Five Must Have Contracts for a Newly Formed LLCs

29 Mar 2016

Once you have formed an LLC, one of the next steps is to get all the required contracts in order. Depending on the nature of your business, your contracts will vary. However, there are certain contracts that are crucial for your business interests. Here are 5 such legal documents that you should have in place, preferably within the first 90 days of forming the company.

  1. Operating Agreement
  2. Employment Agreement / Independent Contractor Agreement
  3. Confidentiality Agreement
  4. Master Service Agreement
  5. Website Legal Agreements

#1 Operating Agreement

An Operating Agreement is one of the most important legal documents for a LLC. It essentially lists out the rights and duties of each member forming the LLC. Instead of shareholders, an LLC has members, who are the owners of the company. Among other essentials, the operating agreement includes pivotal information, like membership class, ownership percentage, capital contribution, and profit and loss share percentage.

A detailed Operating Agreement also contains management clauses that deal with important business aspects, like

  • management of the affairs of the company,
  • the point persons who will manage the company affairs,
  • dispute resolution process,
  • meetings,
  • agendas,
  • minutes of meetings, etc.

The primary purpose of an Operating Agreement is to lay down the terms and conditions among the members in order to smoothly conduct the affairs of the business. Further, if a member wants to leave or a new member wants to join, the Operating Agreement is a useful reference tool to take an informed decision.

The Operating Agreement should not be confused with the Partnership Agreement where the liability of the partners is unlimited for the debts and obligations of the firm.

#2 Employment Agreement / Independent Contractor Agreement

Most LLCs will require the services of employees to effectively manage the affairs of the company. An employment agreement can be used to formalize the relationship between employer and employee, and governs the terms and conditions of the employment.

Independent contractors may also be used instead of employees to provide various services. One important difference between the two is the relationship between the parties. A regular employee works under the general supervision of the company, while an independent contractor works on project basis and does not participate in the affairs of the company, except the project he/she is entrusted with.

A well thought out employment agreement aims to cover every foreseeable eventuality that can arise between an employer and the employee. For instance, you must consider the following clauses that form an integral part of any employment / independent contractor agreement:

  • term of agreement
  • termination of employment
  • working conditions, rules and regulations
  • salary/fees
  • allowances, benefits, insurance, etc.
  • ownership of intellectual property rights to the work created during employment
  • non-compete clause
  • The employment agreements are governed by the employment laws and regulations applicable to a particular state and industry. If the employment agreement does not adhere to local laws and regulations, it may lose its enforceability in the courts. There may be significant consequences for the employer in case the employment agreement is unreasonably harsh on the employee.

    Please click here for a detailed discussion on the employment agreement.

    #3 Confidentiality Agreement

    The confidential information of your business, like trade secrets, client lists, business strategy, pricing policy, etc., is probably one of your biggest assets. As such, it should be protected by a Confidentiality Agreement before it is shared with employees, independent contractors or any other third parties.

    In some instances, the Operating Agreement includes confidentiality requirements for members and similarly, the employment contract covers the employees. However, for contractors and any other third parties, a carefully worded Non Disclosure Agreement (NDA) helps protect you against unwanted disclosure of confidential information.

    Customers’ information is also an important part of confidential information, and its protection forms an integral part of good business practices. Your confidentiality agreement must ensure protection of customers’ information, and you are responsible for ensuring your employees are aware and act appropriately to protect client and customer information.

    #4 Master Service Agreement

    A Master Service Agreement (MSA) defines the generic terms that will govern the future transactions between a long-term service provider and its customer. An MSA may set forth payment terms, intellectual property ownership, warranties, dispute resolution, limitation of liability, confidentiality, etc. A Master Service Agreement sets out most (but not all) of the terms between a service provider and customer.

    With the MSA in place, you will just require a simple purchase order or Statement of Work (SoW) to finalize the finer details of each interaction with your customer. A Statement of Work will consist of the project specific terms and conditions, and it will be governed by the generic terms contained in the MSA. For a detailed discussion on the SoW, please click here.

    #5 Website Legal Agreements

    Your website also requires certain legal documents to safeguard your interests. For instance, every LLC having an online presence should clearly display their Terms and Conditions on its website.

    Terms and Conditions are important as they limit the liability of the company in a number of situations, including any error in the content on the website, the delivery of products or services through the website, etc. Moreover, in the absence of Terms and Conditions, your business is open to be sued over its website in many more instances than it would be otherwise. The Terms and Conditions lists out the disclaimers that help in limiting the liability of the company in certain cases.

    Your website should also have a Privacy Policy that lets the users know the information collection and usage policies. Data protection and use of data collected from anyone’s use of the website are important aspects of a legally-run business, especially when it comes to customer data and payment related information (such as credit card numbers, etc.).

    Furthermore, Terms and Conditions and the Privacy Policy are important for Search Engine rankings of your website, as Google and other search engines may penalize sites without clearly accessible Terms and Conditions and Privacy Policies.

    As you can see, several legal documents are needed to give your company a solid legal foundation. Further, the documents are varied and some can be quite technical. Legal compliance is one important aspect for your business that can limit your liability in case your company faces a potential legal challenge. In this regard, professional help from legal experts will go a long way in addressing your legal concerns for your newly formed LLC. Further, it will help you spare some crucial time that can be better spent on the growth of your business.

    Tact can help review your employee contracts to ensure they provide you with the necessary legal protection - see more about our contract checking service.

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