Starting a business involves many important decisions, but one of the first is determining the right business structure. Four main options exist: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). Choosing the proper structure is a key first step when establishing your company in Minnesota.
This guide focuses on sole proprietorships – their definitions, pros and cons, and step-by-step instructions for registering one in Minnesota.
Related: Minnesota Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is one of the simplest business structures. It’s a business structure controlled by one person, who is also the owner. This structure has no legal distinction between the business and the owner. This means you have full control of your business but also bear all the risks.
For instance, profits go directly to the owner, but all business debts and responsibilities also fall completely on the owner’s shoulders. This is a popular structure for small-scale and minimal-risk businesses because a sole proprietorship can be established without going through a complicated registration process.
Sole Proprietorship Advantages
There are several advantages to choosing a sole proprietorship in Minnesota:
- Lowest startup costs: This structure is the most budget-friendly since there are no formation documents or fees associated with creating a sole proprietorship. The only cost is registering your business name if you choose to operate under a name other than your own.
- Control: As the sole owner, you have complete authority over your business without needing approval from partners or shareholders. You can make decisions quickly without bureaucracy.
- Tax simplicity: Sole proprietorships do not pay separate business taxes. The business’s income is your income, and it’s reported on your individual tax return, making tax time a bit simpler. This structure allows for pass-through taxation, meaning that the business’s profits and losses “pass through” to the owner’s personal tax return.
Sole Proprietorship Disadvantages
However, there are also downsides to consider:
- Unlimited personal liability: This is one of the primary concerns. If the business lands in debt or is sued, your personal assets are at risk.
- Difficulty raising capital: Sole proprietorships can find it hard to secure funding because they can’t sell shares of the business like corporations or LLCs can.
- Potential tax disadvantages: Sole proprietors pay self-employment tax on all business income. Partnerships and corporations allow more flexibility in managing tax liabilities.
A sole proprietorship could be a good fit if you want less paperwork, more control, and cheaper startup costs. But, if you are worried about protecting your personal assets, it might be worth considering a Limited Liability Company (LLC) instead.
Related: How To Form A Minnesota LLC
Steps to Start a Sole Proprietorship in Minnesota
In Minnesota, establishing a sole proprietorship doesn’t require any formal registration with the state. However, there are a few steps to cover so your sole proprietorship business is legally set up. Here are the general steps involved in starting a sole proprietorship in Minnesota:
Step 1: Come up with a Business Name
As a sole proprietor in Minnesota, the owner can operate their business under either their full first and last name. However, registration is required if they want to operate under a specific business name. For example, let’s say Sam Newton wants to start a landscaping business. Sam can legally operate his business as “Sam Newton,” but if he wants to operate it as “Green Dream Landscaping,” he will register it.
Step 2: Verify Name Availability
Every assumed name filing in Minnesota must be unique and can’t closely resemble other registered names. Before filing, search the Office of the Minnesota Secretary of State’s website to ensure the name you want to use is available.
Related: How To Search Available Names In Minnesota
Step 3: File the Assumed Name Form
If the business will operate under a specific business name, like “Green Dream Landscaping,” you’ll need to register it by filing the Certificate of Assumed Name form. This form can be filed online or downloaded from the Minnesota Secretary of State’s website.
Related: How To Register A Minnesota Assumed Name
Registering a Minnesota assumed name won’t stop another business from using the name. For stronger legal rights to your name, you can apply for a trademark.
Step 4: Publish the Legal Notice
After filing the Certificate of Assumed Name Registration, a legal notice must be published. This notice is published in the legal section of a qualified legal newspaper that has circulation in the county where the principal office is located for two consecutive issues. After the advertisement runs, the newspaper will provide an affidavit of publication proving the ad ran along with the notice.
Step 5: Research Business License Requirements
Regardless of the business structure, specific business licenses may be required, depending on the business’s nature and location. For example:
Local business license: Even though there isn’t a state business license, a local business license may still be required. Check with your city officials or economic development office for more information.
Minnesota tax ID number: Minnesota businesses need to apply for a Minnesota Tax ID Number with the Minnesota Department of Revenue if they sell products and/or taxable services or have employees.
Professional license: The state regulates various professions, and they must be registered before offering certain services. A few common professions that require licensing in Minnesota include cosmetologists, accountants, and caterers.
Federal Employer Identification Number (EIN): The EIN is a unique number required by the IRS for some businesses for tax reporting. Usually, the only time a sole proprietorship is required to get an EIN is if it is hiring employees, though some banks will require one to open a business bank account. Otherwise, they will use the owner’s Social Security number.
