Choosing The Form Of Business Organization

Basic Business Cents

One of the first questions facing an entrepreneur is what type of organizational structure is best for the start-up company. This is a key decision that could have serious consequences later; one that many entrepreneurs are ill equipped to make. A free publication by the Small Business Assistance Office of the Minnesota Department of Employment and Economic Development (DEED), titled A Guide to Starting a Business in Minnesota, devotes 60 pages to this subject. This 357-page book covering a variety of start-up considerations can be obtained without charge by contacting:

Telephone: (800) 310-8323,

Fax: (651) 296-5287, or

Email: deed.mnsbao@state.mn.us

A simple comparison of the four basic business structures can be viewed by comparing pros and cons of each. Note, this is the author’s opinion drawn from research and experience and does not constitute a legal position. Legal advice must come from an attorney admitted to the bar in Minnesota and is a necessity for anyone considering starting a new business.

 

PROS

CONS

Sole Proprietorship Simple

Owned and controlled by one individual

Profits are taxed at the individual’s rate

 

Individual is responsible for all debts and obligations of the business

Individual bears the legal responsibility for the business

Partnership

   General Partnership

 

 

 

 

 

Limited Partnership

 

All partners share equally in the right, and responsibility, to manage the business

Partners are taxed on their respective share of the profits at the individual’s rate.

The limited partnership must have one General Partner and at least one Limited Partner.

The limited partners share in the liability only up to the amount of their investment in the business.

 

Each partner is responsible for all the debts and obligations of the business

Partnerships lead to disagreements causing serious disruptions to the business

The General Partner has the right and responsibility to control the partnership but is responsible for the debts and obligations of the business.

Limited partners do not have the power to act or bind the business.

Limited Liability Partnership (LLP) The personal assets of the partners are shielded against liabilities incurred by business in tort and contract situations.

Profits are taxed on the individual’s respective share of the business at the individual’s rate.

Care should be taken that the correct initials must be displayed as a part of the name of the organization.

An LLP is a fairly new form of entity and not well understood by everyone.

Limited Liability Company Liability for business debts and obligations generally rests with the entity rather than with individual owners.

It is not subject to many of the restrictions that apply to an S Corp.

Must obtain both Federal and State Tax ID numbers.
Corporation

 

 

 

S Corp

 

 

 

 

C Corp

A corporation is a separate legal entity, which in most cases shields insulates shareholders from claims against the corporation.

An S Corp is taxed much as the same way as a partnership. Profits/losses flow through to the shareholders in proportion to their holdings.

Best liability protection for the shareholders.

 

 

 

 

 

 

The S Corp must meet the statutory requirements like no more than 100 shareholders, no alien shareholders, only one class of stock.

Dividends and salaries are taxed at the individual’s rates plus the entity has already been taxed at the corporate rate.

 

An individual or partnership that conducts business in Minnesota under a name that is different from the full, true name of each business owner must register the name of the business with the Secretary of State.  An assumed name will not be accepted if it is the same as the name as another entity on file. Business owners may call the information line of the Secretary of State (651) 296-2803 go to the web site at www.sos.state.mn.us to determine if the name is available.

All businesses will encounter certain organizational costs. Both legal and accounting professional help is strongly advised.

Source: A Guide to Starting a Business in Minnesota

Thirty-Second Edition, January 2014

Minnesota Department of Employment and Economic Development