What documents should I prepare when starting my business?
Starting a new business is an exciting adventure, but it comes with important legal responsibilities. One of the foundational steps to ensure long-term success and avoid costly complications is preparing the right legal documents from the outset. These documents not only establish your business’ legal structure but also define ownership and responsibilities, ensure legal compliance, enable smooth operations, and protect your intellectual property and confidential information.
In this article, we’ve broken down essential legal documentation for new businesses into five core categories to help you set the foundation for success.
1. Defining the Internal Structure: Formation and Governing Documents
In our article, How do I form a legal entity for my business? , we discuss the differences between types of business entities and the process of forming a Delaware corporation and a Texas limited liability company. The governing documents of your legal entity will serve as a foundational internal rulebook. They should define the ownership structure, management responsibilities, and operational procedures, ensuring all parties understand their roles and rights. While these documents can typically be amended, it’s best to get them right from the start.
Delaware Corporation (Common Entity for Venture-backed Startups)
Formation Document: Certificate of Incorporation
This is the public document filed with the Delaware Secretary of State to legally create the corporation. It must include the corporate name, purpose, registered agent, and the total number of authorized shares (stock) the corporation is allowed to issue.
Key Considerations: The number and class of authorized shares (e.g., common vs. preferred) set here are critical for future equity grants and fundraising rounds.
Governing Document: Bylaws
Bylaws are the set of internal rules adopted by the corporation to govern its internal management, providing structure for the board of directors, officers, and stockholders. Bylaws are not legally required for a Delaware corporation to be valid. If the corporation does not adopt Bylaws, Delaware General Corporation Law (DGCL) provides default provisions that govern internal matters, including procedural rules for meetings, voting, and director actions.
Key Terms & Considerations:
Management Structure: Defining the roles and duties of the board of directors and corporate officers (e.g., CEO, Secretary, Treasurer).
Capital & Distribution: Procedures for issuing stock and declaring dividends.
Voting Rights: Rules for stockholder voting, including quorum requirements for meetings.
Meetings: Detailed procedures for conducting annual and special meetings of both stockholders and directors.
Consents in Lieu of Meetings: For corporations formed in Delaware, the DGCL permits the board of directors and the stockholders to take action via written consent in lieu of holding a formal meeting. This simplifies governance, but requires careful drafting of the Bylaws to specify which actions require unanimous or majority consent.
Initial Corporate Actions
Once the Certificate of Incorporation is filed, two initial actions are required to operationalize the company:
Action by the Sole Incorporator: This brief, formal document is the first step, where the incorporator, or the person who filed the Certificate, officially names and appoints the initial Board of Directors and adopts the corporation’s Bylaws. This document completes the formation of the corporation and formally hands over the administrative control of the corporation from the incorporator to the board of directors.
Initial Meeting of the Board of Directors (or Written Consent in Lieu of First Meeting): This is the critical meeting where the board of directors establishes the corporation’s legal and operational framework. This includes formally electing the corporation’s officers (e.g., CEO, Secretary, Treasurer), authorizing the issuance of stock to initial stockholders or founders, setting up bank accounts, selecting the corporation’s fiscal year, and ratifying all steps taken by the incorporator.
Texas Limited Liability Company (LLC) (Common Entity for Small Businesses)
Formation Document: Certificate of Formation
This is the public document filed with the Texas Secretary of State (SOS) to legally create the LLC. It must include the LLC’s name, designate a registered agent, and indicate the management structure (member-managed or manager-managed).
Governing Document: Operating/Company Agreement
The Operating Agreement (or Company Agreement) is the primary contractual agreement between the members, detailing the company’s financial and functional decisions. It is crucial for maintaining the legal distinction between the owners and the business. It must be formally adopted and signed by all members, but like Bylaws, it is generally not filed with the state. In Texas, an Operating Agreement is not legally required, but if one is not adopted, the Texas Business Organizations Code (TBOC) default rules will automatically govern the LLC’s internal affairs, which may not align with the owners’ intentions.
Key Terms & Considerations:
Management Structure: Defining whether the LLC is member-managed (owners run the day-to-day) or manager-managed (owners hire external managers, or owners serve in both manager and member capacities).
Capital, Allocations, and Distributions: How initial contributions are structured, and how profits, losses, and distributions are allocated among members.
Voting Rights: How members approve major business decisions (e.g., admitting new members or selling the company).
Meetings: Procedures for communication and decision-making among the members, often less formal than meetings for corporations.
Transfer Restrictions (Buy-Sell Provisions): Defines when, how, and for how much a member’s units or interest can be sold, including triggering events (death, disability, separation) and the valuation method. Alternatively, these provisions may be included in a separate agreement called a Buy-Sell Agreement.
General Partnership
Governing Document: Partnership Agreement
A Partnership Agreement defines the working relationship between two or more individuals (partners) who agree to share in the profits or losses of a business. While general partnerships are often formed implicitly by conduct, a written agreement is crucial to define roles, responsibilities, and future scenarios. This document is not filed with the state.
Similar to Bylaws and Operating Agreements, Texas law does not require a written agreement for a general partnership to be valid. However, a written contract signed by all partners is the only way to effectively override the TBOC default rules. Without a written agreement, TBOC provides that partners share profits equally and have equal management rights, regardless of their financial contributions or intent.
Key Terms & Considerations:
Profit & Loss Allocation: Specifies how income and losses will be allocated, which can be different from the partners’ ownership stake or capital contributions.
Management Authority: Clarifies the voting power of each partner and whether all partners must consent to major decisions.
Draws & Capital Contributions: Rules for partner withdrawals (draws) and requirements for future capital calls.
Dissociation & Dissolution: Establishes the procedures and valuation methods if a partner leaves or the partnership dissolves.
2. Planning for the Future: Owner Relationship Agreements
When multiple founders are involved, it is critical to establish a clear roadmap for future ownership changes. This prevents costly and potentially company-ending disputes should an owner decide to leave, become disabled, or pass away.
Restricted Stock Purchase Agreements (Common for Startups)
Restricted Stock Purchase Agreements (RSPAs) are agreements used when issuing stock at the beginning of the company’s life, particularly to founders and early employees. Unlike stock options, the recipient receives the shares immediately (often at a nominal price), but the company retains a right of repurchase over any unvested shares if the recipient departs before the completion of a specified vesting period. RSPAs are particularly crucial for early-stage companies to protect the equity structure and align incentives.
Key Terms & Considerations:
Vesting Schedule: Defines the period over which the shares are “earned” and the company’s repurchase right lapses (e.g., 4 years of continuous service with a 1-year cliff).
Repurchase Right: The company’s right to buy back unvested shares, usually at the original, low purchase price, if the founder or employee leaves before completing the vesting schedule.
Transfer Restrictions: Prohibits the recipient from selling or transferring unvested stock to outside parties.
Section 83(b) Election: For shares that are subject to vesting, this election allows the recipient to pay ordinary income tax on the low value of the stock at the time of grant, rather than paying potentially much higher ordinary income tax on the stock’s appreciated value when it vests. If the election is made, any appreciation of the stock over the initial value taken into account at the time of grant should be taxed at preferable capital gains rates. The recipient must make the election within 30 days of the grant date and failure to file this on time can result in massive future tax liabilities.
Stockholders’ Agreements or Shareholders’ Agreements
A Stockholders’ Agreement (or Shareholders’ Agreement) is a comprehensive contract among the stockholders of a corporation that governs their relationship with each other and the corporation. It goes beyond the basic structure of the Bylaws to manage complex issues related to equity ownership, sale procedures, and corporate control. The terms of a Stockholders’ Agreement generally apply equally to all stockholders, though they may be modified for specific investors through separate, confidential side letters.
Key Terms & Considerations:
Transfer Restrictions (Buy-Sell Provisions): Defines when, how, and for how much a stockholder’s shares can be sold, including triggering events (death, disability, separation) and the valuation method. Alternatively, these provisions may be included in a separate agreement called a Buy-Sell Agreement.
This is especially important for stockholders in community property states. The agreement should ensure that, in the event of a stockholder’s divorce, a former spouse is legally required to sell their community property interest in the shares back to the company or remaining stockholders, preventing unwanted outside interference.
Veto Rights and Protective Provisions: Specifies a list of major corporate actions (e.g., issuing new stock, changing the company’s business, selling all assets) that require approval from specific stockholders or investor classes, protecting minority interests.
Drag-Along Rights: Allows a majority of stockholders (usually those holding a majority of a specific class of stock) to force minority stockholders to sell their shares alongside them in the event of a company sale. This ensures an acquiror can purchase 100% of the company.
Tag-Along Rights (Co-Sale): Allows minority stockholders to participate proportionally in a sale of shares made by a majority stockholder to a third party. This prevents a majority stockholder from selling their interest without giving the minority stockholders a chance to exit on the same terms.
Dispute Resolution: Dictates the process for resolving disagreements among the stockholders. Many agreements mandate a tiered approach, starting with negotiation/mediation, then escalating to binding arbitration before resorting to costly litigation. Specifying this process ensures efficiency and confidentiality in high-stakes conflicts.
Non-Compete/Non-Solicitation Provisions: While typically included in employment agreements, these restrictive covenants are often included or referenced in Stockholders’ Agreements for key founder stockholders. They protect the company’s goodwill and competitive advantage by restricting a departing stockholder from competing with the business or soliciting its employees or customers for a defined period after their exit.
3. Compliance and Customer Trust: Documents for Conducting Business
After forming and establishing the governance and ownership structure of your new entity, the next step is ensuring that your entity is conducting business legally in all jurisdictions and building a transparent and protected relationship with your customers.
Obtaining an Employer Identification Number
An employer identification number (EIN) is a unique nine-digit identification number assigned by the IRS to business entities operating in the United States. Partnerships, limited liability companies, corporations, tax-exempt organizations, estates, and trusts are all required to have an EIN. Additionally, EINs are required to open a bank account for the business and for any business that has employees or that pays employment or excise taxes or taxes on alcohol, tobacco, or firearms. For sole proprietorships, it may be beneficial to obtain a separate EIN to avoid using the owner’s Social Security Number on business forms and vendor contracts.
Process: The IRS provides a free online application to obtain an EIN immediately. Be careful to only use the official IRS government website to apply for an EIN, and not a third-party website. Alternatively, a business can submit IRS Form SS-4, Application for Employer Identification Number, by mail or fax, although these methods often result in delayed processing times.
State Filings for Assumed Names & Foreign Qualification
Businesses must ensure they are properly registered to operate under a specific name and in all necessary locations.
Assumed Name (DBA/Fictitious Name): If your business operates under a name different from its legal entity name, you must file an assumed name certificate or similar documentation with the relevant state or local authority. Most jurisdictions require renewals for assumed name filings. For example, in Texas, renewals are required every 10 years.
Legal entities formed in Texas (e.g., corporations, limited liability companies) must file Form 503: General Information (Assumed Name Certificate) with the Texas Secretary of State. Unincorporated businesses (e.g., sole proprietorships, general partnerships) are not considered separate legal entities, so the owner or owners must file a certificate with the county clerk in every county where business is conducted.
Foreign Qualification: If your business is formed in one state (e.g., Texas) but conducts significant business activities in another (e.g., New York), it must register as a “foreign” entity in the second state. The threshold level of activity that triggers a foreign qualification requirement varies by state but generally includes having a physical presence in the state (e.g., a store or office), having employees in the state, having significant economic activity despite no physical presence, or owning property in the state. Additionally, if the business is subject to sales or franchise taxes in a state, it will generally be required to complete a foreign qualification registration prior to registering for a sales tax or franchise tax account.
Terms and Conditions
A clear and well-drafted set of terms and conditions (T&Cs) is essential for any business. They serve as the foundation of the relationship between the business and its customers, outlining the rights, responsibilities, and expectations of both parties. Beyond simply being a legal requirement in some contexts, they help prevent disputes, manage liability, and promote transparency and trust with clients or consumers.
Key Terms & Considerations:
User Obligations: Outlines what customers or clients can and cannot do when engaging with your products or services.
Payment Terms: Specifies pricing, billing cycles, late fees, and refund policies.
Intellectual Property Rights: States ownership of logos, designs, written content, and other materials.
Warranties: Clearly states any guarantees provided or, more commonly, disclaimers of warranties.
Dispute Resolution: Specifies the process for handling disagreements, often requiring mandatory arbitration before litigation.
Limitation of Liability: Defines the extent to which your business is responsible for damages or losses.
Termination: Explains how and when either party may suspend or end the agreement.
Governing Law and Jurisdiction: Identifies which state’s laws govern the terms. This is especially important for businesses operating across multiple regions.
Privacy Policy
A privacy policy is a fundamental tool for businesses that collect and handle personal information. Many states, including Texas, have enacted laws setting forth clear standards for how businesses must handle consumer data. A well-structured privacy policy not only ensures compliance but also builds customer trust by demonstrating the business’ commitment to transparency and safeguarding personal information.
Key Terms & Considerations:
Data Collected: Lists all categories of personal information collected (e.g., name, email, IP address, browsing activity).
Purpose: Explains the specific reasons for collecting the data.
User Rights and Consent Mechanisms: Clearly outlines rights, such as the right to access, correct, or request deletion of data, and explains how user content is obtained.
Opt-Out Mechanisms: Details how users can opt-out of data sharing or “sales” (as defined by privacy statutes).
Data Sharing: Discloses any parties receiving the data and provides for specific notice if selling sensitive or biometric data.
Data Security: Describes how data is protected in transit and storage, including encryption and access controls.
4. Safeguarding Your Value: Documents to Protect Entity Rights and IP
A business’ value often lies in its trade secrets and human capital. These documents ensure that confidential information stays confidential and that all intellectual property created by employees or contractors belongs exclusively to the company.
Employment Agreements
Employment agreements are critical documents that outline the rights, responsibilities, and expectations for both employers and employees. These agreements help foster transparency, reduce misunderstandings, and create a foundation for a positive and productive working relationship.
Under at-will employment (which is the default presumption in all states except for Montana), either the employer or employee can terminate employment at any time, for any lawful reason, or for no reason at all, without advance notice or legal liability.
However, when a written employment agreement contains specific terms—such as a fixed contract duration, required cause for termination, procedures for discipline or termination, or severance obligations—it overrides the at-will presumption. In these situations, an employer may only terminate an employee for the reasons listed in the agreement and must follow the procedures detailed in the contract. To override the at-will presumption, the employment agreement must clearly state the intent to create something other than an at-will relationship (for example, by specifying “termination for cause” or limiting the grounds on which either party can end employment). Without such explicit terms, at-will employment remains the default status.
Key Terms & Considerations:
Job Duties: Clear outline of the employee’s role, responsibilities, and reporting structure.
Compensation and Benefits: Detailed breakdown of salary, bonus structure, stock options, and benefits package.
Term and Termination: Specifies the duration of the contract and the conditions under which the company can terminate the relationship (e.g., termination “for cause” or “without cause”).
Safeguards for Proprietary Information: Confidentiality, non-disclosure, and non-compete clauses protect sensitive business information and intellectual property. Employment Agreements may explicitly incorporate other key documents like Confidential Information and Inventions Assignment (CIIA) Agreements by reference.
For a more in-depth discussion on considerations for Texas employers, please see our article, What are my obligations as an employer in Texas? .
Independent Contractor Agreements
Independent contractor agreements are essential documents for any business engaging external consultants, freelancers, or contract workers. These agreements establish the boundaries, expectations, and legal distinctions between a contractor and an employee, protecting both parties and ensuring compliance with labor and tax laws.
Key Terms & Considerations:
Scope of Work (SOW): Detailed description of services, deliverables, and deadlines or timing.
Payment: Specifies when and how payment is made (e.g., hourly rates or flat fee).
Independent Status Clause: Explicit language clarifying non-employee status for legal, tax, and benefits purposes and that the contractor controls the means and methods of work.
Protection of Intellectual Property: Confidentiality and non-disclosure provisions to protect proprietary business information. Intellectual property rights to specify ownership of work or inventions created during the contract.
Indemnification: Requires the contractor to protect the business from claims arising from the contractor’s work.
Non-Disclosure Agreements
Non-disclosure agreements (NDAs) are vital for businesses to protect sensitive information and maintain competitive advantages. NDAs legally bind parties to confidentiality, preventing unauthorized sharing or use of proprietary data, trade secrets, business strategies, client lists, and other confidential material. Implementing NDAs fosters trust, ensures clarity on what information must be kept private, and provides legal recourse in case of breach.
Key Terms & Considerations:
Definition of Confidential Information: Broad language describing what information is protected.
Obligations of Receiving Party: Specifies how confidential information must be handled.
Duration: States how long the obligation of confidentiality lasts (often indefinitely for trade secrets, but a set term for other information).
Exclusions and Permitted Disclosures: Lists information that is not considered confidential (e.g., information already publicly known) and defines any legal or required disclosures allowed.
Remedies for Breach: Details consequences and available legal actions if provisions are breached.
Non-Competition and Non-Solicitation Agreements
Non-Competition Agreements (Non-Compete): Non-competition agreements restrict employees from working with competitors or starting competing businesses within a specific geographic area and time frame after leaving the company. They safeguard trade secrets, promote employee loyalty, and help maintain market position by limiting competition from former employees.
Non-Solicitation Agreements (Non-Solicit): Non-solicitation agreements prevent former employees, contractors, or partners from soliciting a company’s clients, customers, or other employees after their departure. These agreements protect the business’ critical relationships and investments, such as client bases and workforce stability, by prohibiting poaching or direct efforts to divert customers or employees.
In Texas, for a non-competition provision to be enforceable, it must be ancillary to or part of an otherwise enforceable agreement (e.g., an Employment Agreement) and be supported by valid consideration, such as a job offer or providing confidential information or specialized training. If a restriction is overly broad, Texas courts have the power to reform the covenant to make it reasonable rather than voiding it entirely. Non-solicitation agreements are similarly enforceable if reasonable and designed to protect legitimate business relationships, such as client lists or employee retention, without imposing undue restrictions.
Confidential Information and Invention Assignment Agreements
Overview: A Confidential (or Proprietary) Information and Invention Assignment Agreement (a CIIA or PIIA) is a cornerstone document for protecting a company’s intellectual property and trade secrets. It ensures that any intellectual property, invention, or creation (e.g., code, designs, market plans) developed by an employee or contractor during their work is automatically assigned to and becomes the property of the company, preserving competitive advantage and reducing ownership disputes. Investors and buyers generally expect clean chains of title for a company’s IP, so CIIAs are standard diligence items for funding, M&A, and licensing.
Key Terms & Considerations:
Scope of Inventions: A broad definition covering all possible creations related to the company’s business.
Assignment of Inventions: Assigns all work-related IP to the company, plus a promise to assign future inventions conceived in the course of work. Includes assistance with any necessary filings.
Confidentiality Obligations: Requires non-use and non-disclosure during and after engagement and limits permissible uses only for company business.
Disclosure Requirement: Requires the employee/contractor to promptly inform the company of any relevant inventions and to maintain and disclose records relating to such inventions.
Return of Materials: Requires the employee/contractor to return or secure deletion of all confidential materials and devices at termination.
Exclusions: Allows the employee/contractor to list any prior inventions they want to exclude from the agreement’s scope.
Conflicts and Third-Party IP Rights: Provides assurance that contributions will not infringe others’ rights and there are no conflicting obligations to prior employers.
Remedies: Provides for injunctive relief and damages for breaches, with acknowledgment that monetary relief may be insufficient.
5. Operational Agreements: Real Estate and Services
Commercial Lease Agreements
A commercial lease agreement is a vital contract for businesses renting property for operations, helping set clear expectations and protect interests for both tenants and landlords. This agreement governs the use of the property, financial obligations, rights, and responsibilities, enabling business continuity and minimizing disputes.
In Texas, commercial lease agreements are primarily governed by contract law and are not subject to the robust consumer protection laws that apply to residential leases. Unlike residential leases, commercial leases are highly complex, often run for many years, and typically heavily favor the landlord. This means negotiation is paramount, and every clause, especially regarding liability, repairs, and termination, must be carefully reviewed.
Key Terms & Considerations:
Term and Renewal: Specifies the duration of the lease and the conditions for renewal options.
Rent and Escalation: Specifies the base rent amount and the mechanism for annual increases (e.g., fixed percentage or based on the Consumer Price Index (CPI)).
Common Area Maintenance (CAM) Charges: Specifies what operating expenses the tenant must pay in addition to base rent (e.g., taxes, insurance, utilities, maintenance).
Permitted Use: Defines exactly how the premises can be used (e.g., “retail clothing store” versus “general office space”).
Alterations and Improvements: Outlines rules regarding the tenant’s right to modify the space.
Maintenance and Repairs: Allocates responsibility for upkeep between the landlord and tenant.
Insurance Requirements: Specifies required insurance coverage to protect all parties.
Subleasing and Assignment: Specifies conditions under which a tenant may transfer lease rights.
Default and Remedies: Outlines what constitutes default and what actions can be taken.
Termination: Outlines procedures and penalties for ending the lease early.
Don’t let legal complexities delay your launch. Having these core documents professionally drafted and executed provides the necessary protection, clarity, and credibility you need to focus on growing your business.
Ready to start? Click here to schedule a consultation with Kalaria Law today to tailor each of these documents to the specific needs and goals of your new venture.
Disclaimer: This article is for general informational purposes only and does not constitute formal legal advice.