I am starting a business. Which legal structure should I choose to operate as: a sole proprietorship, a corporation or a limited liability company?
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It sounds like you are starting this business on your own. If so, you have correctly identified your three main choices of legal structure: sole proprietorship, corporation and limited liability company (LLC). Of these, the sole proprietorship is the one that will entail the greatest risks to the owners. Sole proprietors face personal liability for all debts of their business. In other words, if a contract goes bad or there is an accident, the business owner’s personal assets may be used to satisfy the liability. Corporations and LLCs give “limited” liability protection to their owners: Only the assets of the business itself — not the owners’ personal assets — are used to satisfy debts of the business.
Now, between corporations and LLCs, in general, corporations are more formal, while LLCs are more flexible. Corporations need to elect board members, and have somewhat regular (such as once per year) board meetings. LLCs can be more flexible in how they are organized. Another consideration is taxes: Regular “C” corporations pay income taxes on their corporate earnings, while LLCs are taxed like a partnership — the income from the LLC is reported on the owners’ (called “members”) personal income taxes. This means corporate returns are in essence “taxed twice” while an LLC’s returns are taxed only once.
In starting your business organization, the Minnesota Secretary of State’s website (www.sos.state.mn.us/index.aspx?page=92) offers helpful tips and basic forms. But if there will be more than one owner of the business, it would probably be prudent to consult an attorney who is familiar with Minnesota business organizations to help you properly manage the more complex issues in forming a business organization.
About the author
Dale B. Thompson is an associate professor of ethics and business law at the University of St. Thomas’ Opus College of Business. To tweet questions for the Outside Consultant column, tweet to @USTbusiness.