Cheap LLC Startup: Is Creating Your Own Minnesota LLC Worth the Risk?

Business Questions

2015 Update:

Minnesota LLC law is changing. As a result, this article is no longer current. Please see these instead:

How to Create a LLC in Minnesota

When starting a business, you have a few options for creating an LLC:

  1. form the LLC by yourself,
  2. hire a business startup service, or
  3. hire a business attorney.

This article begins by providing an overview of the law, explaining some of the common problems and confusing areas of LLC law. This article concludes by highlighting what you should know before forming an LLC without a licensed attorney.

What is an LLC?

LLC is an acronym, which stands for “limited liability company.” An LLC is a legal entity separate from its members, essentially a person in the eyes of the law­. The main benefit that an LLC provides is shielding its members from personal liability for the debts and liabilities of the business. In an LLC, “members” is the term used for the “owners.”

The second benefit is that an LLC is taxed the same way as a partnership, having what is known as pass-thru taxation. This means an LLC, itself, is not taxed on its profits. Instead, the members are taxed based on the profits the LLC received for the year. Where there are multiple owners, the owners can allocate the profits in accordance with the percentage of their ownership or some other percentage to which they agree.

Despite not paying taxes, the LLC must maintain separate assets from the members’ assets, such as money in bank accounts.

An LLC is easy to create and is very flexible because LLCs have less regulations and standards than corporations. In Minnesota, LLCs are governed by Minnesota Statues section 322B.

What is the Risk of “Piercing the Corporate Veil”?

Members must be careful not to “pierce the corporate veil,” which results from not following certain formalities. An LLC must always be kept as a separate distinct entity from the members. If a member of an LLC mingles personal and LLC assets together or treats the LLC as an extension of their own assets, this may be considered “piercing the corporate veil.” A court could hold these members personally liable instead of the LLC itself because the corporate shield was lost by its members’ actions.

In Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn.1979), the Minnesota Supreme Court provided our state’s “veil piercing” standards:

  • insufficient capitalization for purposes of corporate undertaking,
  • failure to observe corporate formalities,
  • nonpayment of dividends,
  • insolvency of debtor corporation at time of transaction in question,
  • siphoning of funds by dominant shareholder,
  • nonfunctioning of other officers and directors,
  • absence of corporate records,
  • and existence of corporation as merely facade for individual dealings.

This list is not exclusive. The court held that the veil could also be pierced when the corporation was the “alter ego” or “instrumentality” of the individual shareholder. Members or shareholders of an LLC may also be held personally liable for their own tortious conduct, guaranteed personal contributions to the LLC, guaranteed personal obligations, representing the LLC in matters they have no authority to do so, and for avoiding tax payments. The best option to reduce the risk of exposing personal assets to liability is to treat the LLC as a totally separate entity.

How do I Create an LLC?

To create an LLC, one must register their LLC’s Article of Organization with the Secretary of State. This state department makes a sample template Articles of Organization available to the public online (

This template is simple and convenient to fill out and file, but it also possesses some interesting drawbacks. The template asks for more information than is required and it does not cover all the legal aspects for a LLC. A smart LLC will also create a separate Operating Agreement, although it is not required in MN to create an LLC.

What is asked for in the MN Articles of Organization template?

  • Name of LLC (required)
  • Address of registered office of the business (required)
  • Agent who receives legal correspondence and address in state (Agent not required)
  • Duration (not required)
  • Organizers’ addresses and signatures (required)
  • $135 filing fee

The Articles of Organization can be easily completed and filed without the assistance of an attorney. However, it is always a good idea to have an attorney review the Articles of Organization. Having a completed Article of Organization will reduce the legal cost of an attorney review.

An attorney can be used to check if your LLC’s name is currently in use should you ever want to trademark it. This can also be done personally by searching for your business mark in the USPTO website However, this search is a fairly complex process (e.g. common law trademarks are not listed on these databases), and you will more than likely need a trademark attorney to ensure it is done correctly.

An attorney could also be used as the organizer for the LLC by drafting the LLC formation documents. If the sample template is not used, an attorney will determine if certain provision belong in an Operating Agreement. Most statutory provisions that LLC’s are subject to can be modified if done so in the Article of Organization or in an Operating Agreement.

What is an Operating Agreement and is it required for creation of an LLC?

An Operating Agreement is a contract between the members of an LLC. It is one of the best aspects of an LLC because it allows the creator to narrowly tailor the structure of the LLC to fit its intended purpose. This Agreement is similar to a partnership agreement in that it outlines the rights and duties of the LLC Members, procedures for member voting, the powers of the managers, and restraints on transfers of company ownership.

LLC structure is governed by state statutes, but an operating agreement can supersede the rules set forth in the statutes. This allows the creator to decide how the LLC will be taxed, who managers will be, if any, and how profits are distributed. An Operating Agreement is useful to have if disputes arise within the LLC or just to outline clearly the rules of the LLC and reduce the risk of “piercing the corporate veil”.

In Minnesota, an Operating Agreement is not required for the creation of an LLC. If no Operating Agreement is created the Minnesota Statutes will apply by default to resolve disputes. For example, in dealing with transfer of ownership, the court will apply Minnesota law the transfer of ownership if the LLC has no operating agreement outlining how ownership will be transferred. These statutes may not conform to your idea of how the LLC should run, which is why outlining the guidelines of your LLC is best done upon its creation.

Operating Agreements are not as easy to create as the Articles of Organization. You should consult an attorney to create a clear and concise contract (i.e. Operating Agreement) for the LLC. However, it is not impossible, with significant research and use of sample templates (like sample below), to create Operating Agreements on your own and save money on legal fees, but often with the use of templates significant items are overlooked or misinterpreted and this may cause problems later. One way to create an Operating Agreement for your LLC and use an attorney without incurring heavy legal costs is to have a clear idea of how you want the LLC to run and then let the lawyer draft the agreement with the proper legal language.

What should I know for creating my Articles of Organization?

  1. Name of the LLC
  2. Address “principle Location” and registered office
  3. Number of Board Members (names and contributions)
    • General Power of members vs. managers (if any) Minn. Stat. 322B.37 vs. 322B.606
    • Schedule of % Ownership in LLC
    • Schedule of % of Profits (or salary)- will affect tax status
    • How meetings will proceed
    • Voting rights (what is voted on, who votes on what, when conduct voting, procedure)
    • Terms of office-how members are added/ kicked out
    • Compensation/ Responsibilities
  4. Indemnification
  5. Transfer of Ownership and Interest
  6. How Amendments will be made the these Bylaws
  7. Accounting Year- assign a tax manager- choose tax status (may need consult an accountant)
  8. Governing Law/ dispute resolution
  9. Severability- how manage member death/ termination
  10. Signatures of Members

An LLC’s name is governed by Minnesota Statutes sections 322B.12 and 319B.05. These state basically that the name must be expressed in English letters, and contain the words or abbreviation LLC. An LLC’s name must not contain the words or abbreviation of corporation or incorporated, imply or indicate an illegal business purpose, nor implicate superiority. If the LLC is a professional firm the name must end with any of the following: “Professional Limited Liability Company”; “Limited Liability Company”; “P.L.L.C.”; “P.L.C.”; or “L.L.C.” It is also a good idea to make sure that the name is not currently in use by another local business. This search can be done personally on the Secretary of State website

Some Operating Agreements will arrange for several elected managers to manage the LLC and some will use the members to manage the LLC. In the latter case, member management allows for all members to become involved in the operation of the LLC, much like a partnership. Often sole owners of an LLC will be “member managed”. When appointed managers run the company, the members will not have a say in the operation. This system is similar to corporate executives who must report to the members as a group, like a board of directors. Some form of management is required under MN Stat. 322B.67 which states a “limited liability company must have one or more natural persons exercising the functions of the offices, however designated, of chief manager and treasurer.”

Concluding Thoughts

If the LLC will only have one owner, you can create an LLC by following the bare minimum requirements and doing it without the help of an attorney.

Creating an LLC is an investment of time and money. Creators should employ the proper safeguards for securing their investment. Some creators of LLCs will turn to legalzoom or another online legal service as an alternative to using an attorney. While the fees may be less, the service will also be less. You will be provided with a template for your Articles of Organization that may not be tailored to what your particular company needs.

A good business attorney will not only help you with forming the business. A business attorney should be part of your professional team, serving as a trusted advisor, helping you grow the company:

  • discussing other areas of legal compliance to ensure your company is legal
  • sharing tax strategies to save you money
  • introducing you to other business owners to share ideas and inspiration
  • directing you to tools and resources to help strengthen your busines

An LLC is an investment and it should be created with care and a foundation to last.