Starting a business is, by definition, an involved process. Registering your business, finding a space, negotiating with suppliers, developing contracts and employee applications – all of these things involve more legal forms and i-dotting/t-crossing than you could ever have imagined. In all this chaos, it’s easy to overlook the importance of certain legal documents. For this reason, I’ve pulled together a list of the five legal business documents every new entrepreneur needs to consider.
Even the simplest business has numerous tax obligations. When trying to gauge yours, it’s best to break them into categories:
Federal Tax ID, or EIN
Most business owners need to register for an EIN, or “Employer Identification Number.” (To be doubly sure this applies to you, you can use the IRS’ handy checklist.) The EIN is essentially a Social Security Number for your business entity – it helps the feds identify your company come tax time. You will file your business entity’s tax return using your EIN. Applying for one is simple – just head over to this corner of the IRS website and fill out the online form.
These include the biggies – income tax, employment taxes, excise taxes and so on. Which forms you fill out depend on two factors: on your business entity type (sole proprietorship, partnership, corporation, C or S corporation, or limited liability company) and the nature of your business (agriculture, restaurant, retail, etc.). You can find your entity’s forms by visiting this section of the IRS website. Meanwhile, the Small Business Administration (SBA) has a useful list of business types with links to the forms required for each.
This is one tax topic many new entrepreneurs underestimate. Like federal taxes, state taxes vary between business types. They also vary from state to state. There isn’t enough white space here for me to outline each state’s tax laws. Your state revenue service will provide the forms that you need. SBA.gov has a helpful list, with links to the relevant sections of each state site.
Licenses & Permits
The tricky thing about these is that, like tax forms, they vary from business to business.
Federal licenses are determined by business type – a mini-golf center is going to have a different set of licenses/permits than a financial consulting firm. It’s not hard to figure out your federal licensing requirements. SBA.gov has a list of different business types and the licenses/permits required.
However, then there are the more localized licenses. These are the really tricky ones; they can vary from state to state, county to county, and even city to city. For these, your state’s, county’s and city’s official websites are your best resources. You can also use the following tools to streamline the form-finding process – for both state and local licenses.
Buy-Sell Agreement (BSA)
Here’s one document that often slips under the radar. For any company with more than one owner (apart from perhaps a spouse-spouse team), a buy-sell agreement is an important document to have in place. A BSA legally defines what happens if, for whatever reason, one owner leaves the company. It outlines what will happen to that ex-owner’s piece of the pie, thereby protecting the interests of the remaining owners and those of the company.
You and your co-owners need to draw up your own BSA. Luckily, it’s a relatively simple document, of which many examples and templates exist online. Common points of a BSA include:
Terms of Buy-Out – What parties are involved in the buy-out? Must both parties agree immediately? What is the required timing of buy-out payment?
Pricing – How will price be determined? What factors, such as the nature of the departure (amicable vs. non-amicable departure, disability-related, etc.) will affect the cost?
Funding – Will the buy-out be funded by a life-insurance policy or some other means of investment?
Assets – Does the BSA only cover the ex-owner’s business-related assets, or do other assets, such as loans, factor in? If loans apply, will they be dealt with only in dire circumstances (such as death or illness) or in a broader range of situations?
Legality – What cements the agreement? A personal pact between owners? A pledge of business-related assets?
Non-Disclosure Agreement (NDA)
No new business in this cutthroat, tech-savvy world gets far without a non-disclosure agreement. The NDA protects all of your company’s private information, from your top sales contacts to your method of putting bacon on a burger. (The key is in the distribution, right? And the weaving – oh no, I’ve said too much.)
All of your business associates, from suppliers to employees to consultants, should sign your NDA if they are going to be privy to confidential information.
An NDA is fairly easy to draw up. The basic components are as follows:
- The identities of both parties
- Definitions of any inexplicit terms (“ambiguous” ones, such as “proprietary information”.)
- Exceptions to the NDA.
The “exceptions” mentioned above mean any information that isn’t really confidential, such as:
- Public information
- Information already known by the receiving party
- Information dispensed lawfully by a third party, information that a third party learned on a non-confidential basis, or information that matches any third party’s non-confidential information.
After all the hassle of getting your business up and running, it’s tempting to let a few things slide. For example, in the case of selling or purchasing items, you might say to yourself, “Oh, I’ll just figure it out as I go along.” This is a mistake!
If your company grows the way you want it to, you’ll soon be buying and, if you’re a vendor, selling supplies frequently and in quantity. Depending on your business, you might end up with ten, thirty, or even hundreds of clients.
Now, think about having to negotiate an order with every supplier on a regular basis, while simultaneously keeping track of total costs and inventory. Got a headache yet? I do. You can avoid this nightmare, however, by using invoices and purchase orders. These documents help you keep track of what you have bought and/or sold. You’ll need to use purchase orders for the items you procure and invoices for items or services you sell.
A purchase order, (PO), is an offer you, the buyer, make to your supplier to buy certain items at certain prices. It does not become effective until accepted by the supplier; however, once it is accepted, it is legally binding. You are obligated to purchase all listed supplies at their listed prices, just as the vendor is obligated to supply them at those prices. While essential, the PO is not a complicated document, and you can find a customizable purchase order sample online. The main components of a PO are:
- Each item being ordered
- Cost of each item
- Total cost
- Names and addresses of purchaser and vendor
PO’s benefit your business in a couple of big ways –
Cost Control – Ordering willy-nilly makes it easy to overspend. PO’s consolidate the cost of each purchase, giving you fewer figures to add when calculating spending. This makes it easier to control your budget and profit margin.
Cost-Cutting – Many suppliers will offer discounts on bulk purchases. You can order the bulk amount and get the discount, then have the product delivered to you incrementally over a period of time by way of a “blanket” purchase order or annual contract.
Inventory Control – When an order comes in, a receiving manager checks the packing list against the PO. This ensures that the order received is correct and prevents you from paying for things you didn’t order. For example, if you order 5 boxes of Post-It Notes, your supplier might “accidentally” send you 15. Without a PO, your receiving department might just accept the order, meaning you pay 3 times as much for product you don’t need.
An invoice is a document issued to a buyer by a seller, indicating a fee due for products or services. The exact content of an invoice varies from business to business. I’m not going to go into depth about this here. If you’re going to be issuing invoices, check out an invoice template you can customize to your business.
Here are a few general tips for invoicing:
Send it out early – I don’t mean the week following the transaction. I mean the day, or the next. The longer you put off sending out your invoice, the further back the transaction will drift in your customer’s memory, and the longer he or she might take to deliver payment. This will cost your company money.
Format it clearly – This doesn’t mean list every item on a separate page (unless legal requirements dictate that you do so, which for some items they do!) However, you want to be sure that everyone who handles the invoice – such as packing and shipping personnel, receiving officers, and the clients themselves – can verify the correctness of the order.
Check your math – It’s easy, when busy, to hope the computer got it right the first time and send it off. However, overcharging and undercharging can both have grave effects on your business. Overcharging can easily lose you clients, as it’s a big disgruntler. And undercharging will without a doubt lose you money!
Make the total payment amount and the due date very, very clear. – Just keep in mind the three big B’s – Bold, Big, and printed at the Bottom of the document.
These five documents are not the only ones you’ll need for your start-up – not by far. But they are five cornerstones of any new business. By handling them properly, you create a strong foundation for your company and increase your chances of a long and profitable future.