Yes. The main reason to incorporate a business is to protect the owner of the business from personal liability for the debts of the business. Incorporating a business helps protect it from tort and contract liability. The most common forms of business organization used in Minnesota are the Limited Liability Company (LLC), S or C type Corporations, Limited Liability Partnership (LLP) and Limited Liability Limited Partnership (LLLP).
The liability of a business owner is not unlimited. The business owner can be held liable through the common law concept of “piercing the corporate veil” also see Minn Stat. Sec. 322b.303. Piercing the corporate veil happens for several reasons including failure to keep business formalities, co-mingling funds, and inadequate capitalization to start the business. The business owner can also be liable after incorporating to the extent of funds contributed to the limited liability business entity. The other areas where limited liability may not apply are:
a. personal guarantees on business loans or debts;
b. intentional fraudulent conduct causing harm to another;
You have to file the articles of organization with the Minnesota Secretary of State. The other recommended documents when forming a limited liability organization are the company’s by-laws, first minutes, and a member control agreement. It will also be necessary for most limited liability organizations to obtain a federal and state tax identification number.
If your business is not incorporated in Minnesota and only has one member it will be considered a sole proprietorship. If your business has more than one member it will be considered a general partnership.
A sole proprietorship is a business owned by only one individual and does not offer limited liability to the owner. A sole proprietorship is not considered a separate entity for tax or legal purposes. The owner of a sole proprietorship must file their business name with the Minnesota Secretary of State if the business name is different than the owner’s name.
General partnerships are governed by Minnesota Statute Sec. 323a.0202(a) and are formed automatically when two or more persons engage in an activity for profit. The members of a general partnership are jointly and severally liable for the debts of the business. The only requirements courts look at when determining if a general partnership has been created are if they business owners activities are “continuous, considerable, and regular” and motivated for profit.
A limited liability company (LLC) provides the owners of the business the limited liability of a corporation with more flexibility in how to manage the day to day affairs of the company. The business can be operated like a corporation or a partnership. If the business owner elects to operate like a partnership it needs to be specified in the company’s contract between the owners and management. A Minnesota LLC can have one or more members and is governed by Chapter 322b. A professional firm can also use an LLC and the requirements are found in Chapter 319b. The name of the professional firm must be PLLC, PLC, or LLC. The types of professional firms authorized under Minn. Stat. Sec 319b.02 Subd. 19 include dentists, doctors, attorneys, pharmacists, engineers, accountants, architects, social workers, registered nurses and veterinarians.
The advantages of an LLC are organizational flexibility, unlimited duration, and pass through taxation. A typical Minnesota LLC files a partnership tax return using IRS form (1065). The current maximum tax rates for a Minnesota LLC are 35% federal and 7.85% Minnesota state tax rate. The members of the LLC are typically taxed according to their ownership interest in the company, but can elect through the member control agreement to allocate the profits and losses in a different way. An LLC can also have an unlimited number of members, unlike an S corporation.
The C corporation is created under the Minnesota Business Corporation Act (MBCA) Minn. Stat. Sec. 302a. A C corporation is treated as a separate entity for federal and state tax purposes. It also provides its owners with limited liability protections for tort and contract damages. A type C and type S corporation are filed and operate the same way, the main difference is how they are treated for tax purposes. The disadvantage of a C corporation is double taxation, the entity is taxed at the corporate tax rate, then the shareholders are taxed on the dividends from the corporation.
The MBCA only requires four elements in the articles of incorporation to form a Minnesota C corporation. The four elements are registered office information, number of shares authorized, number of shares authorized, and incorporator information.
An S corporation is an entity that gets treated like a partnership for taxation purposes under Subchapter S of the internal revenue code. It is formed and operated the same way as a C corporation, but is treated differently for tax purposes. The S corporation is also limited to only 75 shareholders and lacks some of the flexibility of other corporate forms.
A Minnesota LLP is governed by Minn. Stat. Sec. 323A.1001 and takes effect once a statement of qualification is filed with the secretary of state. The partners are still liable for debts and obligations that arose before the statement of qualification is filed. After the statement of qualification is filed with the Minnesota Secretary of State, the partners are protected from future liability for the debts and obligations of the LLP. The LLP is not recognized in all states so if your business is going to operate in states other that Minnesota you may want to consider another business form.
An LLLP is governed by Minn. Stat. Sec. 322A.88. This statute provides that the limited liability provisions of an LLLP apply once the statement of qualification is filed with the Minnesota Secretary of State. This statute provides for limited liability protection for general and limited partners of the LLLP.
Interest in a Minnesota limited liability entity is typically considered personal property and can be transferred at any point.
This is also known as a Employer Identification Number (EIN) and is generally required in order to start a limited liability entity. If starting a Minnesota business you will typically need to apply for a Minnesota tax ID number.
To obtain a (FEIN) you need to contact the IRS by phone or online and apply for the number.