For the small business owner looking to form a business the best option is to either operate as an LLC or a Minnesota S Corporation. The greatest advantage is that both provide limited liability for the owners, which means that the owners are not personally liable for business debts and claims of the business. Limited liability means that if the business is unable to pay a supplier, lender, landlord or other creditor, that person cannot go after the personal assets of the owners. The owners may lose their entire business, but would not lose their own assets.
Both an LLC and a Minnesota S Corporation must be formed by filing certain documents with the Minnesota Secretary of State and following certain legal requirements. The filing fee for both an LLC and a domestic corporation is $135.00. An LLC is governed by Minnesota Statute 322B and a Minnesota Corporation is governed by Minnesota Statute 302A. In order to form an LLC or a Corporation you must file with the Minnesota Secretary of State. The organizer signs the Articles of Organization to create the LLC. The incorporator signs the Article of Incorporation to form a Minnesota Corporation. The Minnesota Corporation to be taxed as an S Corporation must then file IRS Form 2553.
One of the main differences between an LLC and an S Corporation is that the LLC does not have as many legal formalities as an S Corporation. However, an LLC should have an operating agreement that governs how the business is operated. The Corporation will have by-laws, must hold meetings and maintain minutes. The LLC can make meetings optional in the operating agreement which makes for fewer formalities and less chance the members will violate the legal requirements.
If the LLC or a corporation violates legal requirements and the LLC or Corporation is sued the liability shield can be pierced, if the LLC or Corporation does not follow the proper procedures. This would put the owners of the LLC or corporation at risk of being personally liable for the business debts or claims of the business. Another difference between an LLC and the S Corporation is that LLC’s have no restrictions on what type of individuals or entities may hold ownership interest in the LLC, unless the LLC elects to pay taxes as a Corporation.
With regard to ownership a Corporation is owned by shareholders. A Corporation’s ownership is determined by the number of shares that each shareholder owns. For an LLC ownership is determined by what percentage of interest the person has in the LLC. An S Corporation can have a maximum of 100 shareholders. LLC owners are called members and an LLC can have an unlimited number of members. For a Corporation officers are elected by the Board of Directors. For an LLC officers are elected by the Board of Governors. A Corporation’s shareholders must be residents of the United States, but an LLC’s members do not have to be residents of the United States. The officers of an LLC or Corporation can have the titles of President, Vice President, Secretary, Treasurer, or Chairman. Both an LLC and a S Corporation may be owned by one individual.
As far as taxes are concerned, an LLC and an S Corporation offer the same flow through tax treatment of a sole proprietorship or partnership. You don’t have to pay a corporate tax for either entity. If the Corporation doesn’t elect S Corporation status it will pay separate corporate taxes. A significant difference between an LLC and an S Corporation is that owners of an LLC are required to pay Social Security and Medicare taxes on profits. S Corporation stockholders are not required to pay these taxes on profits over and above the stockholder’s salaries. However, both a corporation and an LLC can elect to be taxed as an S Corporation by filing IRS Form 2553. The LLC would than be required to follow the formal procedures of a corporation.
The LLC and the S Corporation are the preferred method of operating for a lot of small businesses in Minnesota. If you would like assistance with forming a small business contact Holden Law Firm at 952-836-2640.
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