also include terms of sale, which are the contract between you and your customers. For example, you would include the same information that is required by law, and perhaps additional information about extended customer rights.
Where to get these agreements
The Net Lawman website has one of the largest libraries of legal document templates. You can download a template and edit it as necessary to suit your needs. You can also ask a lawyer to check your edits.
Many of the documents mentioned here are already free on the website. If you need one of these documents that is not free, Net Lawman is likely to provide it to you (subject to fair use and other terms) if you contact them, tell them about your business and mention Wenta.
*This article is not a recommendation of NetLawman. However, it aims to give the reader the best insights into legal documents.