The word ‘corporation’ can conjure up some big images. Big business. Big expense. Big complexity.
While it’s true that forming your business as a corporation takes some extra pains, it comes with distinct advantages over sole proprietorships and general partnerships. And it can actually prevent some of the worst headaches inherent in those business organizations.
A corporation is a separate legal entity that is owned by one or more shareholders, and formed according to state laws. Corporations themselves are responsible for the debt and obligations of the business. In most cases, the shareholders are insulated from personal liability for company debts and expenses.
That’s a stark contrast to sole proprietorships, which are owned by one person; are legally indistinguishable from their owners; and in which the owners are personally liable for business debts and expenses.
There are two main types of corporations: “C” corporations and “S” corporations. The structures differ in how income and expenses are reported, and how profits are distributed and taxed.
Here are the major factors to consider when deciding whether a corporate structure is right for your business.
The way you form a corporation in Minnesota is dictated by state law, see Minn. Stat. § 302A, and the process is pretty straightforward.
Start by filing articles of incorporation with the Secretary of State and paying the filing fee. You may file online after creating an account or download and submit a ready-made Articles of Incorporation form or you may draft and submit your own articles of incorporation (advice of an attorney is advised here).The articles of incorporation contain these elements:
By state law, the name of a corporation must:
A corporation must maintain a registered office located in the state of Minnesota. The address may not be a post-office box. It may be a street address, a rural route and rural route box or fire number, or directions from a landmark. If directions are given, a mailing address in the same town or in an adjacent area must also be given. All addresses must have a zip code.
The corporation is not required to name a registered agent in the articles of incorporation, but if it does name an agent, the articles must list the name of the agent and the agent must be located at the registered office.
A corporation may authorize any number of shares of stock. The articles of incorporation require only the total number of shares authorized. Neither a par value nor a stated value is required, although the articles may include them. Corporations that plan to do business in another state should consider including a provision specifically stating that shares have a par value of one cent per share for franchise fee purposes. This is a restatement of Minnesota state law and may enable the corporation to avoid paying excess franchise fees in other states.
While the number of authorized shares is fixed in the articles, the decision to issue shares is up to the directors, who may reserve shares for later issuance. The board must approve each issuance and ensure that the corporation receives fair value for its shares.
The articles must list the names and complete mailing addresses, including zip codes, of each of the incorporators. There must be at least one incorporator. Each incorporator must be at least 18 years of age and must sign the articles.
There are a number of provisions set out in state law that may be altered or adopted in the articles of incorporation, but that need not appear in the articles in order to properly form a corporation.
Once the corporation is formed, there are the practical steps for startup and operation. It’s a good idea to get legal and tax advice at this point, but in general start-up and maintenance tasks include:
Minnesota corporations must file an annual corporate registration with the Secretary of State which will provide corporations with a reminder-to-file notice. Failure to file an annual registration for any calendar year will trigger an administrative dissolution of the corporation.
Every corporation that does business in Minnesota must file an annual business activities report with the Department of Revenue. Corporations are exempt from this requirement if they:
Corporations that are required to file a business activities report and fail to do so can be barred from using Minnesota courts during the violation period.
Consultants at our Small Business Assistance Office can help you understand more about corporations. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
For a comprehensive look at corporations, see our Guide to Starting a Business in Minnesota. Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the book covers the major issues, questions and concerns about business startups.
Nothing we cover here should be taken as business or legal advice. It’s not. And it’s no substitute for the professional guidance of a lawyer or accountant.