Minnesota Small Business Formation

This section answers these questions:

  • What do I need to do to form a business?
  • What is the difference between the various Minnesota business types I can form?

Minnesota small businesses can select from a number of business entity types when forming the business. Common formation entity types include the Sole Proprietorship, Partnership, LLC, S-Corp, and Corporation. However, small business may benefit from some of the less common entity types.

The most appropriate entity type depends on the small business owners’ needs and goals. The general information presented here is valuable from an educational perspective, but you should seek advice from a Minnesota business attorney regarding your specific circumstances and tax situation before selecting an entity type for your small business.

A general overview of the business entity types available in Minnesota is presented here.

Sole Proprietorship

This business is owned and controlled by one person. This is the default business type before you register a business or start working with a partner. The owner of a sole proprietorship receives all the profits and bears the burden of losses and debts from the business.

The key characteristics of a Minnesota sole proprietorship include

  • Ownners are personally liable.
  • Ownners are personally taxed on profits.
  • No registration is required. This is the default business for one owner.

Partnership (a.k.a. General Partnership)

The business is owned by two or more persons who associate to carry on the business as a partnership. Under Minnesota Statutes (323A.0202(a)), a partnership is “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Partnerships have specific attributes, which are defined by statute. All partners in a general partnership share equally in the right, and responsibility, to manage the business, and each partner is responsible for all the debts and obligations of the business. Distribution of profits and losses, allocation of management responsibilities, and other issues affecting the partnership usually are defined in a written partnership agreement.

The key characteristics of a Minnesota partnership include

  • Partners are personally liable for all debts of the partnership
  • Partners are personally taxed on their share of the profits of the partnership
  • No registration is required. This is the default business for more than one owner.

Limited Liability Company (LLC)

A limited liability company (LLC) is a form of business organization that is designed to combine the tax treatment of a sole proprietorship or partnership with the limited liability characteristics of a corporation. A limited liability company may have one or more owners, who are called “members.” LLC’s can elect to be taxed as (1) a sole proprietorship, (2) a partnership, (3) a corporation, or (4) an S-Corp, as long as the LLC meets legal requirements and files the proper documents.

The key characteristics of a Minnesota LLC include

  • Members are not personally liable for debts of the LLC unless they were personally involved in a wrongful act.
  • Members can be taxed as (1) a sole proprietorship, (2) a partnership, (3) a corporation, or (4) an S-Corp.
  • Registration and annual renewals are required with the Minnesota Secretary of State. An attorney should be used to prepare the entity formation documents, especially if the LLC has multiple members.

Corporation (C-Corp) and S-Corporation (S-Corp)

A corporation is a separate legal entity. It is owned by one or more shareholders. The shareholders elect a board of directors which is responsible for management and control of the corporation. Because the corporation is a separate legal entity, it is responsible for the debts and obligations of the business. In most cases, shareholders are insulated from claims against the corporation. An “S corporation” is a corporation that elects to be treated under Subchapter S of the Internal Revenue Code. In most cases, S corporation shareholders, rather than the corporation itself, are taxed on the profits of the corporation. In contrast, a “C corporation” (taxed under Subchapter C of the Internal Revenue Code) is taxed on the profits of the corporation, and any dividends paid to shareholders from after-tax profits are taxed again at the shareholder level.

The key characteristics of a Minnesota Corporation include

  • Shareholders are not personally liable for debts of the corporation unless they were personally involved in a wrongful act.
  • Shareholders are taxed on dividends and share value appreciation, and if the shareholder is an employee, wages are taxes as personal income.
  • Registration and periodic filings are required. An attorney should be hired to prepare the entity formation documents, especially if the corporation has multiple shareholders.

These less common business entity types in Minnesota may be used by sophisticated companies or recommended by business attorneys under some circumstances:

Limited Liability Partnership (LLP)

A general partnership may register with the Secretary of State as a limited liability partnership (LLP). In a LLP, the personal assets of the partners are shielded against liabilities incurred by the partnership in tort or contract situations. LLPs are relatively new entities in Minnesota, and certain tax and other aspects are not fully developed or understood.

Limited Partnership (LP)

A limited partnership is a type of partnership in which limited partners share in the partnership’s liability only up to the amount of their investment in the limited partnership. A limited partnership must have at least one general partner and one limited partner. The general partner is responsible for day-to-day management of the limited partnership, and is responsible for the debts and obligations of the limited partnership. The limited partner, in exchange for limited liability, is usually not involved in the day-to-day management and control of the business. A limited partnership may register with the Secretary of State as a Limited Liability Limited Partnership.

Warning About Changing Minnesota Business Entity Types.

If you are already operating a small business, there also may be constraints on changing from one form of organization to another. There may also be tax or liability consequences. For these reasons, you should consult a business attorney before making such changes.