The sole proprietor has full and complete authority to manage and control the business. There are no partners or shareholders to consult before making decisions. This form of organization gives the proprietor maximum freedom to run the business and respond quickly to day-to-day business needs. The disadvantage of this form is that the sole proprietor, as just one person, will have limited time, energy and expertise to devote to the business. His or her experiences may not provide the breadth of skills and knowledge necessary to deal with all phases of the business. Further, because the sole proprietor is the only person authorized to act on behalf of the business, he or she may be unable to leave the business for extended periods of time without jeopardizing its operations. As the business expands, the proprietor may be able to hire managers to perform some of these functions and provide additional expertise, but in the early years of the business, the sole proprietor often will perform many of these tasks alone.
The general rule of management is that in both a general partnership and a limited liability partnership, all partners share equally in the right, and responsibility, to manage and control the business. The partnership agreement may centralize some management decisions in a smaller group of partners, but all partners continue to share ultimate responsibility for these decisions. By statute, certain management decisions require unanimous consent of the partners. Other decisions may be made by consent of a majority of the partners. The right to share equally in decisions can make the decision-making process cumbersome, and the risk of major disagreements can impair effective operation of the business. An advantage of the partnership that is not present in a sole proprietorship is that the partnership, with its several owners, can bring a broader range of skills, abilities and resources to the business. The owners’ combined experiences also can promote more informed decision making. In addition, the workload can be shared to lessen the physical and other demands on the individual owners. However, under the Revised Uniform Partnership Act (RUPA), Minnesota Statutes Chapter 323A, a system of formal filings has been established that allows partnerships to limit the authority of certain partners to third parties as well as to limit the liability of partners for obligations incurred after a partner has left the firm. In order to use this system, the partnership must first file with the Secretary of State an assumed name certificate or limited liability partnership statement of qualification. After that filing has been made, the partnership may again file any of the following statements with the Secretary of State:
- Statement of Partnership Authority. This allows the partnership to either restrict or specifically expand the authority of particular partners to conduct various transactions, particularly real estate transactions.
- Statement of Denial. This allows a partner to deny partnership status or the conferral of authority upon the partners by a Statement of Partnership Authority.
- Statement of Dissociation. This allows a partner who is withdrawing from the partnership to avoid liability for obligations for the partnership incurred after the partner has withdrawn, and also allows the partnership to eliminate the authority of that partner to bind the partnership.
- Statement of Dissolution. This allows the partnership to notify the world that it is dissolving and that partners will no longer have authority to act on behalf of the partnership.
The following are also permitted:
- Statement of Merger. This allows partnerships and limited partnerships to merge with each other.
- Statement of Qualification. This statement establishes a Minnesota limited liability partnership under Minnesota Statutes Chapter 323A.
- Statement of Foreign Qualification. This statement registers a non-Minnesota limited liability partnership.
Any of these seven statements may also be amended or cancelled.
In order for any Statement to have an effect on real property transactions, a certified copy of the Statement, obtained from the Secretary of State, must be recorded in the office where land records for the county in which the real property is located, and, if applicable, has been memorialized on the certificate of title for that real property.
In a limited partnership in Minnesota, limited partners may participate in the management and control of the partnership but may not act for or bind the partnership. Those functions are performed by general partners.
The rules for corporate decision making are established by statute, but many rules may be modified by the articles of incorporation or bylaws. Shareholders elect the board of directors, which in turn manages the operation of the business. The corporation also must have one or more natural persons exercising the functions of chief executive officer and chief financial officer. Except in very small corporations in which the shareholders are also the directors, shareholders as a group generally will not directly participate in management decisions. This concentration of decision making in a relatively few individuals promotes flexibility in decision making, but also can result in overruling of minority interests or in some cases manipulation or exploitation of minority shareholders. To resolve this problem, corporations may adopt provisions in the articles of incorporation or bylaws to give minority shareholders a stronger voice in management decisions. Decision-making authority also may be delegated by the shareholders and/or directors to hired managers, who may or may not be shareholders. This delegation further removes decision-making authority from the shareholders. Like a partnership, the corporation can draw on the skills and expertise of more than one individual in running the business. This can broaden the base of information for decision making and reduce workload demands on individual managers.
The articles of incorporation, bylaws or state business corporation act establish procedures and criteria for decision making, such as meeting and quorum requirements, voting margins, and the like, which may make decision making in the corporation more cumbersome than in a sole proprietorship or partnership.
Limited Liability Company
Like a corporation, a limited liability company has centralized management. By statute, a limited liability company is managed by or under the direction of a board of governors, comprised of one or more individuals. In addition, the limited liability company must have one or more individuals exercising the functions of chief manager and treasurer. Additional managers and agents may be appointed by the board. The limited liability company act also authorizes members of the limited liability company to make management decisions under certain circumstances. As with a corporation, many of the rules governing the management of the limited liability company are specified in the articles of organization, bylaws, or the limited liability company statute.
CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.
This is also part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.