An article in Forbes magazine highlights the fact that, in years past, once an individual outgrew a proprietorship, he or she formed a corporation. Today, “limited liability companies (LLCs) are the new normal.” When it comes to business formation in Minnesota, LLCs are-as elsewhere in the nation-an increasingly popular type of business entity. Entrepreneur Magazine reports that the popularity of LLCs is due to two factors. First, LLCs offer businesses the organizational simplicity and flexibility of a partnership. Second, they also offer the limited liability protection of a corporation thereby reducing the risk of personal liability of LLC members. Since LLCs do not have a corporation’s “burdensome formalities,” they are often perfect for smaller size companies.
Significantly, an LLC also provides the tax benefits of a partnership. As stated on the U.S. Small Business Administration website: “Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity.” Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns just like the owners of a partnership would. The SBA notes that some of the basic general principles of forming an LLC are: (1) choosing a business name; (2) filing articles of organization; (3) creating an operating agreement; and (4) obtaining the necessary business licenses and permits.
Entrepreneur magazine observes that the most crucial document of an LLC’s existence is the operating agreement. The operating agreement controls the internal operations of an LLC such as elections, holding meetings, quorums and voting. Crucially, the operating agreement also sets forth the powers of members and LLC managers. The preparation of a good operating agreement takes time and work. The operating agreement is not a document to be quickly prepared and lightly regarded. Because the day-to-day operation of the LLC is governed by the operating agreement, one should be executed only after being thoroughly reviewed.
Minnesota’s new LLC act
On April 8, 2014, Governor Mark Dayton signed into law new legislation pertaining to limited liability companies. Minnesota’s new LLC Act is based on the Revised Uniform Limited Liability Company Act which has now been adopted by several states. The new LLC Act will be effective August 1, 2015, and will be applicable to all LLCs formed after that date. LLCs formed before that date are not subject to the new Act until January 2, 2018. However LLCs formed prior to August 2, 2015, may choose to be governed by the new act prior to 2018.
According to the drafters of the RULLCA, while every state had some form of LLC legislation on the books, the existing state statutes were woefully outdated and often amended by legislatures on a “patchwork” basis. There was relatively no conformity in the rules governing LLCs from one state to another. While state LLC laws were outdated, LLC filings in many states began to outstrip the number of new corporate filings annually. The RULLCA was drafted to bring LLC laws up to date by significantly streamlining them for the 21st century.
Consult an attorney
If you are considering forming an LLC, you should consult with a Minnesota attorney experienced in business formation who can make sure that the correct documentation is prepared and filed. Similarly, if you have any questions regarding whether an LLC is more suitable for your proposed business than a partnership or corporation, an attorney will be more than happy to answer your questions.