Forming A Minnesota Limited Liability Company

This series of posts will discuss the necessary steps to forming a LLC in Minnesota. Some of the processes and considerations involved in forming a limited liability corporation in Minnesota include:

A limited liability company, or LLC, is a form of business organization that generally combines the limited liability of a corporation with the tax status of a partnership. The formation and operation of a Minnesotan LLC is governed by Minnesota Statutes Chapter 322B.

As with a partnership, business income and losses of the LLC are passed through to the owners of the business (except for single-member limited liability companies that elect to be taxed as corporations). As with a corporation, liability for business debts and obligations generally rests with the entity rather than with individual owners. Except for single-member limited liability companies that elect to be taxed as corporations, the LLC’s income is taxed at the owners’ individual tax rate, rather than at the entity level, eliminating the double taxation of profits that occurs with a C corporation. An LLC is not subject to many of the restrictions that apply to S corporations, such as a maximum of 75 shareholders, a single class of stock, and limited types of non-individual shareholders. Unlike a limited partnership, all members of an LLC may participate in the active management of the company without risking loss of limited personal liability. As of 2009, when a single member LLC taxed as a disregarded entity fails to pay federal unemployment taxes, the LLC, not the owner is now liable.

Like a corporation, which may have only one shareholder, an LLC may have only one member or may have two or more members. an LLC’s life ends more easily and may happen at the occurrence of an outside event. For example, the life of an LLC formed before August 1, 1999, ends at the death, retirement, resignation, bankruptcy, or expulsion of any member. Once dissolution has occurred, the members of the LLC need to wind up the affairs of the LLC and terminate the organization’s existence. Termination can be avoided if there are two or more members remaining and they agree to continue the business of the LLC. An attorney can assist in assuring the LLC’s existence will continue following an event of termination.

Under the entity classification rules set out in certain Treasury Regulations, it is generally possible for the organizers of an LLC to choose how that entity will be treated for tax purposes. Those Regulations appear at 26 C.F.R. section 301.7701-1 et seq. The Minnesota legislature has determined that a Minnesotan LLC should file the same type of return for Minnesota purposes as it does for federal purposes and it will be classified for Minnesota purposes in the same way it is classified for federal purposes. Anyone interested in an LLC is strongly advised to seek the advice of tax counsel.

An LLC that transacts business in a jurisdiction that does not recognize limited liability companies risks the possibility that the other jurisdiction will treat the company as a partnership and thus not accord its owners the immunity from personal liability that Minnesota grants to owners of limited liability companies.