Sole proprietorship

Sole proprietorship is a business owned by single owner.  The single owner receives all profits and is personally liable for all obligations.  Sole proprietorships do not enjoy the same tax benefits that corporations do with the IRS and are taxed at the individual’s current tax rate, rather than the corporate tax rate. The owner of the business must report all income and losses on the owner’s personal tax return.  This is generally reported on Schedule C, along with the owner’s personal IRS 1040.

Sole proprietors may set up their business under their personal name or under a fictitious name.  If the business is set up under a fictitious name, a DBA (doing business as) must be filed with the Minnesota Secretary of State and must file an annual renewal. Additionally, the Minnesota Secretary of State requires a Certificate of Assumed Name must be published with a qualified legal newspaper for two consecutive issues in the county where the principal place of business is located.  At Klun, we can help you set up your Minnesota Business as a sole proprietorship.

Advantages of Setting up Your Business as a Sole Proprietorship

  • Control over growth of your business: Since a sole proprietorship is owned by one person, you have complete control over the business.  The sole proprietor makes all of the decisions and is the sole beneficiary of the company’s assets.
  • Ability to pass business to heirs upon death: A sole proprietorship has a single owner, making it easier for that individual to pass the business on to family members upon death.
  • Ease of setting up the business: Forming a sole proprietorship required little paperwork beyond a business license, permits and filing the business name with the State of Minnesota.
  • No corporate taxes: Since the owner of a sole proprietorship reports income and losses on their personal taxes, no corporate tax paperwork is required.
  • Minimal costs to set up the business: Start-up costs for a sole proprietorship are minimal and the easiest entity to set up.

Disadvantages of Setting up Your Business as a Sole Proprietorship

  • Difficulty obtaining financing and long-term capital: Sole proprietorship cannot raise capital by selling stock.  A business owner may find it difficult to attract investors and banks may be less likely to provide financing.  The owner will typically have to finance the business based on their personal assets.
  • Personal liability:  The business owner is personally liable for all the business debts and assets are not protected from creditors.
  • Higher income taxes: Money earned as a sole proprietor has the potential to put the business owner into a higher tax bracket.

At Klun Law Firm, we are dedicated to assisting business owners grow.  There is no business too small for us to help.  The Klun Law Firm can help you file your business name, a DBA and other licensing requirements with the Minnesota Secretary of State.  Klun can also help you set up other important documents for your Sole Proprietorship such as tax filings, filing a Certificate of Assumed Name or an amendment to an existing Assumed Name, annual renewals and business licenses.  Call us today at (877) 365-3221 to set up an appointment to discuss what the best business structure is for your business and tax situation.

General Partnership

A general partnership is an association of two or more people carrying on a business together with the goal of earning profits.  Like a sole proprietorship, a general partnership is viewed as being one and the same as its owners.

Advantages of Setting up Your Business as a General Partnership

  • Control over growth of your business: Since a sole proprietorship is owned by one person, you have complete control over the business.  The sole proprietor makes all of the decisions and is the sole beneficiary of the company’s assets.
  • Ability to pass business to heirs upon death: A sole proprietorship has a single owner, making it easier for that individual to pass the business on to family members upon death.
  • Ease of setting up the business: Forming a sole proprietorship required little paperwork beyond a business license, permits and filing the business name with the State of Minnesota.
  • No corporate taxes: Like a sole proprietorship, a partnership has only one level of taxation.  Partnerships do not pay income tax because profits and losses are passed through to the individual partners.
  • Minimal set-up costs: Creating a general partnership requires less paperwork and is cheaper than forming a corporation.

Disadvantages of Setting up Your Business as a General Partnership

  • Joint and several liability: Owners of a partnership have unlimited personal liability and are jointly liability for the partnership’s obligations.  Each partner is personally liable for all of the debts of the partnership, including any debts incurred by any of the other partners on behalf of the partnership.  If the company gets sued, the partners are liable.
  • Ability of one partner to bind the partnership: Any partner in a partnership can enter into a contract on behalf of the partnership.
  • Dissolution due to death of a partner: The death of a partner terminates a partnership.
  • Personal property: A partner’s interest in a partnership is considered personal property that may be assigned to other persons.
  • Difficulty obtaining financing and long-term capital: Sole proprietorship cannot raise capital by selling stock.  A business owner may find it difficult to attract investors and banks may be less likely to provide financing.  The owner will typically have to finance the business based on their personal assets.
  • No Asset Protection:  The business owner is personally liable for all the business debts and assets are not protected from creditors.
  • Higher income taxes: Money earned as a sole proprietor has the potential to put the business owner into a higher tax bracket.
  • Difficulty selling the business: Selling an interest in a general partnership is very troublesome. All other partners typically have to agree.

Partners in a partnership owe a fiduciary duty to one another.  Unlike a sole proprietorship there is more than one person involved in the business.  Partners owe each other, and the business, basic duties of good faith, the duty of act for the common benefit of all partners relating to the business, loyalty, honest and fairness in all business dealings with one another.   The duty of loyalty requires a partner not act on behalf of someone having an interest adverse to the partnership and not competing with the partnership.  If a partner gets any benefits from the partnership, he or she must share them with the other partners.  Additionally, a partner cannot put his or her interests before those of the business and may not have conflicting fiduciary duties.

Like a sole proprietorship, if a General Partnership chooses a fictitious name it must files that name with the State of Minnesota.  Without written documentation, the partnership becomes subject to significant defaults of Minnesota law under Chapter 323A, the Uniform Partnership Act of 1994.  Let us help you with your partnership paperwork.  Call us today at (877) 365-3221 to set up an appointment to discuss what the best business structure is for your business and tax situation.

Limited Liability Companies (LCC)

Limited Liability Companies (LCC) are a cross between sole proprietorships/general partnerships and corporations.  A limited liability company  allows owners to limit their liability for the entity’s debts and normally passed through to the owners as if it were a partnership.  However, unlike a general partnership, there is no requirement that at least one general partner be liable for the debts and obligations of the partnership.  Owners of the LLC are typically referred to as members.

Advantages of Setting up Your Business as an LLC

  • Pass-through taxation: No double taxation because profits are taxed at the member level.
  • Protection of personal assets: Members are protected from liability for acts and debts of the LLC.
  • Tax flexibility: LLC can elect to be taxed as a sole proprietor, partnership, S-corp or corporation.
  • Ability to be set up with single owner:  The LLC can be single owner.
  • Few record-keeping requirements: No requirement for annual general meeting or board of directors.
  • Health insurance:  The managing member of an LLC can deduct 100 percent of the health insurance premiums he or she pays–up to the extent of their pro-rata share of the LLC’s net profit.
  • Tax treatment: The profits or losses of the business pass directly through to the owner’s personal income tax return, Form 1040. The LLC files a Form 1065, and then lists each member’s taxable profit on Form K-1. The bottom-line profit of the business is not considered to be earned income to the members, and therefore is not subject to self-employment tax for non-managing members.

Disadvantages of Setting up Your Business as an LLC

  • Inconsistent treatment: Due to a lack of uniformity among LLC statutes in the U.S., if a member wants to operate their LLC outside Minnesota, they may not receive consistent treatment.
  • Taxable profits:  Each member’s pro-rate share of profits represents taxable income.
  • Employment:  As a member of an LLC you are not allowed to pay yourself wages, so members won’t enjoy the privileges of unemployment benefit, nor will they be paying into social security.
  • Difficulty in raising capital: Investors may not be comfortable investing in a company without shareholders or a public offering.
  • Self-employment tax: The manager’s share of the profits is subject to the self-employment tax Minnesota residents may set their business up as a Minnesota Limited Liability Company (LLC) by filing Articles of Organization along with a $135.00 filing fee.  Minnesota’s Secretary of State reviews the filing and must approve the articles of organization.  Additionally, Minnesota requires annual renewal once a year.  Klun Law can help you form you limited liability company and draft articles of organization to meet Minnesota law.  Call us today at (877) 365-3221 to set up an appointment to discuss your limited liability company.

Minnesota residents may set their business up as a Minnesota Limited Liability Company (LLC) by filing Articles of Organization along with a $135.00 filing fee.  Minnesota’s Secretary of State reviews the filing and must approve the articles of organization.  Additionally, Minnesota requires annual renewal once a year.  Klun can help you form you limited liability company and draft articles of organization to meet Minnesota law.  Call us today at (877) 365-3221 to set up an appointment to discuss your limited liability company.  Minnesota residents may set their business up as a Minnesota Limited Liability Company (LLC) by filing Articles of Organization along with a $135.00 filing fee.  Minnesota’s Secretary of State reviews the filing and must approve the articles of organization.  Additionally, Minnesota requires annual renewal once a year.  Klun can help you form you limited liability company and draft articles of organization to meet Minnesota law.  Call us today at (877) 365-3221 to set up an appointment to discuss your limited liability company.

Limited Liability Partnerships

In contrast to general partnerships, limited partnerships consist of one or more general partners and one or more limited partners.  General partners are personally liable for debts of the partnership and conduct the day-to-day business of the partnership.

The limited partners enjoy limited liability.  However, they can lose such limited liability if they perform any function within the partnership other than invest capital.  Limited partnerships are taxed only at the individual level.  Minnesota has adopted the Revised Uniform Limited Partnership Act, which creates default rules if the limited partnership does not have a partnership agreement.  At Klun, we can assist you by creating a limited partnership.

A general partnership may also elect to be a Limited Liability Partnership (LLP).  Unlike a limited partnership, an LLP allows all the partners to enjoy limited liability and participate in the day-to-day functions of the partnership.  A Minnesota LLP is governed by Minn. State. Sec. 323A.1001.  It is also taxed at the individual level.  To register an LLP with the State of Minnesota, a State of Qualification form is required along with a filing fee of $135.00.  Annual renewal is required.  At Klun, we can assist you in setting up and maintain your general or limited liability partnership.

Unfortunately, the LLP is not recognized in all states, so if your business is going to operate in states other than Minnesota, you may want to consider another business form. Minnesota also allows a business to be set up as a Limited Liability Limited Partnership (LLLP).  Governed by Minn. Stat. Sec. 322A.88, the LLLP provides for limited liability protection for general and limited partners of the LLLP. Assumed Names Minnesota requires that any individual, corporation, limited partnership or limited liability company that conducts business in Minnesota under a name other than their full legal name, must file a Certificate of Assumed Name along with a $30.00 filing fee.  Filing fees for subsequent amendments are $30.00 per filing.   After filing with Minnesota Secretary of State, you must publish the Certificate or Amended Certificate of Assumed Name with a qualified Legal Newspaper for two consecutive issues in the county where the principal place of business is located.  An annual renewal is required once each calendar year. Klun Law Firm can assist with filing DBA/assumed name documents.  Call us today at (877) 365-3221 to set up an appointment to assist you.

C Corporations

C Corporations are a business entity that provides strong liability protection to their owners with a complete separate entity, making them advantageous to those seeking investors.  However, they are more costly and difficult in terms of regulation and paperwork.

Advantages of Setting up Your Business as a C Corporation

  • Liability protection: Because the C corporation is legally an entirely separate entity from the owners and shareholders, owners and shareholders cannot be held responsible for any debts of the C corporation or any lawsuits brought against it. In other words, your personal assets will not be affected by the actions of the corporation.
  • Capital Investment: A C corporation can sell stock or shares, either common or preferred — and there’s no limit to the number of shareholders. If you ever plan to go public, you’ll also need to be structured as a C corporation. In addition, the C corporation form allows you to offer employees a stock option plan.
  • Taxes: Because the corporation is a separate entity, the profits and losses of the C corporation are retained for the corporation. Unless you or your shareholders receive dividends, you will not be taxed on the company’s income. Also in your favor, you can deduct business expenses and employee benefits in your tax filings.
  • Lower tax rate: You also have the option of splitting profits and losses between the business and the owners to create an overall lower tax rate.
  • Perpetual existence: A C corporation will exist indefinitely, even if a shareholder or owner leaves, becomes disabled, dies, or sells off their shares.
  • Employment:  Allows shareholders to also serve as employees.
  • Number of shareholders:  Unlike an S corporation, there is no limit on the number of shareholder and shares that may be held by people who are neither citizens nor residents of the United States.
  • Tax Flexibility: Flexibility to carry corporate losses forward to future tax years.

Disadvantages of Setting up Your Business as a C Corporation

  • Higher costs: Corporations pay a number of state and federal filing fees, and each state also has its own set of regulations. Dealing with these regulations may require the professional expense of an attorney or accountant.
  • Increased paperwork: Increased regulations and complex rules require a corporation to file a number of documents, including Articles of Incorporation, corporate bylaws, corporate minutes, certificates of good standing, and more.
  • Double taxation: Owners of the corporation pay a double tax on the earnings of the company, and shareholders must pay taxes on the dividends received. However, if the owners take a salary, the corporation is not required to pay tax on the earnings. The payments are considered a business expense.
  • A C Corporation cannot pass through losses to investors, as can an S corporation or LLC in Minnesota, a business owner can be held personally liable under certain circumstances.  This is called piercing the corporate veil.  Under Minn. State.Sec. 322b.303. piercing the corporate veil may occur if a business owner fails to keep business formalities, co-mingles funds or has inadequate capitalization to start the business. Some of the paperwork required to create a C corporation includes a corporate charter, by-laws, establishing books and records, reports to the states as well as a board of directors meeting.   Because mistakes in these documents can create problems, you should contact us to consult before setting your business up as a C corporation.

S Corporations

An S corporation is a corporation which has elected to have its profits pass through to is shareholders in the same manner as a partnership or sole proprietorship.  The shareholders of an S corporation receive the benefit of limited liability, and are treated in the manner of partners for purposes of taxation.  An S corporation requires Articles of Incorporation be filed with the Secretary of State of Minnesota.  An S corporation issues stock and is governed as a corporation. The owners, referred to as shareholders, have the same protection from liability as shareholders of a C corporation. Shareholders in an S corporation have no personal liability for business liabilities.

However, not all businesses qualify to be an S corporation.  To qualify as an S corporation, the corporation:

  • May have no more than 75 shareholders, all of whom are individuals, estates, or qualifying trusts;
  • Must have only one class of stock (although differences in voting rights may be allowed);
  • Must be formed in the United States; and
  • All shareholders must be citizens or residents of the United States. Non-resident aliens may not hold shares.

Advantages of Setting up Your Business as an S Corporation

  • Limited Liability: The most significant advantages of converting a sole proprietorship or partnership to an S corporation are limited liability.  An S corporation protects the personal assets of its shareholders. Absent an express personal guarantee, a shareholder is not personally responsible for the business debts and liabilities of the corporation. In a sole proprietorship or general partnership, owners and the business are legally considered the same—leaving personal assets vulnerable.
  • Pass-through taxation: An S corporation does not pay federal taxes at the corporate level.  Any business income or loss is “passed through” to shareholders who report it on their personal income tax returns.
  • Losses: Corporate losses may ordinarily be passed through to the shareholders, who can then claim a deduction from their other taxable income.
  • Tax-favorable characterization of income:  S corporation shareholders can be employees of the business and draw salaries as employees. They can also receive dividends from the corporation, as well as other distributions that are tax-free to the extent of their investment in the corporation.  A reasonable characterization of distributions as salary or dividends can help the owner-operator reduce self-employment tax liability, while still generating business-expense and wages-paid deductions for the corporation.
  • Straightforward transfer of ownership. Interests in an S corporation can be freely transferred without triggering adverse tax consequences.  The S corporation does not need to make adjustments to property basis or comply with complicated accounting rules when an ownership interest is transferred.
  • Ability to raise capital: Operating as an S corporation may help a new business establish credibility with potential customers, employees, vendors and partners because they see the owners have made a formal commitment to their business.
  • Easier Tax Accounting: tax accounting is easier for an S corporation than for a partnership or LLC.

Disadvantages of Setting up Your Business as an S Corporation

  • Fewer investment opportunities: Unlike a C corporation, the S corporation may not be the subject of a public offering.
  • No flexibility in allocation of profits: unlike an LLC, profits are allocated in proportion to each shareholder’s ownership interest in the corporation.
  • No deduction of fringe benefits: S corporations may not deduct the cost of fringe benefits granted to employees who have more than a 2% ownership interest in the corporation.
  • Shareholder must be U.S. citizens or permanent residents:  Businesses who wish to seek foreign investors may be burdened by the residency restrictions on shareholders.
  • Formation and ongoing expenses. S corporations have a higher cost of doing business that sole proprietorships and general partnership sue to record keeping and paperwork requirements by the state.
  • Tax qualification obligations. Mistakes regarding the various election, consent, notification, stock ownership and filing requirements can accidentally result in the termination of S corporation status.
  • Stock ownership restrictions. An S corporation can have only one class of stock, although it can have both voting and non-voting shares. Therefore, there can’t be different classes of investors who are entitled to different dividends or distribution rights.
  • Closer IRS scrutiny: Because amounts distributed to a shareholder can be dividends or salary, the IRS scrutinizes payments to make sure the characterization conforms to reality. As a result, wages may be recharacterized as dividends, costing the corporation a deduction for compensation paid. Conversely, dividends may be recharacterized as wages, which subjects the corporation to employment tax liability.
  • Less flexibility in allocating income and loss: Because of the one-class-of-stock restriction, an S corporation cannot easily allocate losses or income to specific shareholders. Taxation: Under normal circumstances an S corporation does not pay corporate income taxes. Instead, the corporate profits are passed through to the shareholders, who report the distribution on their individual tax returns. Many small business owners whose businesses generate significant profits choose to incorporate as an S corporation to avoid paying self-employment taxes on all of their income.

Klun is here to assist you with the paperwork, formation of an S corporation, establishing by-laws.  These documents are complicated and we are here to assist.  Call us today for an appointment.

DBA a Different Name?

Minnesota requires that any individual, corporation, limited partnership or limited liability company that conducts business in Minnesota under a name other than their full legal name, must file a Certificate of Assumed Name along with a $30.00 filing fee.  Filing fees for subsequent amendments are $30.00 per filing.   After filing with Minnesota Secretary of State, you must publish the Certificate or Amended Certificate of Assumed Name with a qualified Legal Newspaper for two consecutive issues in the county where the principal place of business is located.  An annual renewal is required once each calendar year.

Klun Law Firm can assist with filing DBA/assumed name documents.  Call us today at (877) 365-3221 to set up an appointment to assist you.