Are you a ‘one man band’ startup? Single Member LLC in Minnesota: what it is, how to do it and the perils
Because many tech startup ventures-and the applications/products created-often begin with one person, or perhaps remain indefinitely owned by a single individual, LLC’s remain popular amongst early stage companies, Internet-based “lifestyle”, businesses or for-hire technicians.
According to Minnesota Statute , LLC’s can be owned and operated by a single natural person. Here are the basics surrounding the single member LLC in Minnesota:
A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship, making it a a flexible form of business enterprise. They are a relatively new type of entity, starting in the 1970’s when they were initially created to merge the personal liability protections that the corporate veil provides with some of the tax advantages that partnerships offer. Because the LLC exists as a separate legal person, like that of a corporation, they can reduce or eliminate personal liability for debts (unless the member(s) have signed a personal guarantee) while (potentially) protecting against other other forms of legal action against the individual member(s) of the company.
Small companies often make use of the LLC “flow through” taxation, which means the company’s income is only taxed as personal income and not taxed at both the corporate and individual levels. Additional benefits include: flexible profit distribution, no “minutes” recording and relatively easy filing requirements in Minnesota.
Of course, LLC’s aren’t for everyone, especially if you’re thinking about raising investment capital for your company anytime soon. Fred Wilson, (not an attorney) has a solid post elaborating on various business entities from the perspective of a prominent Venture Capitalist and why, they often times prefer C Corporations. Additionally, many early stage companies also opt to do some of the work in creating an LLC by themselves in order to save money. This is only a good idea if you go forward with your eyes wide open.
Generally speaking, there are many benefits to legally organizing one’s business endeavors under the corporate veil of a Limited Liability Company, especially when compared to the lack of legal protection of a sole-proprietorship/DBA or the more complex to own and manage C Corporation. Here are the steps to filing for a single member LLC in Minnesota:
- Pick your name & make sure it’s available by checking the Minnesota Secretary of State website here.
- If you’re not going to file immediately, you may want to reserve your name using this form ($35). The risk in waiting is that someone else comes along and snatches the name you have in mind – stranger things have happened. Keep in mind this merely reserves the right to use the name as a business entity and doesn’t give you any trademark rights.
- Complete & print the “LLC Articles of Organization” form*. This form is relatively easy to fill out on your own, all relevant instructions are included.
- Either mail in your “LLC Articles of Organization” form with the proper funds ($160) or file them online here for an extra ($10).
- If you had previously filed an assumed name (DBA) with the same name as your new LLC, you’ll want to negate that with this form ($free).
Can it really be that simple? No, not exactly. While filing the necessary paperwork to register an LLC is pretty simple, maintaining the protection that an LLC can give you involves a bit more-and additional steps should be taken for two or more member(s). Limited Liability Companies exist in large part to limit the personal liability of the owners. But merely filing out the forms and getting a piece of paper from the Secretary of State does not ensure that you actually are limiting your personal liability. Just because you have an airplane ticket doesn’t mean you have arrived at your destination; you still have to show up on time, make it through security, find the right plane and not get kicked off the plane for inappropriate behavior. Maintaining your protection may require some additional reading or a consultation with an attorney to make sure your paperwork and filing fees were not a waste of time and money.
So, here are a few things that you need to do to maintain an LLC. This is by no means everything, but its a start.
- Keep your personal and business money in separate accounts: Intermingling funds is one way that business owners can lose their liability shield. Use your business accounts only for real business expenses and pay yourself a salary. Talk to an accountant if you’re not sure what kinds of things can be expensed.
- Sign documents as a company officer: A quick way to lose your liability shield is to not even use it. You don’t want to sign anything in your own name if your LLC is supposed to be the one bound by contract. Something like “BIZCO, LLC by its CEO, John Doe” would be preferable to just “John Doe.”
- Keep Adequate Funds on Hand: Startups often don’t have much money which is OK so long as you aren’t exposing your company for large contract or tort liability. If you don’t have reasonable funds to cover your obligations, a court might determine that you are on the hook as well.
- Maintain Your Business Records: Holding meetings may not be necessary if you are the only owner of a company, but you still need to maintain some kind of business records and complete your annual filings with the Secretary of State. If you don’t respect your LLC, why should anyone else?
These are just a few of the more common things that can cost LLC business owners dearly. If you are on a tight budget, doing some filing work yourself may make sense, even if you have an attorney. But please take the time to find out what you are doing and why you are doing it.
The above does not constitute legal advice. If you are unsure about how LLCs work or whether creating one is the right move, both the author and TECHdotMN strongly recommend consulting an attorney.