The act of filing Articles creates a new legal entity, which has rights much like a natural person.  This filing is distinguished from filing an assumed name certificate or a "doing business as" (dba) petition with the Secretary of State's office.  The assumed name certificate is required for all businesses that do not file Articles, and do not do business under the owner's personal legal name.  However the assumed name certificate does nothing to establish your business as a separate legal entity.

The phrases "business structure," "form of organization,"  "business form," and "business entity" all refer to the same thing; namely, which set of rules for limiting liability and determining taxes will govern your company.  For example, if you are a corporation then Minnesota Statute 302A regulates your business entity. 

One cautionary note;  many startup owners feel they have nothing to loose because they own nothing and are judgment proof.  This is short-sighted, because a judgment against you today can last for 10 years, and can be renewed after that.  Unless you plan to never have any wealth whatsoever, you are not judgment proof.

The other reasons for incorporating involve tax and estate planning advantages.  Describing the exact nature and extent of those benefits is best left to your accountant and estate planning advisor.  Nonetheless, it is worth noting that in some cases you can pay substantially less in employment taxes.  Further, C-Corporations offer many additional tax benefits such as deductions for offering fringe benefits to your employees.

Finally, lenders like to see that you are incorporated;  that is, as long as they have your personal guarantee on the debt.  A personal guarantee circumvents the limited liability shield and allows the lender to reach your personal assets.  Thus, if liability arises and bankrupts your business, the lender can still get paid back even if other creditors of the business are left without a penny.  For this reason, some lenders even require proper incorporation of your business along with a personal guarantee before they will lend money.  Even if not required by the bank, incorporation makes you appear more sophisticated, realistic and credible, which favorably impresses lenders.

• Sole Proprietorship
• General Partnership
• Limited Liability Company (LLC)
• C-Corporation (C-Corp)
• S-Corporation (S-Corp)
• Limited Partnership (LP)
• Limited Liability Partnership (LLP)
• Limited Liability Limited Partnership (LLLP)
• Non-Profit Corporation
• Professional Association
• Cooperative

The primary reason for incorporating is to shield your personal savings and wealth from liability arising from the business.  However, choosing which structure to operate under is a decision dictated by not only by liability protection, but also by tax and estate planning considerations.  For this reason, we urge you to consult a CPA and possibly an estate planning attorney before selecting a business structure.  

A sole proprietorship and partnership do not provide liability protection.  Each of the other structures offer some form of limited liability. Of those offering liability protection on some level, the most common are the LLC, the S-Corp and the C-Corp, discussed briefly below. 

Limited Liability Company.  The liability protection enjoyed by LLCs is nearly equivalent to that offered the S-Corp.  However, the LLC statutes are more recent, and vary widely from state to state.  And, internationally, and in some states in the US, an LLC may not receive the same legal protection that a corporation does.  Especially 1-owner LLC's may encounter loss of liability protection outside of Minnesota.  If you do business as an LLC in a state not recognizing recognizing your limited liability status, it's as if you are doing business as a sole proprietorship or partnership;  you will have personal liability for business activity occurring in that state.  What's more, because the LLC is relatively new, and still evolving, it's harder to predict what the future of liability protection for LLC's will be, even in Minnesota. 

Subchapter-S Corporation.  Not every company can qualify to become an S-Corp.  The IRS will not grant S-Corp. status to a business unless the business meets rigid IRS criteria.  One of the key requirements is that S-Corp's cannot divide profits disproportionate to each shareholder's ownership interest.  This can be problematic, for example, if you want to attract passive investors who contribute money while you contribute labor.  Such passive investors usually demand preferences in getting paid profits first, if they're available at all.  In an S-Corp., you could only offer a greater share of profits to passive investors if your investors owned a greater percentage of the business than you.  Of course, this might be highly objectionable from your perspective, as you would loose your control over the business.  You should consult with an attorney or CPA about the IRS restrictions on S-Corp. ownership.

Subchapter C Corporation. This entity is typically chosen when a company wishes to offer fringe benefits to its employees.  That is because the IRS provides more tax advantages for for things like employee fringe benefits to C-corp's. who are typically larger companies with more ability to take advantage of advanced tax planning. People often mention the down side of a C-corp as being the "double taxation."  This refers to the situation that C-corps pay taxes as entities.  Of course, S-corps and LLP's and other entities still have to file tax informational statements, but they don't pay taxes at the company level.  Instead, the tax burden is taken up at the owner-level, and owners pay their individual income taxes based on income statements filed by the company.  In the C-corp., double taxation only exists if there is a distribution of profits.  Profits are distributed only after you pay the employees their salaries.  Thus, if you pay big salaries (but they must be "reasonable"), then you aren't going to have as much left over, if any, to pay taxes at the corporate level.  However, if you do pay taxes at the corporate level due to profit distributions, that money is taxed at the corporate level, and, just like the LLP's & S-Corp's, that income is taxed again at the level of the individual owners.

Beyond these basics, the specific advantages and disadvantages of entity selection are numerous, and professional assistance is recommended.

However, there are significant problems with this approach, which you can read about by clicking here. Interestingly, the same problems often exist if you use do-it-yourself form books or software, or even a low-end incorporator.  There is no shortage of new internet sites that offer to incorporate you for $75 or $150.  Unfortunately, they do not offer anything better than if you did it yourself.  You end up spending about the same amount of time as you would if you downloaded and mailed-in your own form from the Secretary of State's website. 

If you want to incorporate and maintain legal protection, your two best options are to hire an attorney or buy a good self-help book (not just any book will do).  However, even some inexperienced and/or unethical attorneys may provide inadequate services as well.  What you need is an experienced attorney who provides high-quality and thorough work.  Of course, this costs more.  For this reason, the Pliam Law Group has developed the Smart Start  incorporation workshop.  SMART START utilizes a semi-self-help method in a group setting that saves on attorney time, and saves you money, without sacrificing any of the quality or thoroughness that you need.