Step 3: Form Your Business
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Step 3: Form Your Business

Organizational Structure

One of the most important decisions to make when starting a business is which type of organizational structure will form your business.  This decision will not only impact the ever so obvious tax implications you face, it will determine your personal liability as the operator as well.   

The type of business entity that works best for you will depend on three key factors: liability, taxation and the continuous expense of administration.  

  1. Legal liability - To what extent do you, as the business owner, need to be insulated from legal liability? 
  2. Taxation - Based on your individual situation and goals, what are the opportunities to minimize taxation? 
  3. Administration expense - Do the tax advantages offer enough benefit to offset the costs of conducting business?  

As you explore different organizational structures you should take flexibility and future need factors into consideration as well.  

With the above factors in mind, here is a brief overview of the main types of organizational structures available in Minnesota: 

Sole Proprietorship
The most common and simplest form of organization is a sole proprietorship.  Sole proprietorships are owned and controlled by one individual. This individual solely receives the profits and bears the losses from the business. This individual is solely responsible for the debts and obligations of the business. Income and expenses of the business are reported on the proprietor’s individual income tax return, and profits are taxed at the proprietor’s individual income tax rate.  

A partnership is a business owned by two or more associates who carry on the business as partners. All partners share equally in the right and responsibility to manage the business, which includes sharing profits, debts, and obligations of the business. Income and expenses of the partnership are reported on state and federal tax returns, which are filed by the partnership. These returns include schedules that are used to report the partner’s respective shares of the partnership’s taxable income. The partners then report this income on their separate tax returns along with their other income and pay tax at their applicable tax rates.  

A corporation is a formal and complex form of organization. The corporation is a separate legal entity owned by one or more shareholders. Like a person, a corporation is taxed and held legally liable for its actions. Corporations can make a profit, but are also responsible for the debts and obligations of the business. The key benefit of corporate status is the avoidance of personal liability. Incorporating a business is a complex process; cost is a primary obstacle to forming this type of organization.  

Limited Liability Company
A limited liability company is a hybrid organization incorporating aspects of a partnership and a corporation. A limited liability company is designed to have the tax treatment of a partnership with the limited liability characteristics of a corporation.  

This is an incredibly important decision to make. Counsel from business experts such as an attorney, accountant, Small Business Development Center (SBDC), or Service Corps of Retired Executives (SCORE)consultant is advised in making such a decision. These professionals will be able to assist you in identifying the pros and cons of various organizational structures in the context of your business.

For further information on how to register your Minnesota business visit the MN Secretary of State's Office

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