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Entrepreneurial Services FAQ

• BEFORE YOU START YOUR BUSINESS
  • Should I prepare a business plan?
    • Yes. Preparing a business plan is a helpful and often enlightening experience. The process of putting your business concept on paper forces you to consider and analyze all aspects of the business and will help you better understand the business. It will also identify challenges or weaknesses that may have initially been overlooked. In addition to helping you better understand your business, the business plan is the primary document used by investors and lenders to help them understand your intended business.
      
      Business plans have varying degrees of complexity, depending on the type of business, its intended growth, and the plan’s purpose. Most business plans are about 2- to 30 pages long and typically include the following sections:
      
      • Executive Summary,
      • Business Description,
      • Market and Opportunity Analysis,
      • Business Model,
      • Competition,
      • Management, and
      • Financial Data.
      
      Business plans typically include financial projections which you should use to determine whether the business can be operated profitably in the future, and the amount of capital required to grow your business. This assessment should be done before starting the business. Even though they are uncertain and subject to great variance, investors and lenders also use financial projections to assess the opportunity presented by your business.
  • Do I need a separate entity such as a corporation or LLC?
    • Yes. Operating a business using a legal entity that is separate and distinct from you individually is a good idea. The most common legal entities utilized by owners are corporations and limited liability companies (LLCs), but there are others that may be more appropriate for your business. A business attorney (and an accountant) can assist you in determining which entity is most appropriate for your business and its future plans.
      
      If you operate your business as a sole proprietorship or partnership (without a separate legal entity), you (and all of your personal assets and resources) will be personally at risk for the debts and obligations of the business, even though they were incurred as part of the business. Operating a business using an entity shields the owners from personal liability and provides a significant layer of protection against the debtors and creditors of the business. In a properly formed and operating business entity, you are not personally responsible for the debts and obligations of the business. Other reasons to establish a business entity include tax advantages, that the entity’s duration is typically indefinite and not tied to the life of the owner, and it will be easier to raise outside capital operating as an entity.
  • When and how do I set expectations among the owners/founders?
    • Soon. Expectations of the owners/founders of a business should be addressed as early as possible to ensure that all of the owners/founders have the same understanding about how the business will be operated and grow, and about allocation of risks, responsibilities, and expected returns. Common considerations for new businesses include:
      
      • relative ownership percentages and rights,
      • allocation of profits and losses,
      • compensation (of owners and others),
      • responsibilities and obligations,
      • access to capital,
      • limitations on transfers of ownership interests, and
      • plans relating to future sale or exit from the business.
      
      These considerations and others should be addressed and put into written agreements among the owners/founders as soon as possible, ideally prior to creating any real "value" in the enterprise. If expectations and obligations are not addressed and agreed to when the business is organized, disputes, disagreements and challenges could arise, all of which could harm the business, cause distraction and expense, and possibly lead to the failure of the business.
  • What must I have to start a business?
    • Commitment and capital are crucial to start-up businesses and the absence of either one could cause the demise of your business. As is the case with most young companies, you should expect to experience difficulties during the start up phase and growing pains as the business progresses. If you are in a personal financial or other situation that will prevent you from being fully committed to your new venture, you should consider delaying starting the business until your circumstances are more favorable. Businesses require money to operate and grow. You must determine the amount of capital that will be required to start your business and to operate until you reach profitability or until you can obtain financing from other sources. A business that doesn’t have enough revenues or capital to fund its organization and operations is all but certain to fail.
  • Do I need to have officers/board members?
    • Yes. Legally, your entity is required to have officers and a board. In early and limited circumstances, these titles could all be held by a single founder. However as your business grows, adding capable and experienced officers and board members will allow for additional points of view, provide access to contacts, spread out responsibilities and increase the businesses chance of success. We strongly urge you to add advisors who can help your enterprise and who bring strengths, skills and contacts that complement, rather than duplicate, your own.
  • Do I need a lawyer?
    • Yes. While retention of an attorney is not legally required to organize a business, there are several legal issues that you should consider prior to starting a business. An attorney who routinely deals with forming businesses can be an invaluable advisor at the formative stage of your business. By employing the services of a legal professional, you can feel confident that the business is being properly formed, and can avoid worrying that you have overlooked an important legal consideration in forming your business.
      
      Other helpful resources are also available to assist you including the Minnesota Secretary of State, Department of Employment and Economic Development, along with other advisors (like accountants and bankers). Starting a business without the assistance of a legal professional can be compared to wiring a house without the services of an electrician; it can be done without the assistance of a professional, but the only way you will know that a mistake has been made is when it’s too late. Hiring a legal professional at the outset can lay the proper foundation for your enterprise and prevent unforeseen problems in the future.
  • Do I need other professionals or advisors?
    • Yes. Exactly what other help your company needs will depend upon the capabilities of you and your team balanced against the needs of your company You should conduct a thorough self-analysis of your (and your team’s) individual strengths and weaknesses, and seek out advisors and other professionals who will complement your strengths and address your company’s weaknesses. Developing relationships with certain types of advisors can add real value, including:
      
      • Finding an accountant who has experience with your type of enterprise, including industry expertise, where possible. Your personal accountant may or may not be the ideal choice for your business. Seek referrals from business contacts and professionals to an accountant well-suited to help your business.
      • Developing a relationship with a banker, even prior to the time you really need assistance from a bank, is also something that can have a positive impact on your business in the future.
      • Consultants who have unique and relevant experience in analyzing and managing businesses, along with other expertise your organization currently lacks.
• SETTING UP A BUSINESS
  • Should I set up a separate business entity?
    • Yes. A primary benefit of operating your business through a separate entity is to protect your personal assets from your business creditors. There also may be tax benefits available from operating through an entity.
  • What types of business entities are available, and which should I use?
    • There are numerous types of entities providing varying degrees of liability protection and multiple management structures. The right entity choice for your business will depend on many factors, including the anticipated management structure for your business, prospects for growth, capital needs and sources, tax considerations, and other matters.
      
      The most common forms of entities are limited liability companies and corporations. In the case of both entities, assuming they are well formed and maintained, an owner’s exposure to the claims of the entity’s creditors is limited to the owner’s investment in the entity with limited exceptions. Each entity is governed by a board and has a centralized management structure.
      
      Other types of business structures include:
      
      • partnerships which offer a decentralized management structure but do not protect personal assets from business creditors,
      • limited liability partnerships, which offer the same protection from an entity’s creditors, but provide for a decentralized management structure much like a partnership,
      • sole proprietorships, which are not separate entities and rarely effective for any sort of successful business.
  • Are there tax advantages to forming certain entities?
    • Yes, each form of entity is taxed either as a corporation (often referred to as a "C corporation"), S corporation, or partnership. Each form can provide tax benefits depending on the entity’s and owner’s situation. A brief summary of some of the considerations for each type of entity is provided below:
      
      • C Corporations. Are subject to two levels of tax. First, corporate earnings are subject to corporate income tax. If these earnings then are distributed to the shareholders as dividends, they are subject to a second level of tax at that level. An owner that intends to reinvest profits into the business rather than distribute them to the owners may not be all that concerned regarding the second layer of tax at the time of business start up. These shareholders sometimes elect to accept the additional layer of tax to obtain other non-tax advantages afforded by the corporate form. For other owners, however, a C corporation can be a tax inefficient way to operate your business. This inefficiency can often arise at the time of exit if the business is to be sold through a sale of assets, typically a buyer’s preferred structure.
      
      • S Corporations. If eligible, certain corporations elect to be taxed as "S corporations" (under subchapter S of the Internal Revenue Code) which allows them to pass earnings (and losses) through to shareholder without incurring an additional layer of tax. This generally allows the shareholders to be taxed directly on business income, and eliminates the second level of tax. S corporations may provide the shareholders with additional benefits. Compared to a limited liability company, for example, an S corporation may help owners who work in the business limit their exposure to payroll taxes. However, an S corporation also must observe a number of special rules regarding ownership and distribution of profits to be eligible to become an S corporation and to maintain that status. These rules can limit the entity’s flexibility with respect to ownership and distribution of profits, but they also tend to be simpler than the tax rules that apply to entities taxed as partnerships.
      
      • Partnerships. Entities taxed as partnerships can provide for a more efficient and flexible tax structure. The owners of various forms of partnerships and limited liability companies are taxed directly on the earnings of the entity, which "pass-through" to the individual owners’ tax returns without an additional layer of tax. Each owner reports his or her share of the entity’s earnings, deductions, and losses, and pays tax on any net in come at the owner’s individual tax rates. Unlike an S corporation, there are no limits on who can be an owner of an entity taxed as a partnership. As long as partnership tax rules are respected, the partnership form provides a great deal of flexibility for owners to design an entity structure around the needs of their business and circumstances.
      
      The relative tax benefits and issues of each form of entity will depend on the facts surrounding your business and situation. In each case the professionals at Gray Plant Mooty can help you make these decisions and identify a form of entity that suits your business needs.
  • Where should I form my entity?
    • In most cases we advise clients to form the entity in the state where their business is located. For a large number of our clients that means organizing their business in Minnesota. It also happens that Minnesota has a very well written and easy to use corporate statute and low costs for maintaining an entity in the state. There are some minority shareholder protections that may or may not be appropriate for your business or structure so we strongly caution you to discuss this choice with your legal advisor.
      
      For some clients there are advantages to organizing their business in other states either because of the business’s location or, more often, to take advantage of another state’s tax or corporate laws. For example, many corporations are organized in Delaware because of its advanced and flexible corporate statutes and the universal appeal to investors from other states. While the costs of maintaining a corporation in Delaware can be higher than many jurisdictions, Delaware has a well developed body of corporate case law and the Delaware’s legislature keeps its corporate and business statutes current.
  • What will it cost?
    • The cost of organizing an entity depends on the complexity of the entity and the state in which the entity is organized. Although the initial filing fee in most states is less than a couple hundred dollars, some states, like Delaware, regularly assess a franchise tax against entities formed in their jurisdiction. These franchise taxes can be significant in certain circumstances. Minnesota does not have a regular corporate franchise tax and in most cases, as long as an entity complies with its annual filing requirements, Minnesota will not charge additional fees. From a cost perspective, this makes Minnesota entities attractive to small business owners and entrepreneurs.
  • How do I choose a name?
    • If you have a particular name in mind, your lawyer should be able to help determine whether that name is currently in use or whether there are risks associated with operating your business under your desired name. The name of your entity may or may not have any relationship to your business, services, and/or products. How to name those items is a separate topic and can often be significantly influenced by trademark law.
  • Do I need a separate office?
    • No. You do not need a separate office. In most states, a physical address is required when an entity is formed. The purpose of this address is to provide a physical location where legal notices may be served on the entity. Using your personal residence as the official address of the entity will not, on its own, cause your residence to be considered a part of the business.
  • What documents are required to set up a business?
    • "Articles of Incorporation" are filed to organize a corporation. For a limited liability company the document is called "Articles of Organization." Your entity will not exist until this document is filed with the state of organization. Other documents are also important to the organization and ongoing maintenance of a business entity. It is very important that, among other requirements, you maintain "corporate formality" relating to your entity or you could risk losing the liability protection for your personal assets that normally exists when you have a separate business entity.
      
      • Minnesota corporations and LLCs typically have bylaws, which set forth the basic procedural rules for governance of the entity and its owners. A Minnesota LLC typically also has a Member Control Agreement, which operates much like a partnership agreement, setting forth economic and other rights of the members.
      
      • Although not required by law, we usually recommend that any business with multiple owners consider a buy/sell agreement, either separately in the case of a corporation or as part of the Member Control Agreement in the case of a limited liability company. These agreements generally provide the entity and the owners with options to acquire an owner’s share of the business in the event of a tragedy or a change in relationship among the owners.
  • Should I license or assign technology I own to my business?
    • Maybe. The answer to this will depend on your plans for your business. If your business is likely to remain closely held and without significant needs for outside capital, it may make sense to set up a license arrangement because the technology rights may revert to you individually in the event the business fails. If you plan to raise capital from others which will require other owners, an outright assignment of the technology may be required by investors in order to attract their capital.
• RAISING MONEY FOR YOUR BUSINESS
  • How do I fund my business?
    • Generally, you can raise capital by either obtaining short or long-term loans (Debt) or selling ownership in your business (Equity).
      
      • Debt Financing. If you decide to obtain a loan, you are borrowing money on the promise you will pay it back, usually with interest. Loans may be obtained from different sources, including lending institutions (banks) or from friends and family. For a startup company without much operating history or assets, banks will likely require a guarantee and/or some sort of collateral. This would require you to personally guarantee the loan, or collateralize it with your house or with assets of your business. If you plan to obtain a loan from friends and family, you should understand that there are legal compliance (including securities laws) issues involved.
      
      • Equity Financing. Another option is to raise capital by selling equity in your business in a private offering. Typically, an investor would invest capital (in the form of cash or assets), in the business for a share of equity interest in the company. This will also require compliance with applicable laws, including, in particular, state and federal securities laws.
  • Should I self-finance or take money from others?
    • This depends on the amount of capital your company will need to grow and how much control you need to be comfortable running your business. Ask yourself: How much control are you willing to give up for investment money?
      
      Often times entrepreneurs take money when they start their business from family and friends. This initial money is often referred to as "seed money." The seed money may be enough to get the business off the ground. In exchange for the seed money, business owners usually give up portions of equity in the business. As your business grows, the business may need to obtain additional rounds of financing. With these additional rounds of financing, additional equity is given up in exchange for additional investments. If your business requires large sums of money to grow, you may want to consider obtaining large investments from venture capitalists or from either individual angel investors or organized investment groups.
      
      In either case, it is important to balance the capital needs of your business against the amount of control you need to retain. Sophisticated investors (venture capitalists and angels) will often require certain governance and voting rights in addition to the equity they obtain in the upside of the business.
  • How much money do I need?
    • This is really driven by your current cash flow, your budgeted needs, the stage of growth of your company, and ultimately, your business plan. You should consider expenses, growth plans, and amounts needed to maintain the business and accomplish the businesses goals. Ideally, you should raise enough money at one time to be able to accomplish a defined set of goals and cover the expenses of your business for a defined period of time.
  • What are different stages of financing?
    • The first stage of financing is raising what is typically called seed money. People raise seed money (often from friends and family) to get their business off the ground and to cover some of the start-up costs associated with starting a business. The next stages of financing are typically referred to as "rounds" or "series’" of financing. Entrepreneurs typically will conduct a certain round of financing to fund certain growth stages of the business. Various rounds of financing can continue until the business becomes profitable on its own and can generate cash needed to fund future growth and developments.
      
      Sometimes, businesses that are further along in their development and needing access to larger sums of money only accessible through the public equity market, may consider taking the company public. With an initial public offering, a business (almost always with the assistance of an underwriter) would go through the lengthy and costly process of issuing shares of stock to the public and listing the shares for sale on a public exchange like the New York Stock Exchange or NASDAQ.
  • How do I find investors?
    • Finding individuals or organizations to invest in your business can be very difficult and is almost always time consuming. Many entrepreneurs begin by asking friends and family (or others closely connected to them) to invest in their businesses. As discussed above, as the business and its capital needs grow, you may decide to seek institutional or angel investors for capital.
      
      There are very strict federal and state securities laws that govern solicitation of investors, however. So, when looking for investors, you need to be mindful that you need to comply with the laws that regulate offers and sales of securities.
      
      To make search for qualified investors easier, you may be able to hire a third party to find qualified investors for you. You can consider engaging a licensed broker to help find investors who would be willing to invest in your business. You would likely have to pay them a fee, usually composed both of cash and some form of equity interest in the business.
  • What documents do I need to provide to investors?
    • Federal and state securities laws require companies to disclose all "material" facts about themselves and the offering. To satisfy these disclosure requirements, you will need to provide prospective investors with a form of offering or disclosure document. This disclosure document gives material information about the business and the possible risks of investing. There are many forms of disclosure documents—often small business owners will provide prospective investors with a private placement memorandum, or a truncated or abbreviated version of a private placement memorandum, depending on a number of factors, including sophistication of the investor and the dollar value of the securities being sold.
  • Can I pay someone to raise money for me?
    • Yes, you can pay someone to raise money for you. You can engage licensed placement agents or brokers to assist you in raising money and finding investors. You should hire only those who are licensed to solicit investments and help you raise money. Using a broker who is not licensed can create legal compliance problems and may invalidate all of the investments you received.
      
      Engaging licensed placement agents or brokers to assist you usually increases the likelihood that you will raise the capital you need. For their assistance, placement agents typically receive a commission for selling the securities and may require warrants to purchase securities in your company.
• PROTECTING BUSINESS IDEAS - INTELLECTUAL PROPERTY
  • How do I protect my idea for a business?
    • Unfortunately, ideas alone cannot be protected by law. However, once those ideas begin to take shape in the form of an invention, a creative work, or a brand name, intellectual property law is a useful tool to protect your business against competitors.
  • How do I protect what’s unique about my business?
    • Determining how to protect what’s unique about your business is dependant on what type of business you are in. It could require filing for a patent for your invention or it could require registering the name of your company as a trademark. In essence, protecting what’s unique about your business under the law will require an approach tailored specifically to your business.
  • How do I protect my brand?
    • Registering the name of your business or your product as a trademark can be an effective way to begin protecting your brand. Trademark rights may be used to prevent others from using the same mark or a confusingly similar mark, but not to prevent others from making the same goods or from selling the same goods or services under a clearly different mark.
  • What is intellectual property?
    • Intellectual property is a term that refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. The term intellectual property encompasses trademarks, copyright, patents, and trade secrets which are all types of legal protection for various types of intellectual property.
  • What is a trademark?
    • A trademark includes any word, name, symbol, or device, or any combination used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others, and to indicate the source of the goods. In short, a trademark is a brand name.
  • What is a copyright?
    • A copyright is a form of legal protection provided by law to the authors of "original works of authorship," including literary, dramatic, musical, artistic, and certain other intellectual works. This protection is available to both published and unpublished works.
  • What is a patent?
    • A patent is a grant of exclusive property rights by the U.S. Government for inventions for a fixed period of time in exchange for public disclosure of the invention when the patent is granted. The grant of a patent excludes others from making, using, or selling the invention in the United States. A patent cannot be obtained on a mere idea or suggestion but requires an actual invention.
  • What is a trade secret?
    • A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information used by a business to obtain an advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information." A trade secret may not be eligible for protection by patent, trademark, or copyright law, but must remain a company secret that is not made available to competitors or the public in order to retain any legal rights as a trade secret.
• KEEPING YOUR BUSINESS "LEGAL"
  • What filings do I need to make once my entity is formed?
    • If formed in Minnesota, both Corporations and LLCs need to file an annual report with the Minnesota Secretary of State. The report form can be accessed online at http://online.sos.state.mn.us/abr/corp_annual_filing.asp and must be filed before December 31 of each year after the entity is formed (there is no need to file a report for the year in which your entity is formed). Similar requirements exist for entities formed in other states. You must file all required tax returns with the IRS and the Minnesota Department of Revenue. Finally, there are also other possible filing obligations if you do conduct business in other states.
  • What if I did not file my Annual Report?
    • If you did not file your annual report your entity may be administratively dissolved. If your entity is dissolved, it may be reinstated for a fee.
  • What things should I consider if I conduct business in other states?
    • If you are a Minnesota corporation or LLC and you operate in other states, you should consider the following things:
      
      • Does the particular state require me to register in that state to conduct business?
      • Does the particular state require my particular business or activity to be licensed in that state to conduct business?
      • Do I have to file tax returns or pay tax in the other State in which I conducted business?
  • What information do I need to keep?
    • In Minnesota (and most other states) corporations and LLCs must maintain the following information:
      
      • General financial records,
      • Annual year end financial statements including a balance sheet and an income statement,
      • Records of all meeting and decisions of shareholders for the last three years,
      • Records of all meetings and decisions of the board for the last three years,
      • Articles,
      • Bylaws,
      • Reports made to shareholders generally within the last three years,
      • Names and contact information of the board members and officers,
      • Shareholder or member control agreements,
      • Certain other agreements.
  • Where do I keep that information?
    • The information that you are required to keep and maintain should be kept in the company’s record book or corporate minute book at the entity’s principal executive office or at another place determined by the board. Often, we maintain the original minute book of many of our client companies, with a "shadow" copy of the minute book retained at the company’s principal offices.
  • Who is entitled to look at that information?
    • Generally, the shareholders, the members, or the beneficial owners are entitled to have access to the company’s records.
  • Do I have any obligation to provide information to owners even if they have not asked for it?
    • No. You do not need to provide information if the owners do not request it. However, if they make a written demand for such information, you must provide the information to the requesting owner within the timeframe provided by law.
  • Do I need to have shareholder/owner meetings on a regular basis?
    • While it is good corporate practice to have at least one meeting annually of the shareholders or owners, no meetings are required at any regular interval for Minnesota entities. In some cases, your articles or bylaws may require regular meetings. They are also required by law in certain states (like Delaware) and must be held upon appropriate demand of an owner.
  • Who is authorized to make decisions on behalf of my Company?
    • Generally, directors make decisions that relate to non-day to day activities such as: director and key officer compensation and hiring, creating new product lines, approval of annual budgets, key strategic decisions, undertaking significant expansion or debt, and the issuance of equity in the business. Shareholders/owners are only required to be involved in the most significant types of actions to be taken by the company (like a sale of the business or substantially all its assets). Finally, officers and other personnel make decisions relative to the day to day operations of the business.
  • How do I record decisions?
    • Decisions may be recorded in the form of (1) meeting minutes for board and shareholder meeting or, 2) written actions by the board or owners for decision that occur outside of meetings. Written actions may require unanimous consent unless a lesser number is authorized in your articles.
  • What if I am not in compliance?
    • Generally, if a corporation (or LLC) is not incompliance with the statutory requirements, or otherwise fails to maintain its separate existence (e.g. lack of corporate formalities, commingling of corporate and personal assets and bank accounts), because failing to do so may cause you to lose the liability protection for personal assets usually afforded by the existence of the entity. losing its status as a corporation (or LLC) and the owners run the risk of losing the entity’s liability shield.
• GETTING MONEY OUT OF YOUR BUSINESS?
  • How much cash from operations can be distributed from my business to the owners of the business?
    • Many state statutes restrict the amount of distributions that can be made to the owners of a company for purposes of protecting the company’s creditors. In Minnesota, for example, the company may distribute cash from operations to the company’s owners only if its board determines that the company will continue to be able to pay its debts in the ordinary course of business, and only in an amount that meets this test.
  • I want to sell my business, but I have not received an offer to purchase it. How do I find a buyer?
    • One option is to hire an outside investment banker who will do some of the leg work in finding possible buyers. An investment banker can also help advise you on financial aspects of the deal and help you to obtain the best possible price, all the while allowing you to continue the work of building value in your business while he or she moves possible deals forward.
  • Should I sell the stock or the assets of the business?
    • As a seller, you will generally prefer to sell stock because this means the company will continue as the same legal entity but just have different owners. All known and unknown liabilities of the company will stay with the current legal entity, so you do not need to worry about unknown liabilities after the transaction has closed.
      
      It may be difficult, however, to find a buyer willing to purchase stock. For the same reasons that sellers typically prefer to sell stock, buyers typically prefer to buy assets. When a buyer buys assets, for the most part, it removes the risk of the buyer becoming responsible for any liabilities of the selling company.
      
      Whether a sale will be of stock or of assets should be discussed early in the negotiating process, both because this is likely to affect the purchase price, tax treatment, and all of the documentation drafted in connection with the sale.
  • What is the timeline for completing a sale of a business?
    • This varies widely depending on a number of factors including the complexity of the transaction, the number of parties involved, availability of the parties’ counsel and any actions that need to be completed prior to the sale (e.g., governmental approval). From the time that basic deal points are agreed to, the most simple transactions might be able to be completed in a matter of several weeks. More typically, transactions take two to six months to complete. Very complicated transactions requiring regulatory approvals and similar complexities can take a year or more from start to finish.
  • At what point in the process of a sale of a business should I get an attorney involved?
    • It’s probably best to get an attorney involved as soon as you are in serious discussions with a potential buyer. Getting an attorney involved early in the process may help to focus early negotiations in order to more efficiently determine whether or not the parties will be able to reach a definitive agreement. It also will likely ensure that you are raising all of the most important issues at the front end of the process so you aren’t forced to deal with them after you have already invested a lot of time, money, and energy in a possible sale.
• WORKING WITH EMPLOYEES AND CONSULTANTS
  • What’s the difference between an employee and a consultant?
    • Whether a worker is considered an employee or consultant can be very important. The law treats these different relationships differently in many situations, including taxes and the application of workplace laws such as discrimination and leave laws.
      
      Failure to properly classify the relationship can have significant consequences. For example, a company (and, in some cases, even the company’s officers and directors personally) who improperly classifies an employee as an independent contractor may be subject to all the unpaid income taxes, payroll taxes, and the FICA taxes of the employee, in addition to penalties and interest.
      
      In evaluating whether a worker is an employee or a contractor, administrative agencies and courts will generally disregard the label that the parties place on the relationship and instead look to factors such as:
      
      • Right to control the manner and means by which the project is accomplished;
      • Skill required for the job;
      • Source of instrumentalities and tools used in completing the job;
      • Location of the work;
      • Duration of the relationship between the parties;
      • If the company has the right to assign additional projects to the hired party;
      • Extent of the hired party’s discretion over when and how long to work;
      • Method of payment;
      • Hired party’s role in hiring and paying assistants;
      • Whether the hiring party is in business;
      • Provision of employee benefits; and
      • Tax treatment of the hired party.
  • What documents should I use with employees?
    • There are a variety of documents that you are required to use or should consider using with employees. These include offer letters, employment agreements, governmental forms, employee handbook, job descriptions, and workplace signage. A brief summary of each of these items follows:
      
      Offer Letter
      We recommend that all employers use an offer letter that outlines the basic elements of the position, proposed compensation and conditions for being hired (e.g., background checks, checking references, confirming educational background, signing a satisfactory employment agreement, noncompete agreement, confidentiality agreement, etc.).
      
      Employment Agreement
      An employment agreement is not necessary in every case especially if you use offer letters. Employees employed on an "at-will basis" (meaning the employer or the employee can terminate the employment relationship at any time for any reason) may not require an employment agreement. Most employers, however, have a number of conditions and obligations that they wish to impose on the employment relationship and this is best done through the use of an employment agreement.
      
      Items typically addressed in an employment agreement include:
      • Position, salary, bonus, and other compensation and benefits
      • Termination procedures and obligations, including severance
      • confidentiality, non-compete and assignment of inventions provisions
      
      Many of these provisions must be written to protect legitimate business interests. There are also certain other limitations and legal requirements to make them enforceable. It is important that you consult your legal advisor about these requirements before commencing an employment relationship.
      
      Governmental Forms
      At a minimum, you will need to have all employees fill out a Form I-9 (Employment Eligibility Verification) and a Form W-4 (Employee Withholding Allowance Certificate). The I-9 is designed to ensure that the individual is legally authorized to work in the United States and must be completed within three days of an employee’s start of employment. You can find the form on the U.S. Customs and immigration service web site at www.uscis.gov/files/form/i-9.pdf. Likewise, employers must have a new employee complete a federal Form W-4, available at www.irs.gov/pub/irs-pdf/fw4.pdf, for the purpose of withholding federal taxes. Minnesota does not have its own version of Form W-4. Instead, the Federal W-4 Form should be used in accordance with instructions available at www.taxes.state.mn.us/taxes/withholding/ to claim Minnesota withholding allowances.
      
      Employee Handbook
      We recommend that you develop and distribute an employee handbook that contains all your personnel policies that employees need to know and follow. Handbooks should be carefully drafted, however, to avoid creating legal commitments an employer may not want to keep, and to avoid creating legal promises that might alter the at-will employment relationship.
      
      Written job descriptions
      In addition to a handbook, you should also consider written job descriptions. Current and accurate job descriptions provide applicants with a realistic understanding of the requirements of the position and discourage poorly-suited applicants from applying. Job descriptions are also useful tools for managing current employees; supplying the criteria for performance evaluations; and assisting a company if it is ever required to prove for legal reasons that the particular duties were essential functions of the job, or that a certain position was properly classified as exempt from wage and hour laws.
      
      Workplace Signage
      Employers are required to post a number of notices in a conspicuous place visible to employees. This is often satisfied by maintaining a bulletin board for postings in a conspicuous location. You can find listings of required posters for Minnesota and Federal purposes at http://www.doli.state.mn.us/posters.html and http://www.dol.gov/osbp/sbrefa/poster/matrix.htm.
  • What documents should I use with a consultant, and what should they include?
    • If you work with independent consultants, generally there should be a written agreement between the parties that establishes the terms of the arrangement. Important terms of the agreement include the scope of and fees for services and the nature of the relationship. Consulting agreements often also include nondisclosure/confidentiality provisions which require the consultant to maintain the secrecy of the company’s confidential information. When appropriate, these agreements should also include provisions protecting the company’s intellectual property and relationships with customers and employees. As with noncompetes in employment relationships, these types of provisions must be carefully drafted and narrowly tailored to the needs of your business to be enforceable.
  • How can I compensate/motivate the people I retain?
    • The type of arrangements you use is likely to vary depending on whether the person being retained is an employee or independent consultant.
      
      Employees
      For full-time employees, typical arrangements include a base salary or hourly wage (depending on position) and some level of employee benefits such as health and/or dental care, paid holidays, paid vacation leave, paid sick leave, 401(k) retirement plans, etc. Part-time employees are typically paid a base salary or hourly wage (depending on position) with minimal, if any, employee benefits. For management or executive level employees, other possible incentive compensation arrangements include such things as:
      
      • cash bonus arrangements,
      • equity-based compensation such as stock options, restricted stock, stock appreciation rights, and other performance awards
      • deferred compensation arrangements,
      • supplemental executive retirement plans,
      • pension plans,
      • life and disability insurance,
      • change-in control payments,
      • severance arrangements, or
      • perks such as use of a company car, travel allowances, tax planning and counseling services, annual physical examinations, country club dues, etc.
      
      Compensation, benefits, and incentive plans must be carefully crafted, however, to comply with federal and state tax, wage and hour, and other laws. Among other requirements, employers must pay at least the minimum wage rate to employees who are not exempt from wage and hours laws. These employees must also be paid at least 1.5 times their regular rate for any work performed over 40 hours during any workweek. The determination of whether an employee is exempt from these requirements is based on the employee’s pay, duties, and responsibility level. With the ability to recover not only unpaid wages, but statutory penalties, and attorney fees, the liability for violations of these laws can be significant.
      
      Consultants
      Compensation arrangements for independent consultants are typically structured in a manner to differentiate them from employees. Typically, consultants are paid retainers or fees that can be paid on the basis of hours worked over a given time period (day, week, month, etc.) or tied to the satisfactory performance of milestones or certain projects or tasks. Independent sales representatives are often paid on a commission basis. Consultants typically pay their own expenses, and must be responsible for providing all benefits and paying all taxes related to compensation. While not as common, bonus arrangements or equity-based compensation are sometimes utilized to motivate the consultant to achieve milestones within a shorter timeframe or exceed minimum performance criteria.
  • Are there any legal requirements in order to commence employment?
    • Under federal law, employers in every state must report to their appropriate state agency all employees to whom the employer anticipates paying wages. This is easiest done online at: www.newhirereporting.com/mn-newhire/.
      
      Employers are also required to withhold state and federal taxes from their employees’ paychecks. Some employers do this internally and others contract with a payroll service or accountant to outsource this function. In addition, employers must also participate in Minnesota’s Unemployment Insurance Program. Information about participating in this program can be found at www.uimn.org/tax/start.htm.
      
      Finally, employers must maintain worker’s compensation insurance on employees and any other workers covered by Minnesota’s worker’s compensation laws. There are various options available for fulfilling this obligation.
  • What other workplace laws should I be concerned about?
    • The following federal and state laws are applicable to all Minnesota employers. Listed in parentheses is the minimum number of employees you must have before the law applies to your business:
      
      • Minnesota Human Rights Act (1)
      • Federal and Minnesota Fair Labor Standards Act (1)
      • Lawful Consumable Products Act (1)
      • Minnesota Workers’ Compensation Act (1)
      • Minnesota Whistleblower Laws (1)
      • Minnesota Statute Providing Right to Demand Reasons for Involuntary Termination (1)
      • Uniformed Services and Employment and Reemployment Rights Act (and corresponding Minnesota law) (1)
      • Minnesota Laws Requiring Prompt Payment of Wages (1)
      • Minnesota Polygraph and Lie Detector Tests (1)
      • Certain Leave Laws (1)
      • Unemployment Insurance (1)
      • Occupational Safety and Health Laws (1)
      • Title VII of the Civil Rights Act of 1974 (15)
      • Americans with Disabilities Act (15)
      • Pregnancy Discrimination Act (15)
      • Federal Equal Pay Act (15)
      • Age Discrimination in Employment Act (20)
      • COBRA (20)
      • Notice and Access to Personnel Records (20)
      • Minnesota’s Parenting Leave and Other Leave Laws (21)
      • Family and Medical Leave Act (50, within 75 mile radius)
      • Federal Worker Adjustment and Retraining Notification Act (100)
      
      Because the laws are detailed and can be complex to apply, we recommend that you consult legal counsel for specific application of the law to situations you may face.
  • What do I need to consider in deciding to hire an employee?
    • Employment Applications; Job Advertisements
      If not carefully written, job application forms and advertisements may be viewed as discriminatory. Applications and job advertisements should be carefully written so as not to solicit any information about "protected classes," not to contain language that may be discriminatory in some way, and to include equal employment opportunity language.
      
      Interview Questions
      Employers should ensure that interviewers understand and receive training on proper interviewing techniques and topics off limits to discuss, including solicitation (direct or indirect) of information regarding protected classes (gender, race, disability, etc.).
      
      Several other hiring practices are subject to specific legal regulation and requirements. If you plan to undertake any of the following, please consult your legal advisor before doing so:
      
      • Background Check
      • Drug and Alcohol Testing
      • Medical Exams
      • Other Pre-Hire Testing
  • What do I need to consider in deciding to terminate an employee?
    • There are several important considerations that will be helpful when you determine it is necessary to terminate an employee or group of employees:
      
      Document
      Without documentation supporting the termination decisions, wrongful discharge suits often boil down to the employer’s word against the employee’s. Documentation, such as performance reviews and disciplinary actions, can create a record to demonstrate that a termination decision was made for legitimate, rather than unlawful reasons.
      
      Consider the Circumstances
      The termination planning process should include a careful and critical examination of the reasons for terminating, the timing of the termination, the potential legal implications, and a consideration of possible alternatives. Going through this process before the termination can expose problem issues and potential liabilities. It is better to assess these risks before the termination takes place. If there is any risk of claims or litigation, you should also consider a separation and release agreement in exchange for a severance payment.
      
      Plan for the Termination Meeting
      An employee should be informed of the termination decision in person, in a private and confidential setting. In preparing for the meeting, the employer should anticipate the employee’s reaction and adhere to certain procedural safeguards, including:
      
      • Have a witness present
      • Treat the employee with dignity and respect
      • Consider the timing of the meeting
      • Explain the termination decision without unnecessary explanation or debate
      • Discuss the return of company property
      • Make arrangements for the employee to take their personal belongings
      • Pay the final paycheck (while the law requires payment within 24 hours of the departing employee’s demand, to avoid any dispute it is best to make the payment at the termination meeting)
      
      Because Minnesota (like many other states) has a statute governing the termination of sales representatives, we recommend that you consult legal counsel specifically on this issue prior to the termination of any sales representative relationship
  • What are common employer mistakes?
    • Restrictive Agreements
      Many employers wish to protect themselves from unfair competition by current or departing employees through restrictive covenants, such as confidentiality, invention assignment, non-compete, or non-solicitation agreements. To be enforceable, however, these agreements must be carefully drafted and tailored to each individual employee and supported by adequate legal consideration. In Minnesota, an offer of new employment may be adequate consideration for a non-compete or non-solicitation agreement, but current employees must be given additional consideration, such as a lump-sum payment or something else of independent value, for a non-compete or non-solicitation agreement to be valid.
      
      Retaliation
      Most employers are aware of their obligation to avoid discrimination based on the protected classes under discrimination laws (race, sex, disability, etc.). Be aware that an employee may have a successful retaliation claim, even if an employee brings an unsuccessful complaint or charge of discrimination, or engages in other protected activity, if the employer then takes an "adverse action" because of that activity. Adverse action can be as drastic as termination or as simple as offering the employee fewer hours.