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Formation and Business Planning

The variety of business organizational forms can overwhelm entrepreneurs. Each type of business organization is associated with legal and tax decisions that can affect the entity and its owners far into the future. Startup businesses need to consider the expense of business formation, the benefits of the different business organizations, the possibility of personal liability, the personal and business tax consequences, and the constant legal responsibility created by statutes and regulations. Businesses usually choose from among the following forms:

Sole proprietorships unite ownership and management in one person. The owner takes profits and losses directly. Income is taxed on the owner’s personal return and not at the business level. Sole proprietors are held personally liable for business obligations. This form requires no statutory procedure to launch—owners can just start business at any time—the business should obtain required licenses and comply with relevant labor laws.

Partnerships involve one or more owners operating a business for profit. As with the sole proprietorship, partners are personally liable for business obligations. The partners take profits from the business as income. Tax advantages make partnerships attractive to some businesspeople. Some types of partnership allow limited liability for some or all of the partners.

Corporations are legal entities upon formation with many of the rights and responsibilities of real persons. Corporations are liable for their own obligations, thereby protecting the owners, directors, and officers of the business from personal responsibility. Corporations can sell ownership interests, or shares, in the company to raise capital. Tax treatment of a corporation can cause financial obstacles. The corporation files its own tax return and pays taxes on profits before it is allowed to pay dividends to shareholders. Shareholders then pay taxes on the dividends on their personal tax returns. Tax rules mitigate the double taxation in certain circumstances.

In today’s world, double taxation is the price for personal liability protection. Corporations may range in size from large, publicly held conglomerates to small closely held businesses involving family members as shareholders.

Limited liability companies and limited liability partnerships present two popular options for new enterprises. These business organizations merge various tax benefits of partnerships with aspects of corporate limited liability. Although the benefits are undeniable, limited liability businesses have specific ownership and termination requirements and might not appreciate the full scope of the tax or liability advantages.

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Areas of Representation

We represent clients in the following areas (and around all of Minnesota):