Number of New Businesses Increase Due to Recession: Don’t Forget to Call a Lawyer

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The Star Tribune published an interesting article earlier this year. The article is only available in the print edition). The headline was “Starting Over: The economy has funneled thousands of Minnesotans into new jobs or even completely different careers.” The gist of the article is that the sour job market (50% fewer jobs available than in 2007!) and high unemployment (“real” unemployment has reached an astonishing 19%) has caused many Americans, after months of looking for a job in their field, to change jobs completely or start their own business. It has been reported that about 9% of all job seekers end up starting their own business. When you decide to take that leap and open your own business, there are always legal issues that you should address sooner rather than later.

The Star Tribune article mentioned a local man Dave Merten, who founded Snappy Dog Salsa after he lost his car dealership. All new business owners should make sure that they establish a business entity such as a corporation or a LLC (limited liability company) so that they are not personally liable for any debts or judgments that the business takes on. It is always best to keep separate business and personal (so no writing checks for the business out of your personal account…or vice versa!). If friends or relatives are willing to invest in your new business idea, prepare a promissory note if the money is meant to be a loan, or the proper documents like a member control agreement (if your company is a LLC) if that person will have an interest, whether financial, managerial or voting, in the company. While you can set up a LLC or a corporation with a website like LegalZoom.com, it is always recommended that you talk with an attorney and have him or her prepare the documents for the business entity to make sure that you are accomplishing what you and any potential investors want.

Mr. Merten should also make sure that his proprietary information is protected. In his case, his salsa recipe should be protected with confidentiality agreements that all employees or collaborators must sign. All confidential information about the  company and customer lists should also be protected in the confidentiality agreement. The last thing a salsa company wants is a former employee to go and start his own company with the company’s recipe and to contact the company’s customers to sell the new, competing salsa. A non-compete agreement could also be appropriate, provided that it is for a reasonable length of time and that it covers a reasonable territory (for example, you couldn’t prevent someone who leaves the company from opening up his own salsa business anywhere in the US or even just in Minnesota for 3 years after leaving).

If you do have other people working with you, make sure that you correctly classify then as employees or independent contractors. As we reported in our November newsletter, you can’t call a person an independent contractor just because you want to and because you don’t want to pay the taxes and expenses that go along with an employee. Whether a person is an employee or an independent contractor depends on many factors. And finally, if you do hire an employee, make sure you are up to speed on the laws, both federal and state, that regulate the employment relationship. The Minnesota Human Rights Act applies to all employers with 1 employee or more, Minnesota law provides for certain types of leaves (like a 6 week leave for the birth or adoption of a child for employers with 21 or more employees), and there are strict requirements for paying employees, whether for regular wages or overtime. You don’t want to start our your business on the wrong foot by not being informed of what your obligations are as an employer.

Let us know if you have any questions about your business or if you are thinking about starting one.

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