ENTITY FORMATION
There are a number of different entities to consider, but it is imperative that you properly form your entity and follow corporate formalities.
Sole Proprietorship:
A sole proprietorship is formed by one person going into business. No forms or registration is required to create a sole proprietorship. However, some state or local laws may require some specific types of businesses to acquire permits or licenses (brewery licenses). A sole proprietorship is not a legal entity.
If the business is subject to taxes, the proprietor must obtain a sales tax certificate. If there are additional employees, you will need to obtain a Federal Employer Identification Number. When choosing to name the business, if it is ran under a name other than the sole proprietor’s name a statement must be filed indicating that the business is the sole proprietor doing business under a different name.
All profits and losses of a sole proprietorship belong to the owner. Therefore, all profits and losses are taxed at the owner’s personal income level. All income and expenses should be reported on the Schedule C or Schedule C-EZ (Form 1040). Then the net income or loss from the business is moved to the business owner’s individual Form 1040. A sole proprietor should use a Schedule SE to report net self-employment income (in order to compute Social Security, Medicare, and self-employment tax). In addition, for Minnesota income tax use Form M-1 (individual income tax form).
Management of a sole proprietorship is easy because only one person is the decision maker. However, the sole proprietor is personally liable for all business obligations of the sole proprietorship. Therefore, if the business’s assets are not sufficient to satisfy the debts of the business, then the owner’s personal assets can be used to satisfy the debt.
General Partnership:
A general partnership is formed by two or more people agreeing to do business together for profit, whether or not the purpose was to create a partnership. A partnership may be formed by a formal or informal oral agreement, or by a written partnership agreement. A partnership agreement governs the relations between and among the partners. If a partnership agreement is silent on an issue, default rules apply. Minnesota default rules are found in Chapter 323A. It is advisable to create a written partnership agreement that sets forth the:
1. The partners’ names and addresses;
2. Each partner’s rights to management and profits;
3. Nature and duration of the partnership;
4. Conditions for the admission and withdrawal of partners;
5. Provisions that will govern the dissolution of the partnership, as well as any other provisions that the partners wish to add.
A general partnership is taxed on a personal level, similar to a sole proprietorship. This is called flow-through taxation, meaning that all profits and losses flow through the partners and are taxed on a personal level. There is no double taxation, as is the case with corporations, because profits and losses are not taxed at the business level, but only the personal level. To file your taxes as a partnership you use Form 1065. You may also use Schedules K and K-1. Individual partners should use Form 1040 to report distributive share of partnership income, deductions, credits and losses. In addition, in Minnesota, a partnership has to file Form M3 and Form M1 (compute individual income tax).
General partnerships do not have limited liability, meaning that the partners are personally liable for obligations of the partnership. However, a creditor must first exhaust assets of the partnership before going after the partners’ assets.
Limited Liability Partnership (LLP):
To form an LLP, some states require the business to first form as a general partnership. After doing so, the partnership may file a registration document with the Secretary of State to become an LLP. Minnesota requires a general partnership to file a Minnesota Limited Liability Partnership Statement of Qualification Form to become an LLP. Other states allow LLPs to be formed without requiring the business start as a general partnership. When choosing to name your LLP, the name must include “Registered Limited Liability Partnership,” or “Limited Liability Partnership,” or “R.L.L.P.,” or “L.L.P.,” or “RLLP,” or “LLP”.
LLPs have limited liability for all partners. Most states allow LLP partners to be shielded from liability for partnership debts and obligations. Other states shield LLP partners from debts that arise out of negligence or wrongful acts of other partners within the LLP, but keep the partners liable for other debts and liabilities. Minnesota shields partners for partnership debts and obligations. The difference between an LLP and a limited liability limited partnership is that an LLP has no limited members, but rather all general members with limited liability.
In Minnesota a LLP must renew its LLP status yearly by filing a limited liability partnership annual renewal form. If an LLP wants to do business in a state outside of the state it was formed in, the LLP has to register as a foreign limited liability partnership with the state it intends to do business in before conducting any business.
Limited Partnership:
A limited partnership contains two types of partners, general partners and limited partners. General partners are the same as if they were partners to a general partnership. The partner is unprotected from personal liability, is responsible for managing the partnership, and shares in the profits and losses of the business. A limited partner has limited liability, meaning the partner’s liability is restricted to the amount of their investment in the limited partnership. However, generally, limited partners do not engage in management of the business.
To form a limited partnership, the partners must comply with state statutory requirements because limited partnership are governed by statutory law. Applicable Minnesota Statute is MINN. STAT. § 321. To form a limited partnership you must file a certificate, with each state determining what needs to be included in the certificate. In Minnesota, the certificate must set forth the name of the limited partnership, the address of the business’s office, the address of the agent for service of process, the name and address of each general partner, and whether the limited partnership is a limited liability limited partnership. MINN. STAT. §321.0201 State laws may restrict the name a limited partnership may choose to do business as. In Minnesota the name of a limited partnership is governed by Minn. Stat § 321.0108.
A limited partnership does not pay federal income tax. The profits and losses are taxed at the personal level as income or losses for the individual partners, often called flow-through taxation.
Limited Liability Company (LLC):
An LLC is a statutory entity. The entity is formed by filing articles of organization with the secretary of state. An operating agreement, which is entered into by the owners, is also created in order to define provisions that regulate the internal affairs of the business. An LLC may be owned by one person or have many owners and all owners are called members. An LLC has limited liability, meaning that all members are not personally liable for the company’s debts, even if they are acting in a management position. If the LLC wants to transact business outside of its state of organization it will need to apply for authority to do business in the foreign states.
Members can decide to manage the company; however, members can also choose to elect managers if they do not want to take part in a management role. An LLC is taxed using flow through taxation, just as a partnership is taxed. This means the LLC does not pay taxes at an entity level, but rather all profits, losses, and other tax items flow through to its members.
Corporation:
A corporation is an entity that is organized under the laws of a particular state, and operates for profit. This is the most complex business entity. Minnesota corporations are governed by statutory law found in MINN STAT § 302A. To form a corporation you must file articles of incorporation with the state. In Minnesota the articles must be filed in the office of the secretary of state. Once the articles of incorporation are filed the corporation’s existence begins. Statutory requirements on how to file the articles of incorporation varies between states.
Determining where to incorporate your business is important because the corporation will be governed by the laws of the state it is incorporated within. Normally, corporations incorporate in the state it will be doing business in because if business is conducted outside of the state, the corporation has to qualify as a foreign corporation to do business outside its incorporated state. If the corporation will be doing business in many states, it is common to incorporate in the state where the corporate headquarters is located. Corporations may also be formed in a different state to avoid statutory provisions or take advantage of a state’s beneficial statutory provisions. (Delaware is where most publicly-traded corporations are incorporated. These corporations are governed by the Delaware General Corporation Law which is favorable to corporations.
When determining what to name your corporation, most states require the name includes a word that indicates the company is a corporation, such as “corporation”, “incorporated”, “limited”, “company”, or an abbreviations of these words that indicate the business is a corporation. MN corporate names are governed by Minn. Stat. section 302A.115. When you decide on a name, the next step is to check with the state department to determine the availability of a name, if available the name may be reserved. It is also advisable to do a trademark search because most states do not check potential names against trademarks. Minnesota Law regarding reserving a corporation name are found in Minn. Stat. section 302A.117.
Corporations are a separate business entity, meaning that a corporation can sue in its own name, own property, enter into contracts, and pay taxes. A corporation is also not affected by the death of a shareholder or upon the transfer of a shareholders ownership interest, but rather has a perpetual existence.
One important benefit of a corporation is that it is liable for its own obligations, limiting shareholder risk to the amount of capital invested in the corporation, often called limited liability.
Corporations generally have a board of directors (BOD). The BOD has control of the management of the corporation and is elected by the shareholders. A shareholder has limited management functions and a shareholders main duty is to elect directors and vote on major transactions. Corporations also have officers, which are agents of the board. Primary officers include the president, vice president, secretary, and treasurer. All officers are appointed by the BOD.
When forming a corporation you must file articles of incorporation. States differ on what is required in the document; however, typically the articles must contain at least the corporation’s name and address of its registered office, the amount of authorized shares, the name of its registered agents, and the names and addresses of the corporation’s incorporators. The articles may also include additional provisions concerning management and regulation of the corporation. Often articles are used to alter default statutory rules. Minnesota requirements for articles of incorporation are found in Minn. Stat. section 302A.111. Minnesota requires the name of the corporation, the address of the registered office and the name of its registered agent, if any, at that address, the total number of shares that the corporation may issue, and the names and addresses of the incorporators.
To finance a corporation there are two main methods, borrowing money and selling shares. A shareholder is someone who holds or owns shares of a corporation’s stock and are thereby owners of the corporation, granting them specific rights such as the right to vote on major business decisions and to appoint directors.
A corporation is taxed differently than other entity types. Corporations are taxed both at the entity level and personal level, which is often called double taxation. This means that income is taxed when it is received by the corporation and then taxed again when the income is received by shareholders in the form of a divided, as personal income. A corporation uses a Form 1120 or 1120-A to report income, deductions, and credits. If dividends have been issued, the corporation must send shareholders a Form 1099-DIV. In addition, Minnesota requires a corporation to file a Form M-4.
There is however, an exception to most liability protection called “piercing the corporate veil” where a shareholder or owner may be held personally liable if the person failed to treat the business as a separate entity and used the corporate form to do wrong or injustice. If this occurs a court may disregard the corporation’s separate entity status, finding the person individually liable.
There are advantages and disadvantages to each entity, it is best to consult with an attorney before deciding which entity to form.
Sole Proprietorship:
A sole proprietorship is formed by one person going into business. No forms or registration is required to create a sole proprietorship. However, some state or local laws may require some specific types of businesses to acquire permits or licenses (brewery licenses). A sole proprietorship is not a legal entity.
If the business is subject to taxes, the proprietor must obtain a sales tax certificate. If there are additional employees, you will need to obtain a Federal Employer Identification Number. When choosing to name the business, if it is ran under a name other than the sole proprietor’s name a statement must be filed indicating that the business is the sole proprietor doing business under a different name.
All profits and losses of a sole proprietorship belong to the owner. Therefore, all profits and losses are taxed at the owner’s personal income level. All income and expenses should be reported on the Schedule C or Schedule C-EZ (Form 1040). Then the net income or loss from the business is moved to the business owner’s individual Form 1040. A sole proprietor should use a Schedule SE to report net self-employment income (in order to compute Social Security, Medicare, and self-employment tax). In addition, for Minnesota income tax use Form M-1 (individual income tax form).
Management of a sole proprietorship is easy because only one person is the decision maker. However, the sole proprietor is personally liable for all business obligations of the sole proprietorship. Therefore, if the business’s assets are not sufficient to satisfy the debts of the business, then the owner’s personal assets can be used to satisfy the debt.
General Partnership:
A general partnership is formed by two or more people agreeing to do business together for profit, whether or not the purpose was to create a partnership. A partnership may be formed by a formal or informal oral agreement, or by a written partnership agreement. A partnership agreement governs the relations between and among the partners. If a partnership agreement is silent on an issue, default rules apply. Minnesota default rules are found in Chapter 323A. It is advisable to create a written partnership agreement that sets forth the:
1. The partners’ names and addresses;
2. Each partner’s rights to management and profits;
3. Nature and duration of the partnership;
4. Conditions for the admission and withdrawal of partners;
5. Provisions that will govern the dissolution of the partnership, as well as any other provisions that the partners wish to add.
A general partnership is taxed on a personal level, similar to a sole proprietorship. This is called flow-through taxation, meaning that all profits and losses flow through the partners and are taxed on a personal level. There is no double taxation, as is the case with corporations, because profits and losses are not taxed at the business level, but only the personal level. To file your taxes as a partnership you use Form 1065. You may also use Schedules K and K-1. Individual partners should use Form 1040 to report distributive share of partnership income, deductions, credits and losses. In addition, in Minnesota, a partnership has to file Form M3 and Form M1 (compute individual income tax).
General partnerships do not have limited liability, meaning that the partners are personally liable for obligations of the partnership. However, a creditor must first exhaust assets of the partnership before going after the partners’ assets.
Limited Liability Partnership (LLP):
To form an LLP, some states require the business to first form as a general partnership. After doing so, the partnership may file a registration document with the Secretary of State to become an LLP. Minnesota requires a general partnership to file a Minnesota Limited Liability Partnership Statement of Qualification Form to become an LLP. Other states allow LLPs to be formed without requiring the business start as a general partnership. When choosing to name your LLP, the name must include “Registered Limited Liability Partnership,” or “Limited Liability Partnership,” or “R.L.L.P.,” or “L.L.P.,” or “RLLP,” or “LLP”.
LLPs have limited liability for all partners. Most states allow LLP partners to be shielded from liability for partnership debts and obligations. Other states shield LLP partners from debts that arise out of negligence or wrongful acts of other partners within the LLP, but keep the partners liable for other debts and liabilities. Minnesota shields partners for partnership debts and obligations. The difference between an LLP and a limited liability limited partnership is that an LLP has no limited members, but rather all general members with limited liability.
In Minnesota a LLP must renew its LLP status yearly by filing a limited liability partnership annual renewal form. If an LLP wants to do business in a state outside of the state it was formed in, the LLP has to register as a foreign limited liability partnership with the state it intends to do business in before conducting any business.
Limited Partnership:
A limited partnership contains two types of partners, general partners and limited partners. General partners are the same as if they were partners to a general partnership. The partner is unprotected from personal liability, is responsible for managing the partnership, and shares in the profits and losses of the business. A limited partner has limited liability, meaning the partner’s liability is restricted to the amount of their investment in the limited partnership. However, generally, limited partners do not engage in management of the business.
To form a limited partnership, the partners must comply with state statutory requirements because limited partnership are governed by statutory law. Applicable Minnesota Statute is MINN. STAT. § 321. To form a limited partnership you must file a certificate, with each state determining what needs to be included in the certificate. In Minnesota, the certificate must set forth the name of the limited partnership, the address of the business’s office, the address of the agent for service of process, the name and address of each general partner, and whether the limited partnership is a limited liability limited partnership. MINN. STAT. §321.0201 State laws may restrict the name a limited partnership may choose to do business as. In Minnesota the name of a limited partnership is governed by Minn. Stat § 321.0108.
A limited partnership does not pay federal income tax. The profits and losses are taxed at the personal level as income or losses for the individual partners, often called flow-through taxation.
Limited Liability Company (LLC):
An LLC is a statutory entity. The entity is formed by filing articles of organization with the secretary of state. An operating agreement, which is entered into by the owners, is also created in order to define provisions that regulate the internal affairs of the business. An LLC may be owned by one person or have many owners and all owners are called members. An LLC has limited liability, meaning that all members are not personally liable for the company’s debts, even if they are acting in a management position. If the LLC wants to transact business outside of its state of organization it will need to apply for authority to do business in the foreign states.
Members can decide to manage the company; however, members can also choose to elect managers if they do not want to take part in a management role. An LLC is taxed using flow through taxation, just as a partnership is taxed. This means the LLC does not pay taxes at an entity level, but rather all profits, losses, and other tax items flow through to its members.
Corporation:
A corporation is an entity that is organized under the laws of a particular state, and operates for profit. This is the most complex business entity. Minnesota corporations are governed by statutory law found in MINN STAT § 302A. To form a corporation you must file articles of incorporation with the state. In Minnesota the articles must be filed in the office of the secretary of state. Once the articles of incorporation are filed the corporation’s existence begins. Statutory requirements on how to file the articles of incorporation varies between states.
Determining where to incorporate your business is important because the corporation will be governed by the laws of the state it is incorporated within. Normally, corporations incorporate in the state it will be doing business in because if business is conducted outside of the state, the corporation has to qualify as a foreign corporation to do business outside its incorporated state. If the corporation will be doing business in many states, it is common to incorporate in the state where the corporate headquarters is located. Corporations may also be formed in a different state to avoid statutory provisions or take advantage of a state’s beneficial statutory provisions. (Delaware is where most publicly-traded corporations are incorporated. These corporations are governed by the Delaware General Corporation Law which is favorable to corporations.
When determining what to name your corporation, most states require the name includes a word that indicates the company is a corporation, such as “corporation”, “incorporated”, “limited”, “company”, or an abbreviations of these words that indicate the business is a corporation. MN corporate names are governed by Minn. Stat. section 302A.115. When you decide on a name, the next step is to check with the state department to determine the availability of a name, if available the name may be reserved. It is also advisable to do a trademark search because most states do not check potential names against trademarks. Minnesota Law regarding reserving a corporation name are found in Minn. Stat. section 302A.117.
Corporations are a separate business entity, meaning that a corporation can sue in its own name, own property, enter into contracts, and pay taxes. A corporation is also not affected by the death of a shareholder or upon the transfer of a shareholders ownership interest, but rather has a perpetual existence.
One important benefit of a corporation is that it is liable for its own obligations, limiting shareholder risk to the amount of capital invested in the corporation, often called limited liability.
Corporations generally have a board of directors (BOD). The BOD has control of the management of the corporation and is elected by the shareholders. A shareholder has limited management functions and a shareholders main duty is to elect directors and vote on major transactions. Corporations also have officers, which are agents of the board. Primary officers include the president, vice president, secretary, and treasurer. All officers are appointed by the BOD.
When forming a corporation you must file articles of incorporation. States differ on what is required in the document; however, typically the articles must contain at least the corporation’s name and address of its registered office, the amount of authorized shares, the name of its registered agents, and the names and addresses of the corporation’s incorporators. The articles may also include additional provisions concerning management and regulation of the corporation. Often articles are used to alter default statutory rules. Minnesota requirements for articles of incorporation are found in Minn. Stat. section 302A.111. Minnesota requires the name of the corporation, the address of the registered office and the name of its registered agent, if any, at that address, the total number of shares that the corporation may issue, and the names and addresses of the incorporators.
To finance a corporation there are two main methods, borrowing money and selling shares. A shareholder is someone who holds or owns shares of a corporation’s stock and are thereby owners of the corporation, granting them specific rights such as the right to vote on major business decisions and to appoint directors.
A corporation is taxed differently than other entity types. Corporations are taxed both at the entity level and personal level, which is often called double taxation. This means that income is taxed when it is received by the corporation and then taxed again when the income is received by shareholders in the form of a divided, as personal income. A corporation uses a Form 1120 or 1120-A to report income, deductions, and credits. If dividends have been issued, the corporation must send shareholders a Form 1099-DIV. In addition, Minnesota requires a corporation to file a Form M-4.
There is however, an exception to most liability protection called “piercing the corporate veil” where a shareholder or owner may be held personally liable if the person failed to treat the business as a separate entity and used the corporate form to do wrong or injustice. If this occurs a court may disregard the corporation’s separate entity status, finding the person individually liable.
There are advantages and disadvantages to each entity, it is best to consult with an attorney before deciding which entity to form.
