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Forming a Sole Proprietorship

If business organizations – meaning the way companies are legally formed and structured – came in a build-it-yourself kit, some would be so complex they’d make a team of engineers cry like kindergartners as they struggled to assemble the Tinker Toys the right way.

But the kit for a sole proprietorship would be the model of simplicity. A spool. A couple of sticks. Done. A kindergartner could do it.

Forming a sole proprietorship in Minnesota is just about that easy. There are no complicated state laws surrounding the sole proprietorship. From a regulatory standpoint, the owner may need to register the business name as an assumed name with the Secretary of State, obtain the appropriate business licenses and tax identification numbers if necessary, and begin operations.

Business Licenses

Not all businesses are regulated or require a license to operate in Minnesota. To find out if the business you’re considering requires a license, certification or permit, visit the License Minnesota website.

Obtaining Tax ID Numbers

Sole proprietors must obtain federal and state tax identification number if the business has employees, even if those employees are members of the sole proprietor’s immediate family. 

Let’s start with the feds.

To obtain a federal employer identification number (FEIN): To apply online with the Internal Revenue Service go to, https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online; to file a paper form by mail, file Form SS-4 with the Internal Revenue Service. Download Form SS-4 and the SS-4 Instructions directly from the IRS website at https://www.irs.gov/forms-pubs

Sole proprietors who do not have employees, who are not required to file information returns; who do not have a retirement plan for themselves; and who are not required to pay federal excise taxes in connection with their business generally may use their Social Security number as their federal taxpayer identification number.

Now, the state.

A business must obtain a Minnesota Tax Identification Number from the Minnesota Department of Revenue if it is required to file information returns for income tax purposes, has employees, makes taxable sales, or owes use tax on its purchases. Most businesses need a Minnesota Tax ID Number; however, a sole proprietorship that does not have any of these tax obligations does not. 

You may apply for a state tax ID number online at https://www.mndor.state.mn.us/tp/webreg/_/, by phone at 651-282-5225 or 800-657-3605, or by filing a paper form -Application for Business Registration (ABR)- with the Minnesota Department of Revenue. The ABR form and instructions are downloadable at http://www.revenue.state.mn.us/businesses/Pages/Business_Registration_forms.aspx

To apply online, you’ll need your federal employer ID number (FEIN), if applicable; business name or if applicable, Certificate of Assumed Name; business owner's Social Security Number; contact phone number and email address; the North American Industry Classification Code (NAICS); and business begin date.

Obtaining an Unemployment Insurance (UI) Employer Account

Sole proprietors who have employees also need an unemployment insurance employer account number. Registration should be done as soon as possible after the first wages are paid for covered employment. It must be done before the due date of the first quarterly wage detail report the employer is required to submit.

Using the Employer Self-Service System at http://www.uimn.org/employers/index.jsp, you can register for an employer account with the state’s Unemployment Insurance system online or by phone. See step-by-step instructions to register a new account online.

The state prefers that the automated phone system be used only by employers who do not have access to the Internet. Call 651-296-6141 and press option 4. If the business is a result of a reorganization of, or acquisition from another business, additional information may be required before a tax rate can be assigned.

That’s About It

Those are the basic steps for forming a sole proprietorship, though sole proprietors who startup with employees – or who expect to have them in the future – should bone up on key issues for employers.

Learn More

Consultants at our Small Business Assistance Office can help you understand how to form a sole proprietorship. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.

Our Guide to Starting a Business in Minnesota provides a detailed look at this and other important issues.

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