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Five Internal Contracts Every Business Should Have.

Sana Virani

5/25/20243 min read

man writing on paper
man writing on paper

Having the right documents in place not only protects the interests of the founders but also creates a solid foundation for the business to grow and thrive. Proper documentation sets clear expectations, outlines responsibilities, and mitigates potential risks. The success and longevity of your business also depends on the documents that were made internally.

Key Benefits of Having Essential Documents

  • Legal Compliance

  • Asset Protection

  • Efficient Operations

  • Dispute Resolution

  • Investor Confidence

1. Operating Agreement/Bylaws

An operating agreement or bylaws prevent governance disputes by defining management roles and responsibilities, operational conflicts by detailing decision-making procedures, and ownership issues by specifying ownership percentages and membership changes. They outline profit and loss distribution, meeting procedures, and transfer of interests, ensuring transparency and order. These documents provide frameworks for dissolution, dispute resolution, and fiduciary duties, and set amendment procedures and capital contribution requirements. Additionally, they help ensure compliance with laws, preventing misunderstandings, conflicts, and legal issues, thus facilitating smoother and more efficient business operations.

2. Founders Agreement

A founders agreement helps prevent ownership disputes by defining equity distribution, clarifies roles and responsibilities to avoid role ambiguity, and outlines decision-making processes to manage conflicts. It includes equity vesting schedules to address early exits, assigns IP ownership to prevent disputes, and specifies compensation and benefits. The agreement sets terms for founder exits and share handling, ensures commitment and contribution levels, and includes non-compete and confidentiality clauses to protect the business. It provides succession planning, dispute resolution mechanisms, and guidelines for future investments and profit distribution, ensuring clear expectations and smoother collaboration among founders.

3. Terms of Service and Privacy Policy

The terms of service explain the rules users must follow when interacting with the business, while the privacy policy details how user data is collected, stored, and used, ensuring compliance with data protection laws. Terms of Service (ToS) and Privacy Policy documents help prevent legal liability by defining service terms and limitations. They protect intellectual property, manage user expectations about service availability and changes, and define account management terms. Privacy Policies ensure transparency about data collection, use, storage, and sharing, ensuring compliance with laws like GDPR or CCPA, securing user consent, and detailing data protection measures. These documents also enhance transparency, build user trust, and provide procedures for handling user data requests, ensuring regulatory compliance and reducing legal risks.

4. NDA

A Non-Disclosure Agreement (NDA) prevents the unauthorized disclosure of sensitive information, protecting trade secrets, business strategies, and proprietary data from being shared with competitors or the public. It ensures confidentiality during business negotiations and collaborations, safeguarding intellectual property and fostering trust among parties. NDAs clarify the scope of confidential information, set legal obligations for maintaining secrecy, and outline consequences for breaches, thus mitigating the risk of information leaks, legal disputes, and potential financial losses. They also define the duration of confidentiality and provide a clear framework for handling confidential information, ensuring all parties understand their responsibilities and the importance of maintaining discretion.

5. Employment/Freelance Contracts

Employment and freelance contracts prevent misunderstandings and disputes by clearly outlining the terms of engagement, including job responsibilities, compensation, deadlines, and performance expectations. They define the duration of employment, termination conditions, and confidentiality requirements, protecting the company's intellectual property and sensitive information. These contracts establish legal obligations for both parties, ensuring compliance with labor laws and preventing issues related to misclassification of workers. By specifying payment terms, work deliverables, and dispute resolution mechanisms, they provide a framework for addressing conflicts and ensuring both parties understand their rights and obligations, thereby promoting a smooth and professional working relationship.

Conclusion

In conclusion, these five documents are essential for business to establish a strong legal foundation and ensure smooth operations. Having these key business agreements in place is crucial for the smooth operation and legal protection of any business. They establish clear guidelines, prevent disputes, protect intellectual property, and ensure compliance with laws and regulations. Failure to maintain these agreements or neglecting their terms can lead to serious problems such as ownership disputes, legal liabilities, breaches of confidentiality, and regulatory non-compliance. Therefore, businesses must prioritize the creation, maintenance, and enforcement of these agreements to avoid potential pitfalls and safeguard their interests, reputation, and long-term. We recommend business prioritize the creation and maintenance of these documents to protect their interests and encourage growth, success.