You have a great business idea – so now what? Starting a small business can be a daunting task considering the different legal entities in Minnesota and the economic climate. That said, taking that first step toward entrepreneurship is exciting and rewarding.

One of the first decisions you will make when starting your small business is choosing the right type of legal entity. This step is crucial, as it will lay the foundation for how your business will be run and what types of business succession planning are available to you. The legal entity you choose can affect taxes and liability protections.

The four most common business structures in Minnesota are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each has its own advantages and disadvantages, so it’s important to decide which entity to establish in consultation with an experienced small business attorney.

Sole Proprietorships

Sole proprietorships are the simplest and most common type of business structure. They’re easy to set up and require little paperwork. The biggest downside of a sole proprietorship is that the owner is personally liable for all debts and liabilities of the business. This means that if the business can’t pay its debts, your personal assets (such as your home, previously accumulated retirement accounts or savings) could be at risk.

Partnerships

Partnerships are similar to sole proprietorships, where two or more owners are involved. Like sole proprietorships, partnerships are easy to set up and require little paperwork. There is one big caveat, however: Like sole proprietorships, partners are personally liable for the debts and liabilities of the partnership. This means that if one partner mismanages the finances or runs up a lot of debt, the other partner(s) could be on the hook for those debts.

Limited Liability Companies (LLCs)

A properly set up and managed LLC offers some personal liability protections for company debts or liabilities. LLCs can have one or more owners, and unlike partnerships, each LLC owner is only liable for their own actions (not those of their fellow owners). On the downside, in comparison to sole proprietorships and partnerships, LLCs require more paperwork.

Corporations

Properly set up and managed Corporations can provide the highest level of personal liability protection. So long as the Corporation is managed as a business and not an extension of the owner, the owner’s personal assets are generally protected from creditors and lawsuits. A possible downside is that corporations involve more paperwork than sole proprietorships and partnerships. In addition, depending on the type of corporation and management structure, it may be required that profits be shared with shareholders in addition to any employees before owners get a take of profits. 

Professional Firms Act

If you are seeking to create a small business that provides professional services, in addition to the above business type decisions, the company must be set up in compliance with Minnesota’s Professional Firms Act.   “Professional services” means services of the type required or permitted to be furnished by a professional under a license, registration, or certificate issued by the state of Minnesota, such as medicine, optometry, chiropractic care, counseling, dentistry, veterinary medicine, architecture, engineering, accountancy, legal services and more.  The rules in this act govern how a business is named, restrictions on ownership interests, and how services are provided in Minnesota.

Establish Your Small Business With Confidence

The right business structure for your small business depends upon a variety of factors, including your business’s primary purpose, your long-term business goals, and the extent of liability protection you require.

An experienced small business startup attorney can provide valuable advice on which legal entity makes the most sense for your business. From there, your attorney can help you file the paperwork to set up the business with the state, draft contracts, and help explore business succession planning options.