Start a Competing Business Without Getting Sued: Key Steps

You can usually start a competing business after leaving an employer, but how you leave matters as much as what you build. The safe path has four parts. First, check what you signed. Second, prepare without taking anything that belongs to your employer. Third, set up the new company and its money correctly. Finally, if the old business is failing, buy its assets the right way rather than simply walking off with its customers.

Plenty of good companies start this way. A team sees its employer slipping, loses faith in the owner, and decides it can do the job better. At AEGIS Law, we have helped employee groups launch new companies, and we have represented employers on the other side of those departures. This article covers the legal steps that keep a fresh start from turning into a lawsuit.

Can you legally start a competing business while still employed?

In most states, you can plan while you’re still on the payroll. However, you can’t compete yet. Employees owe their employer a duty of loyalty while they work there. Courts in Missouri, Illinois, and most other states let employees take preparatory steps. For example, you can form an entity, line up a lease, talk to a lender, and write a business plan. What you generally can’t do is solicit the employer’s customers, recruit coworkers in a coordinated way, or use company time and resources for the new venture.

The line between preparing and competing is where most disputes start. Downloading a customer list on your last day looks bad, even if you never use it. Emailing a business plan from your work account creates evidence. So does telling key clients you’re leaving before you resign. As a result, the cleanest launches keep the new venture completely separate. Use personal devices, personal email, and personal time.

Officers, managers, and owners carry heavier duties than rank-and-file employees. If you sit on the board or hold an ownership stake, you may also owe fiduciary duties that limit what opportunities you can take with you. In that case, talk to a lawyer before you take any concrete step.

What agreements could stop you from leaving to compete?

Pull every document you signed with your employer. That includes offer letters, handbooks, equity grants, and bonus plans. Look for four kinds of restrictions. These are noncompetes, customer nonsolicitation clauses, employee nonsolicitation clauses, and confidentiality terms. Many people forget they signed one. Others assume a clause is unenforceable because a friend told them so.

State law decides how far those clauses reach. Missouri courts generally enforce restrictions that are reasonable in time and geography and that protect customer relationships or trade secrets. Illinois limits noncompetes and nonsolicits under its Freedom to Work Act, including a ban for workers who earn below set thresholds. Meanwhile, the federal picture has shifted. The FTC’s nationwide noncompete ban never took effect, so state law still controls. For more, see our guide to noncompete agreements after the FTC ban.

Confidentiality obligations last longer than most people expect. Even with no noncompete at all, trade secret law protects things like pricing models, supplier terms, and detailed customer data. Taking that information can lead to an injunction that shuts down a new company in its first month. Therefore, leave with your skills and your reputation, not your employer’s files.

How do you start a competing business on solid legal footing?

Once the departure risks are managed, the new company needs the same foundation as any startup. Form the entity, usually an LLC, and sign an operating agreement on day one. With a group of founders, that agreement matters even more. It should cover who owns what, who manages, how decisions get made, and what happens if someone leaves. Vesting for founders who earn their stake over time protects everyone.

Money comes next. A new venture typically needs a bank loan, an investor, or both. Lenders will often ask the founders for personal guaranties. Those can be negotiated. You can sometimes cap the amount, limit the term, or release the guaranty once the business hits certain numbers. If key employees will share in growth without buying in, consider a profits interest. Our article on profits interests in LLC equity plans explains how they work.

Finally, build the operating contracts. A new company needs a lease, vendor agreements, insurance, payroll, and IT support. In addition, customers will want a fresh set of terms. Founders who start a competing business often underestimate this list. Getting it right early saves money and prevents gaps when the doors open.

Pick a name and brand that are clearly your own. A name that echoes your former employer can invite a trademark or unfair competition claim, and it confuses customers. Run a trademark search before you print signs or build a website.

Can you buy the failing employer’s assets?

Sometimes the best way to compete is to take over what’s left of the old business. When a company is failing, its assets usually sit under a lender’s lien. The lender may be willing to sell that collateral after a default. Under Article 9 of the Uniform Commercial Code, which Missouri has adopted as section 400.9-610, a secured party can sell collateral after default. However, every aspect of the sale must be commercially reasonable.

A buyer can purchase from the lender in a foreclosure sale, buy the lender’s loan and then foreclose, or buy directly from the owner. Each path comes with different risks. A foreclosure buyer generally takes the assets free of the lender’s lien and junior liens. Still, the buyer needs to confirm that notice went out properly and that no other creditor holds a senior claim. Our article on UCC perfection certificates shows how lenders document those liens.

Here’s one example from our own files. In 2014, a group of employees at a long-running St. Louis auction house learned from a newspaper story that the company was being sued by consignors. Within a weekend, they had projections and a business plan. Within months, they had a new entity, financing, a new home in a historic Central West End church, and the old company’s assets acquired through a foreclosure. The new business, Link Auction Galleries, drew more than 1,200 people to its grand opening. Speed helped. Still, what made it work was doing each legal step in order.

Frequently asked questions

Can my old employer sue me even if I never signed a noncompete?

Yes. Claims for breach of the duty of loyalty, trade secret misappropriation, and interference with business relationships don’t require a noncompete. A clean departure is the best defense.

Can I tell customers I’m leaving?

Generally, you can announce your new business after you leave. A nonsolicitation clause may restrict that. Contacting customers to move their business while you still work there is the riskier move.

Do all the founders need to sign personal guaranties?

Not always. Lenders often ask, but the number of guarantors, the amount, and the release terms are negotiable. Raise these points before the loan documents are final.

Talk with AEGIS Law

The decisions you make in the weeks before you leave shape the risk your new company carries for years. AEGIS Law helps founders plan departures, form and finance new companies, and acquire assets from distressed businesses. Contact AEGIS Law before you give notice.

By AEGIS Law