Entrepreneurs should ensure they have the right legal documents before starting their business. Obtaining the appropriate documentation, state permits and licenses protect the interests of the business, minimizes financial risks and exposures.
See Also: How to get a loan from the Development Bank of Nigeria and grow your business.
Also, legal documents establish the business on the right side of the law. Additionally, it prevent the likelihood of business closures and payments of fines and penalties.
In this article, we listed and explained the top legal documents that businesses need to have.
Legal Documents Entrepreneurs And Start-ups Should Have
A business plan may not a legal document but it is very important should an entrepreneur require financing from investors. The purpose of a business plan is to aid the entrepreneur plan and make critical decisions.
The business plan states the goals and objectives of the business and how the entrepreneur seeks to achieve such goals.
Also, a business plan helps to keep track of the progress and growth of the business. Additionally, the business plan provides clarity on how to pursue opportunities for the growth and expansion of the business.
Certificate of Registration/Incorporation
A certificate of incorporation or registration is a legal document. It shows the business is registered under the appropriate authority to conduct business in Nigeria. Therefore, it’s one of the required legal documents for any business entity.
A business registering as a company receives a certificate of incorporation, while a business registering as a business name receives a business name certificate.
A certificate of incorporation is a legal document and shows the business is set up following the provisions of the law. It recognises the business as a legal identity distinct from the entrepreneur. Therefore, the law gives the business similar rights as a person recognized under the law.
The entrepreneur requires registration documentations to open a business bank account, bid for contracts, remit tax, etc.
An employee contract is a legal document that establishes the relationship between the entrepreneur and his employees. It enumerates the rights, obligations, responsibilities, and duties of each party in the employment relationship. An employee contract is one of the legal documents every entrepreneur must have as it protects him from certain liabilities and risks.
In the absence of an employee contract, the entrepreneur is exposed to liabilities and risks. The risks may include exposure of trade secret, confidential information about the employer or business, fruitless lawsuits, etc. These liabilities and risks have the potential of hindering the growth of the business.
Entrepreneurs operating as a limited liability entity requires an operating agreement. An operating agreement is a legal document outlining the terms of a limited liability company according to the specific needs of the owners.
The operating agreement states the obligations, duties, and responsibilities of the business owners to the limited liability entity. This agreement is similar to the Articles of Association of a company but it’s distinct from the Articles of Association. The specific interests of the owners are stated explicitly in an operating agreement while the Articles Association is modeled to the requirements of the law.
This document guides the internal operations of the business from the business’s financial, functional to administrative decisions. An operating agreement protects the status of the company and clarifies verbal agreements between the business owners.
However, it’s not mandatory for business owners operating a limited liability company to have an operating agreement as an article of association plays a similar role.
Businesses operating in the form of partnership requires a partnership agreement. A partnership agreement is crucial to the formation of the business as it defines the relationship between the business owners to the business.
So, the partnership agreement defines the initial contribution and future contributions of the partners. It guides the operations of the business starting from decision making, administrative and managerial responsibilities of the partners and the dissolution of the partnership.
A limited liability entity can operate without an operating agreement but a partnership cannot operate without a partnership agreement.
Company Constitution (Memorandum)
Businesses that want to operate as an incorporated entity require a constitution before registering such a company. A constitution is a legal document that contains information concerning the company. It defines the scope and limits of the goals, objectives, powers, and functions of the company.
Also, the document contains the name clause, objects clause, capital clause, liability clause, situation clause, powers of the company and shareholders of the company.
Moreover, this document is important as it defines the relationship between the company and the shareholders by stating the liability of each shareholder to the company. In addition, it helps prospective shareholders and the public (for public companies) have better insights about the company.
The memorandum of association comprises the company’s constitution and is referred to as the company’s constitution.
Every business delivers service(s) or enters into business contracts with its customers. In transacting with customers, the entrepreneur must have a service agreement with its client. A service agreement is one of the very important legal documents that define the relationship between the business and the customer.
A service agreement states the duties, obligations, and responsibilities of the parties towards each other concerning a proposed transaction. Also, it clarifies verbal agreements and misunderstandings between the parties, serving as a communication tool between the parties.
Furthermore, it helps protect the interests of the business in the event of a default in obligation by the other party. That being the case, the business may claim the remedies stipulated in the agreement.
It is quite common for businesses operating as limited liability companies not to have a shareholder’s agreement. This is because the rights of the shareholders are contained in the memorandum of association.
However, private limited liability companies need to have the proper documentation stating the rights of its shareholders. A shareholder’s agreement is a legal agreement or document between the company and its shareholders. It states their rights, liabilities, obligations, and responsibilities towards the company.
This document is important for businesses because the memorandum of association does not state the specific interest of the shareholders. In the memorandum of association the rights of the shareholders are generic Therefore, a shareholder’s agreement covers the specific interests of the shareholders and their responsibilities to the company.
The shareholders’ agreement covers matters that include voting rights, dividends, transfer of shares, mode of payment for shares, the procedure to follow in the event of the death of the shareholder, etc.
Intellectual Property Agreement
Intellectual properties are intangible assets created as a result of the business creativity e.g. goodwill, patents, copyrights, trademarks, database rights, confidential information, etc.
Every business has intellectual property whether they are aware of it or not, and like tangible assets, they can be sold, mortgaged, leased or licensed to third parties for the generation of income for the business.
Consequently, the protection of the business rights to their intellectual property when being used by third parties in agreements is important. This is because, these rights can be transferred to third parties without the owner’s knowledge, infringed upon, exploited in a way that affects the business negatively.
Industry Requirements (Industry Licensing)
Businesses that provide certain specialized services require licenses or permits from the appropriate authority or body to operate. An industry license is a legal document that shows that the business has obtained from the appropriate body the license to use a specialized skill in conducting the business of the provision of skillful services.
This license differs from the certificate of incorporation obtained from the Corporate Affairs Commission as it is industry-specific while a certificate of incorporation is a general license to conduct business in Nigeria.
For instance, entrepreneurs in the business of providing health care services require permits and licenses before they can operate. Also, entrepreneurs seeking to carry out the business of banking or insurance or stockbroking need a license from CBN, NAICON, SEC respectively in order to operate.
An entrepreneur operating in such skilled industries without a license or permits from the appropriate body risks the closure of his business, lawsuits, imprisonment, fines as stated in the law establishing that authority.
A business entity like any other legal entity has the right to its privacy. These rights include the protection of confidential information in its possession from third parties, as the misuse can affect the business negatively.
Such information includes financial records, client’s information, trade secrets, etc. Therefore, the need for a non-disclosure agreement between the business and privies to such information.
A non-disclosure agreement is a legal document that creates a confidential relationship between the business and the privies of such information. This agreement prevents privies from disclosing confidential information to third parties without the consent of the business owner.
These legal documents are more than just formalities. They help you set the right foundation for your business. Also, they protect and give you peace of mind as you navigate the entrepreneurial space.
Quite often, you don’t need to create this document from scratch if your business is under a tight budget, you can start by using some of the free templates online.
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