Starting a Small Business in Minnesota

The legal pitfalls to avoid

By Benjy Schirm, J.D. | Last updated on January 23, 2023

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You’ve been talking about it for years: striking out on your own, hanging your own shingle and being your own boss. If your stars are aligning—you have a business plan, the right partners and the funding you need—here are some of the pitfalls you can avoid as you head out on your new journey.

Incorporating Early

No matter what industry or market you plan to enter, in Minnesota, you must consider the legal ramifications of running a business. Aside from needing bank accounts, and filing taxes or registering your business with the state, the partners that you begin your venture with must be defined and agreed upon. As much as it may not feel like it, you and your business are separate entities. A business can be structured to benefit you, or it could be designed to hinder you; making the right choices legally from the outset will ensure growth and a solid foundation from which to work, while giving you the stability of knowing how much of the business you own.

Legal Problems Can’t Be Worked Out Later

Most small businesses are started with family members or best friends. But no matter how long you have known someone, when business gets involved, a whole host of personal and interpersonal needs show up. This is why there are HR departments in every business. Disputes are usually unavoidable, so you should put down, in a legal document, how they will be resolved. You should also clarify other potential issues, like who makes what decisions, and how—and when—people are paid.

Feasible Payment Structure

Most disputes in new businesses are over work ethic or pay—especially because a new business often has many expenses, and little-to-no money coming in. The general rule of thumb is that a business owner shouldn’t expect to be paid for the first year and a half of a business’ life. So, how do you survive during that time? Well, if there is venture capital money, some of it can be allocated to salaries. And any business that does come in may be divided amongst the workers.

Competitor’s Rights

Non-compete clauses in contracts are the most negotiated item and are often the most overlooked by employees. Non-competes must be examined and determined to be satisfied by your new business. Most restrictions involve geography and time; you must be certain your new business doesn’t run afoul of these constraints, or you may be walking into a lawsuit before your business begins.

Not Having NDAs or IP Protections

When you have a new idea or business, the first thing you want to do is tell the world how awesome your product or your service is. You’ll probably, however, want to avoid doing so until your intellectual property is protected. Friends, unfortunately, can steal ideas; family members bragging about your new successes can endanger a business’ future. If you’ve got a really great idea, you need to protect it, right away, or you may have an expensive legal battle ahead. Consider having people sign nondisclosure agreements before you show them your idea. Starting a new business is unimaginably difficult: Nearly 40 percent of businesses close in their first two years, and fewer than 50 percent make it to the five-year mark in Minnesota. Contact a reputable and experienced business attorney to help your fledgling company learn to fly. For more information on this area, see our business organizations overview.

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