You have a great idea for a new business. . . now what? One of the first decisions for someone in your position is whether to formally organize your business, and, if so, what type of entity to select. There are several to choose from, each with unique legal and tax consequences. The most common entity types are the Sole Proprietorship, Partnership, Corporation and Limited Liability Company.

In Minnesota, your company automatically becomes a Sole Proprietorship if you are the only owner and do not select another entity type, or a Partnership if there are two or more persons associated to carry on a business for profit. There are no statutory requirements to forming a Sole Proprietorship, but the owner should register the business name as an assumed name with the Secretary of State. Similarly, there are no formal requirements for Partnerships, but Minnesota statutes do provide alternative forms of partnerships with greater levels of liability protection. Typically, however, sole proprietors and partners are personally liable for business debts, and therefore not always the best structure for your business.

The most common entity types in Minnesota are Corporations and Limited Liability Companies. A Corporation may be formed for any lawful purpose, but requires filing articles of incorporation with the Secretary of State. Perhaps the greatest benefit of forming as a corporation is limitation on personal liability for its owners (called “shareholders”). However, unlike partnerships or limited liability companies, corporations are treated as separately from their owners for tax purposes. The profits of a corporation are taxed to the corporation when earned. Shareholders are then separately taxed when profits are distributed as dividends.

A Limited Liability Company (“LLC”) is a flexible corporate form that combines elements of a partnership and corporation. Like corporations, an LLC offers owners limited personal liability for debts and acts of the business. However, like a partnership, an LLC offers the benefit of pass-through taxation, if properly elected. An LLC must have one or more owners (called “members”), and must file articles of organization with the Secretary of State to be recognized

Deciding which entity is right for your business depends on many factors including the needs of the owner(s), characteristics of the business, and the needs (or often, requirements) of other stakeholders such as banks, vendors, customers or client. That’s why it is important to have a trusted advisor to guide you through the decision making process.