Setting Up for Success

Choosing the right legal entity is an important first step in starting a new business.

By Jeffrey Clancy

statute, the required officers are individuals who can fulfill the duties of chief executive officer and chief financial officer, which are typically defined in the corporation’s bylaws. Officers are not required to be shareholders.

Generally, the shareholders of the corporation enjoy limited liability protection from the corporation’s debt obligations to creditors. Owners should consult a tax professional when deciding how they wish to be taxed. A corporation can be taxed in one of two ways:

1 C-corporation is taxed at two levels, the corporation itself is taxed as well as the individual shareholders.

Starting a business is an exciting, yet overwhelming, undertaking.

Choosing the best entity – or organization that is formed to conduct business – comes with many complexities. Some items to consider are the tax implications, non-tax considerations, governance issues, business succession planning, and understanding the entity options available. A relationship with a seasoned attorney and tax professional is a good idea when entering the small business world.

Determining the appropriate geographical jurisdiction is an important component when deciding where to form an entity. Consider where the registered office is located, where will most business operations and transactions occur, state tax considerations, and residency. For this article, we will focus on forming the entity in Minnesota. There are many options in Minnesota such as:

General partnership

–––––––––––––

Limited partnership

–––––––––––––

Limited liability partnership

–––––––––––––

Sole proprietorship

–––––––––––––Corporation

–––––––––––––

Limited liability company

–––––––––––––

All have advantages and disadvantages. This article focuses on the two most common entities chosen by prospective business owners: corporations and limited liability companies.

Corporation

A corporation is incorporated under Minnesota Statutes §302A. A corporation’s management and operations are handled by a board of directors that is elected by the shareholders. The board of directors appoints the officers of the corporation who manage the day-to-day operations. By

2 S-corporation has “pass through” taxation directly to the shareholders.

To create a corporation, Articles of Incorporation must be filed with the Minnesota Secretary of State. Other organizational documents are also required, such as:

The names of the shareholders

An initial shareholder resolution that identifies each shareholder’s capital contribution, elects a board, as well as other housekeeping matters

A board of directors’ resolution that appoints the officers of the corporation

Limited Liability Company

A limited liability company is a new entity choice that was created as a hybrid of both corporation and partnership law. Minnesota Statues 322C governs limited liability companies. Unlike corporations, a limited liability company has several governance options that its members may choose from:

Minnesota has many entity options for the future business owner. Tax and legal considerations must be analyzed and addressed when deciding which entity is best for your business.

–––––––––––––

Member-managed, where the members make the management and operational decisions for the company. As such, the members appoint the officers of the limited liability company, which typically include a president and treasurer.

–––––––––––––Manager-managed, where the managers, who may be individuals or entities, manage the company.

–––––––––––––Board-managed, which is similar to a corporation’s governance structure.

–––––––––––––

Members of a limited liability company are shielded from the debt obligations of the company, similar to shareholders in a corporation. This flexibility in governance, liability protection, and the fact that limited liability companies generally are treated as partnerships for tax purposes (unless they elect to be taxed differently) make a limited liability company a very appealing option for business owners. As always, it is important to consult with your tax professional when making this decision.

Like a corporation, Articles of Organization must be filed with the Minnesota Secretary of State to organize a limited liability company pursuant to Minnesota Statutes §322C. Other required items include:

An organizational action adopting the Articles of Organization and naming the members

Additional resolutions to adopt members’ capital contributions and to elect the officers of the company, depending on governance structure

An operating agreement to address events ranging from the general structure under which the company operates to what happens when a member leaves the company, whether voluntarily or involuntarily Minnesota has many entity options for the future business owner. Tax and legal considerations must be analyzed and addressed when deciding which entity is best for your business.

Surrounding yourself with a team of professionals is a crucial step in helping to start your new business venture.