Choosing the organizational form a business will take is a fundamental decision for every entrepreneur. Choosing the right entity can empower the business to yield returns to the owners, offer liability protection, and run efficiently, at the highest capacity. The forms of organization available to business owners in Minnesota are many, but don’t let them overwhelm you.
If you own and control your business by yourself, this is a sole proprietorship. For a business to be a sole proprietorship, one individual receives profits, bears losses, and is responsible for the debts and obligations of that business. The profits of a sole proprietorship are taxed at the proprietor’s income tax rate and the income and expenses are reported on that individual’s income tax return. In the case of a married couple operating a business together, it must be owned by only one of them in order to be a sole proprietorship.
If a business is owned by two or more persons together, it will be operated as a partnership. There are multiple forms of partnership available to business owners. The most basic of these is a general partnership, in which all partners have an equal right and responsibility for managing the business. The debts and obligations of the business, as well as the taxation, will be shared by the individual partners based on the distribution which should be defined in a written partner agreement. A general partnership may register as a limited liability partnership, which shields the personal assets of the partners against liabilities incurred by the business.
An alternate form of partnership is the limited partnership, in which at least one general partner forms a partnership with limited partners who are only liable up to the amount of their investment in the debts and obligations of the business. Limited partners have legal authority to participate in the management and control of the company, but only the general partner may act for the company. Under Minnesota Statute 323 A, a limited partnership may elect to form a limited liability limited partnership, in which both limited and general partners are given limited liability protection.
Apart from proprietorships and partnerships is a third form of business, the corporation. The important distinction of a corporation is that it is treated as a separate legal entity. The owners of a corporation are shareholders, which are shielded from claims against the corporation. Also, the debts and obligations belong to the corporation itself. Management and control of a corporation are the responsibility of a board of directors which are elected by the shareholders. There are two subchapters under which a corporation may operate. In a C corporation, profits are taxed before dividends are paid to the shareholders, and those dividends are taxed as individual income for the shareholders. An S corporation, which according to the Internal Revenue Code may only have one class of stock and up to 100 shareholders (each of which must be a taxable individual), does not pay separate taxes on its profits. Thus an S corporation is treated similarly to a partnership.
Minnesota businesses may also be organized as a limited liability company, which elects to be taxed directly as a sole proprietorship, partnership, or corporation. Aside from taxation benefits, other attractive features of LLCs are that they provide liability protection for their members and have lower formality requirements than corporations.
These business organizations provide an abundance of options for forming your business. Understanding which is right for your business could be the key to unlocking the full potential of that business and ultimately yielding its greatest possible returns to owners. It should be noted that this is only a list of basic forms of business in Minnesota. There are other specialized forms of organization which may be explored, but not without professional advice.