When you are preparing to form your business, you have many choices of how to structure that company, and each different type has advantages and drawbacks. Through careful research and with the help of a skilled business legal team, it is possible to find the right type of business to suit your objectives.
Two of the most popular options for business ownership and management are sole proprietorships and partnerships in Minnesota. These two formats are amongst the most common and offer a very resilient form of control and leadership compared to other corporations. Working with an attorney experienced in business formation could help you understand the opportunities and risks associated with this foundational decision.
A sole proprietorship is a business that is owned and operated by a single person though it is not necessarily a legal entity. When someone is a member of an LLC, IRS identifies them as a sole proprietorship.
In spite of the fact that sole proprietorships are a very classic format for a business, it is advisable that people avoid a sole proprietorship because they do not maintain the limited liability protection or any other protection that a C corporation or an S corporation would give them. Being a sole proprietorship, one has full control of the business and all decision-making power, but this comes at the cost of liability for errors.
However, sole proprietorships are generally cheaper to create than many other types of business formats. They are simpler in terms of keeping up with the structure of the business and following certain formalities because there is nobody else to answer to, simplifying decisions and making this type of business extremely agile when reacting to shifting markets. The taxes associated with a sole proprietorship are filed under the owner’s sole proprietor’s income tax statement. This is usually less cumbersome than any other business format.
Unfortunately, owners are completely liable personally for any bad thing that could happen associated with the liabilities of the business. If an individual is sued, the plaintiff could come after personal assets such as their home. Additionally, self-employment taxes apply. With a sole proprietorship, raising capital is rather difficult unless there is a close friend or family member who is willing to act as an angel investor or otherwise inject capital into the enterprise. Investors traditionally shy away from sole-proprietorships in Bloomington as the restrictions may make conducting business difficult.
A partnership is joint ownership of a business with equal rights and sharing of profits and losses between all the partners involved. New business owners could set up a partnership or an LLC that may then be taxed as a partnership.
One of the benefits of a partnership is that creation is usually simple. Costs are generally low, and the business is not taxed separately. Each partner files profits or losses of the business on their own income tax returns. Also, with a partnership, there is an increased ability to raise funds with more than one owner. There is more access to funds and the ability to tap into another person’s network to expand and grow the business.
One issue with a partnership is that partners are jointly liable for the actions of the partnership’s obligations. Each person is responsible for something the partnership did. Another disadvantage is the partners cannot sell their shares in the open market. Partners must get consent from other partners in the business as they have the right of first refusal. This is to ensure that the other partner is not stuck with a new owner who they do not get along with or wishes to fundamentally alter the business against the first partner’s wishes.
If there is a two-person partnership, and one partner withdraws or passes away, there is only one person left, transforming the company into a sole proprietorship. If you are unsure about the pros and cons of sole proprietorships and partnerships in Minnesota, consult with a seasoned business formation lawyer. An attorney could help you determine which business structure will work best for your needs and help you start your venture. Call today to schedule an initial meeting.