After months of planning, hypothetical number crunching, worrying and dreaming, you have finally done it: decided to start your own business. With all the opportunities and challenges that lay ahead, the last thing you probably want to think about is legal, let alone legal record keeping.
As mundane of a topic as this may sound, I hope that by the time you finish reading this post, you will see the value of keeping your legal ducks in a row right from the beginning to maximize your business value down the road.
At the beginning
As the heading suggests, if you avoid making common mistakes, you will likely encounter the first wave of legal record keeping right when you get your business started. During this stage, you will likely incorporate your business, obtain a tax ID number, create your limited liability company agreement or bylaws, obtain any licenses required to operate your business, secure a space to operate your business, obtain debt or equity financing for your business, etc.
Many of these actions result in legal records (in the form of agreements, licenses and certificates) that need to be properly maintained so that you can easily access these files when you need them. It is also necessary to provide these records to your advisors, namely your lawyer and accountant. And yes, if you did not engage a lawyer to help you get set up, I highly recommend getting a lawyer involved sooner rather than later to make sure you do not miss an important step that could be very costly (even catastrophic) down the road.
On the way up
As your business grows, you will likely engage with third parties with whom you will enter into agreements. For example, you may enter into non-disclosure agreements to protect the confidential information of your business, or independent contractor agreements with contractors you hire along the way. In addition, you may hire employees, enter into contracts with your customers and/or your vendors, etc.
It is very important to keep records of all of the agreements that you enter into with third parties as your business grows. Maintaining these records will ensure you have the ability to produce and enforce your agreements. Having your agreements in order is also helpful when negotiating new agreements and when you want to reference existing agreements to confirm terms that were agreed to and your rights and obligations thereunder.
In the end
After you have built your business, you may decide to sell your business so that you can enjoy the fruits of your labor. When you get to this stage, you will likely find yourself dealing with another wave of legal documentation before you even close the sale such as broker agreements, letters of intent and more.
However, this will likely be the stage at which your impeccable legal record keeping along the way will really pay off. Prospective buyers will want to conduct both legal and business diligence. Having your legal records organized will make the legal diligence process very easy. When diligence goes smoothly, buyers tend to have more confidence in the underlying business which may impact the purchase price.
Practical tips for legal record keeping
As a final thought, here are some practical tips to help you with your legal record keeping:
- For every agreement you enter into, be sure to keep copies of fully executed agreements containing signatures from all parties; and
- For every agreement, especially ones that will serve as templates that you will use over and over again in your business, be sure to keep final word versions, not only PDFs; and
- Use a spreadsheet to keep track of all of your legal agreements including effective dates, termination dates, notice periods and other key obligations; and
- Be sure to keep backup copies of all signed agreements in electronic format in the cloud so that you always have access to your documents even if hardware gets destroyed or lost.