Do You Need an LLC or Corporation? Choosing the Right Structure for Your Minnesota Business

Starting your business in Minnesota can include a lot of different choices (many that you may not have anticipated when you first ventured down the business path). When you first begin, many people choose to use a sole proprietorship as the "form" of their business because the administrative burdens are low and if your business revenue is below a certain threshold, it's hard to justify additional complexity.

But as your business grows and you consider the next steps for your business, Minnesota offers different corporate structures for you to consider. The most common business structures my clients consider are Corporations and LLCs. Between these two types of businesses, they commonly consider issues such as liability protection, tax preferences, raising capital, administrative complexity, and long-term growth plans. These aren't the only considerations, but they are a good starting point for anyone looking to formalize their Minnesota business.

LLC vs. Corporation

When we are comparing these two business structures, these are assuming that you are at the stage that you want to formally create a business with the state. If you are at the stage where you are operating your business alone and it's still growing in size, choosing to be a sole proprietor can offer simplicity in your business operations. If that's the case, then you can choose to continue to operate as a sole proprietor until you are at the stage that you are ready to consider an LLC or a Corporation.

What is an LLC?

A Limited Liability Company (LLC) is a hybrid business structure that combines the flexibility of a partnership with the liability protection of a corporation. LLC owners, known as members, are not personally liable for the company’s debts or liabilities. This structure is popular among small business owners due to its simplicity, flexibility, and liability protection.

What is a Corporation?

A corporation is a more complex business entity that is owned by shareholders. It operates as a separate legal entity, meaning it can enter into contracts, sue, be sued, and own assets independently of its owners. Corporations are often associated with larger businesses but can also be suitable for small enterprises depending on their goals.

Choosing Between an LLC and a Corporation

It's probably not surprising that LLC's and Corporations have a lot in common and that when you are making the choice between the two, it often comes down to just one or two differences. With that said, let's look at six common areas that we can use to compare them:

1. Liability Protection

Both LLCs and corporations provide liability protection, which means the personal assets of the owners (members or shareholders) are typically shielded from the company’s debts and legal obligations.

• LLC: Offers strong liability protection with fewer formalities. Members are generally not liable for the company’s debts.

• Corporation: Provides robust liability protection as well, but it’s essential to maintain corporate formalities (e.g., holding regular board meetings and maintaining detailed records) to preserve this protection.

2. Taxation

Taxation is a significant factor when choosing a business structure, as it impacts how your business income is reported and taxed. As you've likely read, Minnesota has the highest corporate tax rate in the nation, so for many, the taxation piece tips the scales towards an LLC.

• LLC:

  • Taxed as a pass-through entity by default, meaning profits and losses are reported on the members’ personal tax returns.

  • Option to be taxed as a corporation (either S corporation or C corporation) if it aligns better with your financial goals.

  • No double taxation, as profits are only taxed once at the individual level.

• Corporation:

  • C corporations face double taxation: profits are taxed at the corporate level and again when distributed as dividends to shareholders.

  • S corporations avoid double taxation but are subject to stricter eligibility requirements and limitations on the number of shareholders.

3. Management Structure

The management structure of your business can also be a factor, however it's less of a concern for single-member businesses.

• LLC:

  • Flexible management structure; members can manage the company themselves or appoint managers.

  • Ideal for businesses where owners want to maintain direct control without the need for a formal board.

• Corporation:

  • Requires a formal structure with a board of directors, officers, and shareholders.

  • Best suited for businesses planning to grow significantly or attract investors.

4. Formation and Maintenance

When you've moved up from a sole proprietor to a formal business that is filed with the state, the complexity of forming and maintaining your business entity varies between LLCs and corporations.

• LLC:

  • Easier and less expensive to form in Minnesota.

  • Fewer ongoing compliance requirements, such as annual meetings and detailed record-keeping.

• Corporation:

  • More formalities and higher administrative costs.

  • Requires regular board and shareholder meetings, meticulous records, and adherence to corporate bylaws.

5. Raising Capital

This is one area where the Corporation attracts more interest. You should be looking at your business plan and long-term goals, and if that includes raising capital for the business, pay careful attention to these considerations.

• LLC:

  • Can raise funds through member contributions or by bringing in new members.

  • Less attractive to investors who prefer the stock options and shareholder rights offered by corporations.

• Corporation:

  • Easier to attract investors due to the ability to issue stock.

  • Preferred structure for businesses seeking venture capital or planning to go public.

6. Flexibility and Growth Plans

In addition to the decision to raise capital, you should also consider your growth plan for the business and ultimate plans to exit the business, if that's on your radar as well.

• LLC:

  • Offers flexibility in terms of ownership and management.

  • Suitable for small to medium-sized businesses with no immediate plans for public offerings.

• Corporation:

  • Better suited for businesses aiming for rapid growth, multiple funding rounds, or eventual public listing.

Forming Your Business

When forming an LLC or corporation in Minnesota, there are specific steps and requirements you must follow:

For an LLC:

1. File Articles of Organization: Submit the necessary form to the Minnesota Secretary of State.

2. Create an Operating Agreement: Although not required, an operating agreement outlines the management structure and ownership details.

3. Obtain an EIN: Apply for an Employer Identification Number (EIN) from the IRS.

4. Maintain Compliance: File an annual renewal with the state and pay the required fees.

For a Corporation:

1. File Articles of Incorporation: Submit the required documents to the Minnesota Secretary of State.

2. Create Corporate Bylaws: These govern the internal operations of the corporation.

3. Issue Stock: Distribute shares to initial shareholders.

4. Hold Initial Board Meeting: Elect directors and appoint officers.

5. Obtain an EIN: Register with the IRS.

6. Maintain Compliance: File annual reports, hold regular meetings, and keep detailed records.

One item that's been left off this list for now is your Beneficial Ownership Interest filing with FinCEN. As of the time of posting, BOI filings have been suspended by a Court ruling in Texas. However, new businesses should pay attention to the status of the Corporate Transparency Act at the time they file their business.

Pros and Cons of LLCs and Corporations

So How Do You Choose?

The right choice between an LLC and a Corporation depends on your specific needs and goals. Consider these questions:

• How important is liability protection?

• What are your tax preferences?

• Do you plan to seek investors or raise capital?

• What level of administrative complexity can you manage?

• What are your long-term growth plans?

While I've attempted to go through a variety of the aspects that go into your decision to form a Corporation vs. an LLC, the reality is that a blog post is no substitute for legal advice that is tailored to you and your business. Whether you opt for an LLC or a Corporation, understanding the implications of each structure will position you for success. Take the time to evaluate your options, consult with experts, and align your choice with your business objectives. With the right structure in place, you’ll be well-equipped to navigate the journey of entrepreneurship in the North Star State.

Do I Need a Business Attorney?

If you've never had an annual meeting for your LLC, or if you're just getting started and want to make sure your business is off to the right start, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.