Starting a company is an inherently legal process. The company itself is a legal entity. There are laws that govern the transfer and ownership of company shares. Intellectual property rights – trademarks, copyrights, and patents – exist only because the law created them. Mistakes can lead to liability under the law.
With all of these legal issues, startup founders need to get in the habit of using appropriate documentation from day one. Business and law go hand-in-hand, and the smarter you are about using the law to your advantage (rather than waiting until it works to your detriment), the better positioned your company will be for long-term growth and stability. So, where do you start? Here are 10 legal documents that you will likely (and in some cases, absolutely
) need for your startup entity.
1. Articles of Incorporation or Articles of Organization
The liability protection and transferability of shares that are hallmarks of corporations and limited liability companies (LLCs) come from the fact that they are recognized as independent legal entities under the law. In order to form a corporation or LLC, you need to file the appropriate documentation in your jurisdiction of choice
. To form a corporation, you need to file Articles of Incorporation (called a “Charter” in some states). To form an LLC, you need to file Articles of Organization.
While each state’s filing forms are slightly different, generally speaking, you will need the following in order to file Articles of Incorporation or Articles of Organization:
- The name of your company
- A description of the company’s business
- A physical address for your company
- A resident agent in the state where you are filing
- The name and signature of the person submitting the filing
Note that, in most cases, the company’s original owners do not need to be identified on the formation document. Some states, such as Wyoming
and Delaware, have enhanced privacy protections for company founders.
2. Operating Agreement or Shareholder Agreement and Bylaws
Once you form your company, you need to establish the terms of its governance. Who are the initial shareholders (for a corporation) or members (for an LLC)? Who are the initial officers and directors? What powers and responsibilities do individuals in each of these positions have? When are shareholders or members entitled to financial distributions? How will the entity pay taxes (if at all)? What happens if shareholders or members get into a dispute they cannot resolve?
These are just a small sampling of the numerous issues that need to be addressed in startup entities’ governing documents. For LLCs, the primary governing document is known as an Operating Agreement. Corporations should have bylaws and Shareholder Agreements. Minutes, resolutions, and amendments will be necessary, as well as the company’s ownership and governance structure change over time.
3. Intellectual Property (IP) and Technology Assignment Agreement
If you are like most startup founders, you spent long hours working late into the night on your product idea and business plan before you finally decided to take the plunge and start a company. As a result, you created and acquired things – concepts, prototypes, brand ideas, code, domain names, etc. – that you own personally. Now, for liability, tax, valuation, and other reasons, you likely want them to be owned by your company.
In order to document this transfer appropriately, you will need to execute an Intellectual Property (IP) and Technology Assignment Agreement. These agreements can actually have a variety of different names, but the concept is always the same: The goal is to get IP and technology assets out of your name and into the name of your company. This agreement can also be used to clarify that any IP or technology you create in the future will be deemed owned by the company rather than by you personally.
4. Non-Disclosure Agreement
When you are in talks with potential employees, partners, vendors, and independent contractors, you need to be able to discuss your company openly, but you also need to be confident that anything you say will not leave the room. The tool for this is the Non-Disclosure Agreement (NDA). While you can find plenty of free NDA forms on the Internet, startup founders need to be careful to craft confidentiality agreements that are attuned to their unique business needs. What types of information do you need to protect? How strong of protections do you need (if your NDA is too aggressive, you may scare off potential partners)? Which state’s law should govern? Are there any ancillary provisions you want to (or should) include?
5. Software and IP Licenses
When you buy software or use third-party images or video, what you are doing in legal terms is acquiring a “license” to use someone else’s intellectual property. When licensing third-party IP, startup founders need to be sure to carefully review the terms of the license. Is the license for business use? How many “seats” do you need to license? What is the term (duration) of the license, and what happens to your content stored in the software or created using the third-party IP after your license expires?
6. Employment and Independent Contractor Agreements
Whether you choose to hire employees or independent contractors
(or both), you need to have appropriate contracts in place with the individuals who are working for and on behalf of your company. While employment relationships can exist at-will (without an employment contract) in the United States, it will often be in founders’ best interests to require agreements from their employees. The laws governing issues such as IP ownership differ for employees and independent contractors; and, for this and other reasons, founders should always seek to enter into air-tight agreements with their independent contractors.
7. Stock Purchase Agreement or Membership Interest Purchase Agreement
If you intend to sell shares in your company, you will need to have a Stock Purchase Agreement (for a corporation) or a Membership Interest Purchase Agreement (for an LLC). This agreement will detail the terms of the sale and establish the terms pursuant to which the buyer will become a co-owner of your company.
8. Subscription Agreement
Sales of corporate and limited liability company shares are subject to the regulatory authority of the Securities and Exchange Commission (SEC) and state securities agencies. While many share transfers in privately held companies will be exempt from regulatory requirements, transfers to passive investors (i.e., those who will not play an active role in the business) can potentially raise some issues. The Subscription Agreement is a critical tool for startup founders seeking outside equity investment in order to avoid running into regulatory trouble.
9. Trademark, Copyright, and Patent Registration Applications
While registration of trademarks and copyrights is not a legal requirement, as a startup founder, you still need to register your IP
. The registration process can be completed online (with the help of an attorney), and registering your IP will help ensure that you have the exclusive right to commercialize your intangible assets.
10. Business Insurance Policy
Finally, all startup founders should consider purchasing business insurance for their companies. Startups can usually get reasonable coverage limits fairly inexpensively, and the protection that insurance affords will be well worth the modest investment. However, when considering business insurance options, it is critical to read the terms of the policy. What losses does it cover? What are the exclusions? Does the policy cover claims filed after its expiration for liabilities arising during the coverage period? Startup founders need to know what they are buying so that they do not run into unhappy surprises down the line.
Jiah Kim & Associates | Legal Advisors for Startup Founders
Jiah Kim & Associates is a business law firm that represents startup founders across the United States and worldwide. If you are planning to start a company (or if you have already started a company), we can help you with the documentation you need to be successful. For more information about our services and rates, call us at (646) 389-5065 or schedule an initial consultation online
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.