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If you’re thinking about launching a small business in Minnesota, setting up a Limited Liability Company (LLC) can be a great choice. An LLC offers a combination of benefits from a partnership and a corporation, providing you with the advantages of both.
Nonetheless, the process of establishing an LLC in Minnesota may appear overwhelming, with numerous procedures to adhere to and criteria to satisfy. While there are numerous resources accessible, this guide will take you through the seven vital steps required to start an LLC in Minnesota in 2023.
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Pros and Cons of Starting LLC in Minnesota
Embarking on a small business journey can be thrilling and fulfilling, but it also carries a significant amount of accountability. As a small business owner, selecting the appropriate legal framework for your enterprise is among the most crucial decisions you’ll make.
Many people often prefer the option of forming a Limited Liability Company (LLC). Starting an LLC has numerous benefits that make it an appealing choice for small businesses. Nonetheless, there are certain downsides linked to an LLC. Here are some of the primary pros and cons of establishing an LLC in Minnesota.
Pros
The pros of an LLC in Minnesota include:
Lower Renewal Fees in Some Cases
Renewing an LLC in Minnesota is cost-effective, as LLCs enjoy lower renewal fees compared to corporations. While corporations pay a renewal fee of $310, the fee for renewing an LLC is only $45. Over time, this could result in considerable cost savings for your enterprise, particularly if you intend to run it for an extended period.
Fewer Requirements and Formalities
Compared to corporations, LLCs in Minnesota have fewer formalities and requirements to comply with. For example, LLCs are not obligated to hold annual meetings or have a board of directors, resulting in significant time and cost savings. Furthermore, forming an LLC in Minnesota involves fewer documents than in other states, streamlining the process and making it more convenient.
Acquire the Required Permits or Licenses to Run Your Business
Starting an LLC has a significant benefit in enabling you to acquire the necessary permits or licenses for your business to operate lawfully. The types of permits or licenses needed can differ based on the type of business you operate, and may include permits from the health department, zoning permits, home occupation permits, professional licenses, and other related permits.
In some states, conducting sales may also necessitate a seller’s permit. By registering your business as an LLC, you can guarantee that you have obtained all the essential permits and licenses for legal operation.
Easy Tax Policies
Minnesota’s tax policies for LLCs are straightforward, with default pass-through taxation. This means that the revenue of the LLC is distributed among its members and is subject to taxation based on their individual tax rates as reported on their personal tax returns. Furthermore, LLCs in Minnesota are exempt from corporate income tax, resulting in potential cost savings for your business.
Open a Good Business Bank Account
An LLC helps you to open a good bank account for your business. Maintaining a clear distinction between your personal finances and your business finances is crucial as a small business owner. Opening a business bank account, Creating an LLC can simplify the process of managing your business finances by keeping them distinct from your personal finances. This separation enables you to more easily manage cash flow, track expenses, and prepare financial statements.
More Business Assets Protection
In Minnesota, LLCs offer superior asset protection to sole proprietorships or partnerships due to their limited liability structure. This structure helps safeguard business assets from personal debt, legal action, and lawsuits, reducing personal liability. This gives business owners the reassurance that their personal assets are separate from their business assets.
Cons
The cons of an LLC in Minnesota include:
Cost
The formation and maintenance costs of an LLC are typically higher than those of a sole proprietorship or general partnership. When forming an LLC, states usually require an initial formation fee, and some also levy ongoing fees such as annual reports and franchise tax fees. It is essential to check with the Secretary of State’s office in your state to understand the applicable fees.
Transferable Ownership
Compared to corporations, transferring ownership in an LLC can be more complicated. Shares of stock can be sold by corporations to expand ownership, and shareholders are allowed to transfer their shares to others as per the shareholder agreements. In contrast, LLCs require the consent of all members, unless agreed otherwise, to add new members or alter ownership percentages of existing members.
Taxes for Self-Employment
While forming an LLC has its benefits, one potential drawback is that the owners may be classified as self-employed. As a result of this categorization, individuals become accountable for remitting both the employer and employee portions of Social Security and Medicare taxes, which could potentially result in increased tax obligations. Compared to other business structures like S corporations or partnerships, LLC owners may face increased tax obligations.
Increased Administrative Obligations and Paperwork
Even though the formation of an LLC in Minnesota is comparatively straightforward, it involves numerous administrative responsibilities, such as presenting the Articles of Organization and creating an operating agreement. In addition, LLCs must file annual reports and meet other ongoing requirements that can be expensive and demand a considerable amount of time.
7 Steps on How to Start LLC in Minnesota
Here are the seven major steps on how to open LLC in Minnesota:
1. Ensure Your LLC Name is Available
Selecting an appropriate name is the primary task when establishing your LLC. However, before finalizing your choice, it’s vital to confirm its availability in Minnesota. In the event that your LLC is being registered from a different state and you find out that your official name is unavailable in Minnesota, you may need to choose a fictitious name.
To confirm name availability, conduct a business name search on the website of the Secretary of State (SOS). In the event that you settle on an available name but aren’t yet ready to establish your LLC, you can reserve your preferred name for up to a year by filing a Name Reservation form. The fee for this service is $35 by mail, while expedited or online filings cost $55. If necessary, you can extend name reservations for additional 12-month periods.
2. Have a Registered Agent
It is mandatory for all Minnesota LLCs to have a registered office as per state law. This refers to a physical street address within Minnesota where legal documents and official notices can be delivered on behalf of your LLC. You may also assign a designated person, known as a “registered agent,” to receive these documents.
Numerous companies in Minnesota provide services for registered offices and agents. The cost of these services may range from $50 to $300 per year, but it’s essential to select a service that is both cost-effective and dependable. Make sure to choose a service that meets all of your requirements.
3. File the Necessary Documents for Your Minnesota LLC
In order to form an LLC in Minnesota, it is necessary to file the Articles of Organization with the Secretary of State’s office. This document should include complete mailing addresses for all organizers. The submission process can be done online, through mail, or in person.
Minnesota charges a fee of $155 for online or in-person applications, which expedites the process. For mail-in applications, the fee is $135.
To engage in business activities within Minnesota, non-domestic organizations must complete a “Certificate of Authority to Transact Business in Minnesota” form, which incurs a filing fee of $185 if submitted via mail or $205 if filed electronically or in-person.
Also, ensure that all checks and money orders are payable to the MN Secretary of State.
4. File Your Minnesota LLC’s Annual Renewal
In Minnesota, all LLCs must file an annual report, also referred to as an annual renewal, with the Business Services office of the Secretary of State to remain in good standing. The deadline for submission of this report is on the 31st of December every year. Although filing an annual renewal is mandatory for LLCs in the state, there are currently no associated fees for this process.
5. Pay Your Taxes for Your Minnesota LLC
Ensuring punctual payment of taxes is crucial to uphold a favorable reputation. The filing status for Minnesota state taxes for an LLC is typically based on its federal tax filing status. By default, LLCs are taxed as pass-through entities, where profits and losses are reflected on the owners’ individual tax returns.
Nonetheless, LLCs have the option to elect S or C corporation taxation. If an LLC chooses to be taxed as a C corporation, it will be subject to a flat 9.8% corporate franchise tax. Seeking advice from a small business accountant is recommended to comprehend your responsibilities and alternatives.
6. Draft an LLC Operating Agreement for Your Minnesota LLC
While an LLC operating agreement is not mandatory in Minnesota, drafting one can aid in avoiding prospective conflicts between business partners..
An operating agreement outlines crucial details such as your LLC’s management structure, the owners’ roles, and voting rights, and the profit-sharing arrangements. You can engage the services of a lawyer or an online legal service provider to prepare your LLC operating agreement.
7. Obtain an Employer Identification Number (EIN) for Your Business
An EIN, which stands for Federal Tax Identification Number (FTIN) or Federal Employer Identification Number (FEIN), is a necessary requirement for most businesses. However, if you own a single-member LLC without any employees, you are not obligated to obtain an EIN. In such a case, you can utilize your Social Security number instead.
Nevertheless, getting an EIN is a recommended option to safeguard your Social Security number and maintain your privacy.
FAQs On Starting LLC in Minnesota
Conclusion
Forming an LLC in Minnesota offers advantages such as facilitating legal compliance, improving financial management, and protecting your brand. However, it also entails increased paperwork and administrative obligations, limited liability protection, and self-employment taxes.
To establish an LLC in Minnesota, it is important to weigh these factors carefully and take appropriate measures such as selecting a distinctive business name and appointing a registered agent.
