Q&A: The Right Business Legal Structure for Your Food Startup

This month’s guest post features Elaine Vorberg, a Chicago lawyer who specializes in small and medium food & beverage companies. She often receives questions about how young businesses can set themselves up for future success. Her guest post highlights 6 pieces of advice she offers to startups.

I’ve been stuck in an unsustainable, dead-end cycle for years, and can only find inspiration in the success stories coming out of the San Francisco Bay Area. I finally decided I had enough, and this was the year I would break free from the endless cycle of not getting what I deserved.

I started my own sourdough bread.

That’s not entirely true… I started “starter,” a delicately-balanced bubbly blob of culture and yeast that is produced by the precision-timed mixing of 3 pounds of various flours with water over the course of 12 to 14 days.

Your new business is likely starting out the same as my starter is starting, with an excited prospect of bringing an idea to reality and the investment of money and time into a chaotic mess, with no promise of success. I can increase my chances of a rich tangy loaf of crusty bread, with the right ingredients (90 percent of which end up discarded), proper mixing, advantageous environmental conditions, a watchful eye and time.

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You can increase your chances of creating a successful legal structure for your business by giving serious thought to doing the following 6 things.

Top 6 Legal Things Any Food Business Must Do

1. Honoring Current Employment Contracts

When you start your business while still (or recently) employed by someone else, be mindful of covenants you may have made to that employer.  These could be in the form of non-competition or non-disclosure agreements; but they could also arise out of policies and procedures that limit personal use of employer equipment (e.g., if you work on your startup from your employer’s computer, your employer may technically own what you worked on), prohibit “moonlighting” (maybe better known to you as “having a side hustle”), or create property rights in your creative works.  Carefully review your situation (with a lawyer, if necessary) to be sure your new business activities will not violate any terms of your employment.  

2. Properly Organizing / Incorporating Your Business and Obtaining Proper Licenses

You could incorporate or form an LLC with little effort and cost, just as I could use old flour and chlorinated tap water in my recipe, but we will both be disappointed with the results.  Just as I should take time to get good ingredients, you should take time to understand your business’s management structure, capitalization needs, liability risks, and tax effects, as well as the laws in the state in which you may be incorporating or organizing, before deciding on a legal structure (LLC, C-corp, etc.) and preparing and filing the necessary paperwork.  Be sure your business is properly certified or licensed to carry on activities in the state in which it is formed and where it might be operating.  

3. Maintaining Proper Records

Like washing dishes, record-keeping is a chore, but a necessary one.  State laws require businesses to maintain, and in some cases, file with the state certain records concerning the ownership, management and financial condition of the business.  Owners, creditors, lenders and even landlords of the business may be entitled to review your records.  And then, there’s the IRS.  Maintain proper records from the start; and save the time, cost and stress of having to find or recreate necessary documentation when it might be required.  Retain the services of a lawyer or corporate registrar to prepare and keep necessary reports, meeting minutes, and filings (if applicable). Hire an accountant or bookkeeper, if necessary, for proper financial record-keeping.  

4. Insuring Your Business From Unavoidable Risks

To avoid someone mistaking my starter for something that should go in (or just recently came out of) the garbage disposal, it is labeled, “Do not throw away.”  Signs like “Do not catch on fire,” “Do not crash into,” “Do not be sexually harassed,” will not sufficiently protect your business.  Review all aspects of your business with a qualified insurance agent, to understand and properly manage risk through insurance.  To keep claims experience (and premiums low), prepare and regularly update policies and procedures for all business operations in accordance with proper legal standards.

5. Protecting Intellectual Property

My starter may not become a loaf of bread; but if it does, my husband and son will probably eat the entire thing.  Don’t allow this to happen to the ideas, inventions, business information and consumer goodwill you create in and for your business.  Hire a lawyer to advise you on the necessary steps – before and after application filing – to protect registered and non-registered trademarks, copyrights, patents, and trade secrets.  

6. Planning for the Future

Once I have established the starter, I will embark on a two-day process of mixing, kneading, rising, and baking.  I know where my starter is going next.  Likewise, you need a strategic plan, with goals and priorities, for your business.  Understanding your business over the long term gives you the proper perspective when making decisions and allocating resources.  Find a consultant with strong knowledge and experience in your industry to help you achieve your desired outcomes as your business—along with its needs and risks—grows and changes over time.



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