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When Does a Sole Proprietor Need to Form a Business Entity?

Andrew J. Meyer

A small business can form out of unlikely scenarios. You have a hobby or an idea, and before you know it, it’s off and running and people are paying you. At what point do you need to start thinking about creating a business entity? For many, the answer is immediately. Forming an entity is often the first step for a new business. But sole proprietors whose businesses are humming along nicely, can still benefit from forming a business entity.

Some factors to consider:

  • Do you want to reserve the name of your business? All LLCs, LLPs and Corporations are registered with the Secretary of State, and this puts future business on notice of your business’ name.
  • Do people want to invest in your business? A business entity allows them to contribute to the business in exchange for a stake.
  • Are you hiring employees? A business entity makes it easier to separate your personal accounts from your business accounts and comply with payroll laws and regulations.
  • Do you have significant non-business assets that you want to protect from liability stemming from your business? This is typically the main reason why business entities are formed. Liability limitation is a nuanced issue, but broadly speaking, following the formalities required by law for a given type of business entity allows the stakeholders to be shielded from liability for the actions of that entity.
  • Are you signing contracts for the business? Certain contracts will require a personal guaranty from the member, but in situations where a personal guaranty is not required, it can be advantageous to have the LLC at risk in the contract, rather than you personally.
  • Do you want to pass the business on to the next generation? Centralizing the business operation in an entity, with easy to distribute shares or membership interests, makes this kind of succession planning much easier.

If you have a business or even an idea, get in touch with Sanford, Pierson, Thone & Strean to see how these factors, among many others, can affect your plans going forward.

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Wayzata, MN  55391

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