Choosing the Right Business Structure
To be. And how to be.
Those are the first decisions you’ll make when you go into business for yourself.
The first is monumental: You decide to stop dreaming and start doing. You know your business, you understand your market and its potential, and you can’t wait to get started. There’s a kind of stomach-churning excitement.
The second decision is fundamental: You have to choose how your business will be legally structured and organized.
It’s surprising how many people approach this entirely as an afterthought.
When we ask clients at our Small Business Assistance Office what kind of business structure they’re considering, they often respond with a question of their own: “Hmmm, what are the choices?”
But the decision is too important to make on the fly. You’ve really got to take the time to understand and weigh the options.
There are many ways to organize your business. Sole proprietorship. Partnership. Limited partnership. Corporation. Nonprofits and other special types of business organizations. Each has its own set of advantages and disadvantages.
While several factors come into play, the two major issues to consider when structuring your business are:
- How much the owner (or owners) are insulated from personal financial responsibility for the debts of the business
- The way – and how much – taxes are paid on business profits
Here’s a high-level look at the most common ways to organize your business in Minnesota and some basic characteristics. We explore each in greater detail in this section.
As the name implies, the business is owned and controlled by one person. With few legal or regulatory requirements, a sole proprietorship is by far the least complicated business organization. The financial risks, however, can be substantial, since the owner alone is responsible for the debts and obligations of the business.
The business is owned by two or more people, all of whom share equally in the right and responsibility to manage the business. Each partner is responsible for all the debts and obligations of the business. Details of the partnership are usually set out in a formal partnership agreement. Partnerships in Minnesota are formed and governed by state law.
Limited Partnerships and Limited Liability Partnerships
These partnerships are designed to protect partners financially, either by limiting the amount of their personal assets that can be used to pay debts and other obligations of the business or by shielding them entirely in certain circumstances.
A corporation is a separate legal entity that is owned by one or more shareholders and formed according to state laws. Corporations are responsible for the debt and obligations of the business. In most cases, the shareholders are insulated from personal liability for claims against the corporation.
There are different types of corporations: C corporations, S corporations, and closely held corporations. The structures differ in how income and expenses are reported, and how profits are distributed and taxed.
Limited Liability Companies
Generally speaking, a limited liability company combines the limited liability of a corporation with the tax status of a sole proprietorship, a partnership, or corporation. It may have one or more members.
Special Types of Business Organizations
There are some highly specialized structures available to Minnesota businesses, including professional organizations, cooperative associations, and business trusts, all of which are regulated by state law, involve complex legal, financial and accounting issues, and should not be undertaken without expert guidance.
Which is Best for You?
How do you choose the structure that’s right for you? Here are some important factors that should guide your decision:
- Complexity and expense
- Liability of business owner
- Distribution of profits and losses
- Management control and decision making
- Financing and operation
- Transferability of ownership
No one form will be appropriate to all situations. And as the business grows and expands, the structure can – and, indeed may have to – change.
Consultants at our Small Business Assistance Office can help you understand the options. 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.