Forming a Minnesota Limited Liability Company

Protection and Flexibility are the Hallmarks of an LLC

Business and risk are joined at the hip. And they’re inseparable. You can’t have one without the other. It’s best to face that cold reality right from the get go.

In a worst-case scenario, you risk losing your business, all of its assets, every cent you’ve invested in it, plus most of your personal assets to satisfy the debts and obligations of your failed enterprise.

The mere prospect is enough to give even the most self-assured entrepreneur a case of hives. (If you’re deathly allergic to risk, now is a good time to rethink the notion of starting a business of your own.) But there are ways to structure your business that reduce the risks by reducing the personal liability.

The limited liability company – or LLC – is one of the most popular legal structures for a business today. An LLC offers the personal liability protections of a corporation, meaning the personal assets of members are insulated from claims against the company in most cases. It also has great flexibility when it comes to how the business is taxed and how profits and losses are passed through to the owners.

Is the LLC the right business structure for you? There are several factors to consider:

  • Complexity and Expense - LLCs tend to be about as expensive as a corporation, but the process for setting one up is much less involved. The rules and procedures for establishing an LLC are set out in state law and penalties for not following the law can be severe. Owners of an LLC may need more professional guidance (especially on organizational and operation decisions), which increases costs.

  • Owner Liability - Except for fraud or other cases of wrongdoing, the owners of an LLC are generally not held personally liable for the debts and obligations of the business. Just as with the shareholders of a corporation, their risk of loss is limited to what they’ve invested in the company. Owners of small, closely held, or newly organized LLCs may be required to give personal guarantees of repayment to secure financing or credit.

  • Distribution of Profits and Losses - Profits and losses of an LLC can be treated as a sole proprietorship, a partnership or C corporation, depending on how they owners have decided to be treated. Under circumstances dictated by state law, the company’s articles of organization or board of governors may provide for a different allocation.

  • Management Control and Decision-Making - Like a corporation, an LLC has centralized management. By state law, it is managed by a board of governors composed of one or more individuals. In addition, it must one or more people acting as chief manager and treasurer. As with a corporation, many of the rules governing management are set out in the articles of organization, bylaws, or by state law.

  • Financing Startup and Operation - The LLC is financed by contributions from members. It also may invest its own funds, borrow money and trade in the securities of other organizations and the government. Because they can create multiple membership classes and series, LLCs offer more flexibility in structuring outside financing than S corporations. Unless prohibited in its articles, LLC members have the right to increase their own investment before the company accepts contributions from outsiders.

  • Transferability of Ownership Interest - Whether or not an LLC is dissolved once a member’s interest is terminated depends on the process outlined in the articles of organization or a member control agreement, or if the last member terminates and no new members are admitted within 180 days. Otherwise, the termination of a member’s interest does not affect the existence of the LLC. For LLCs formed before August 1, 1999, the termination of membership of any member terminates the existence of the LLC, but the articles of organization may permit the remaining members to continue the business by merging into another Minnesota LLC or into a Minnesota or foreign corporation.

  • Government Regulation - Rules governing the LLC are established by state law as well as the company’s articles of organization and operating agreement. These rules are similar in complexity to those governing partnerships and corporations.

  • Tax Considerations - Tax issues for an LLC depend on how the company elects to be treated for tax purposes. An LLC may be treated as a sole proprietorship, partnership or a corporation. LLCs with more than one member may choose to be taxed as a partnership or a corporation. Either way, it must obtain federal and state tax identification numbers. An LLC with only one member may be taxed as a corporation or as a sole proprietorship. If taxed as a sole proprietorship, the company generally does not obtain a federal or state tax ID number.

Forming a Limited Liability Company

The way you form and operate a limited liability company in Minnesota is governed by state law, and it’s a good idea to take a look at the statutes. You’re not doing this to be your own attorney, mind you, but just to get a good general understanding of what the laws cover. Among other things, the laws include such basics as articles of organization; powers and member interests; governance and management; distribution of profits; loans and obligations, and merger, exchange, transfer or dissolution.

Articles of Organization

Everything starts by filing articles of organization with the Secretary of State and paying the filing fee. You can file online or complete and submit a paper form.

The articles of organization may add to or modify many of the basic provisions set out in state law. An attorney should assist in drafting articles of organization to assure that the needs and desires of the members, as well as legal requirements, are met. Here are some key components of the articles:

Limited Liability Company Name

State law has certain requirements for naming limited liability companies. The name of an LLC must:

  • Be in English or any other language expressed in English characters
  • Contain the words “limited liability company” or “professional limited liability company” or the abbreviations LLC or PLC
  • Not contain the words “corporation” or “incorporated” or abbreviations of either or both words
  • Not contain any words or phrases that indicate or imply that the LLC is organized for anything other than a legal business purpose

The name you choose must also be distinguishably different from the names of any other LLC, corporation, limited partnership, limited liability partnership or any reserved name, assumed name, trademark or servicemark already on file with the Secretary of State. You can find out whether the business name you want is available by searching the Secretary of State’s database . Here are some guidelines to help you search.

Registered Office

A limited liability company must have a registered office located in the state of Minnesota at a physical location (not a post office box, for instance) where a person who represents the company can be found. The registered office may be the place where the business is located or it may be in a different location. Acceptable registered office addresses include a complete street address, a rural route and rural route box or fire number or directions from a landmark to the office location. If directions are given, a mailing address in the same or an adjacent town must be given. All addresses must have a zip code.

Registered Agent

Although it is not required, an LLC may list a registered agent in the articles of organization. In that case, the agent’s full name must be shown and he or she must be located at the registered office.

Every time a limited liability company moves or changes its registered agent, it must report the new information to the Secretary of State on a change of address/agent form.

Names, Addresses and Signatures of Organizers

The articles of organization must list the names and complete mailing addresses, including zip codes, of each of the organizers. There must be at least one organizer. Each organizer must be at least 18 years old and must sign the articles.

Other Provisions

There are many provisions that may be altered in the articles of organization but need not appear in the articles in order to properly form a limited liability company. Some of these provisions include:

  • The power to adopt, amend or repeal the operating agreement is vested in the board of governors
  • Governors serve for an indefinite term that expires at the next regular meeting of the members
  • A limited liability company must allow cumulative voting for governors
  • Absent governors may be permitted to give written consent or opposition to a proposal
  • A larger than majority vote may be required for board of governor action
  • The affirmative vote of a majority of governors present is required for an action of the board of governors
  • A written action by the board of governors taken without a meeting must be signed by all governors
  • All membership interests have equal rights and preferences in all matters not otherwise provided for by the board of governors
  • A member has certain preemptive rights, unless otherwise provided by the board of governors
  • The voting power of each membership interest is in proportion to the value reflected in the required records of the contributions of the members
  • Members share in distributions in proportion to the value reflected in the required records of contributions of the members
  • Members share in profits and losses in proportion to the value reflected in the required records of the contributions of the members
Amending the Articles of Organization

A limited liability company may amend its articles of organization to include or modify any provision that is required or permitted to appear in the articles or to omit any provision not required to be included. Amendments are required when any changes are made in the articles of organization, and you must file an amendment of articles form with the Secretary of State.

The amendment must be approved by a majority of the voting power of the members unless the articles require a larger majority or the amendment will increase a majority already required in the articles of a closely held limited liability company. If this larger majority is to be adopted, the amendment must be approved by this higher majority.

The articles of amendment must include the name of the limited liability company as it appears in the records of the Secretary of State, the text of the amendment, and a statement that the amendment was adopted according to state law. Articles of amendment must be signed by a person who has been authorized by the limited liability company to sign such documents.

Post-Organization Issues

After the LLC is formed, it must perform certain start-up tasks, such as obtaining federal and state tax identification numbers, obtaining an unemployment insurance employer account number, setting up and maintaining the books and records of the business, calling and conducting the initial meeting of the board of governors or members, and taking other actions.

All actions taken and decisions made by the limited liability company through its governors, managers and members must conform with the articles of organization, operating agreement, and applicable law. All actions and decisions should be recorded in the company’s minute book. It’s a good idea to get specific guidance on post-organization issues from an attorney and tax adviser.

Annual Registration

Both Minnesota and non-Minnesota limited liability companies must register with the Secretary of State once every year. You canrenew your registration online or submit a paper form.

Failure to file will result in administrative termination. Reinstatement may occur within one year of the date of the administrative termination by filing the registration form and paying a reinstatement fee.

Operating Agreements

Many aspects of business can be controlled by a document called an operating agreement, which is similar in function to a corporate shareholder agreement. Operating agreements are fact-specific to the circumstances of each limited liability company, and limited liability company members should consult with legal counsel in creating or signing such agreements.

Learn More

Consultants at our Small Business Assistance Office can help you understand more about Limited Liability Companies. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.

For a comprehensive look at Limited Liability Companies, see our Guide to Starting a Business in Minnesota . Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the book covers the major issues, questions and concerns about business startups.

Nothing we cover here should be taken as business or legal advice. It’s not. And it’s no substitute for the professional guidance of a lawyer or accountant.