How to Start a Sole Proprietorship in Minnesota

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by LLC.org Team
Last updated: June 13th, 2024
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Starting a new business in Minnesota can be an exciting venture for entrepreneurs. As a sole proprietor, you have the freedom to operate your business independently, make your own decisions, and keep all the profits. Whether you have a passion for baking, offering consulting services, or any other startup idea, understanding the essential steps to establish your sole proprietorship in Minnesota is crucial. In this guide, we will walk you through the key considerations and necessary actions to help you navigate the process smoothly and set your business up for success in the Land of 10,000 Lakes.

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What is a sole proprietorship?

A sole proprietorship is a business owned and operated by one person. The owner of a sole proprietorship is personally liable for all debts and obligations of the business – the term for this owner is a sole proprietor. This means that if the business fails, the owner’s personal assets, such as their home or car, can be taken to satisfy the business’s debts.

Sole proprietorships are the simplest and most common form of small business ownership. They are easy to set up and operate, and they do not require any special registration or licensing. 

Examples of a sole proprietorship

Any kind of business can be a sole proprietorship. Some examples may include a lawn care business, a small retail store, a freelance writing business, or anything else owned and operated by one individual.

What qualifies your business as a sole proprietorship? 

A business qualifies as a sole proprietorship if it meets the following criteria:

  • The business is owned and operated by one person.
  • The business does not have a separate legal existence from the owner.
  • The owner is personally liable for all debts and obligations of the business.

Sole proprietorship vs LLC

A sole proprietorship is a business owned and operated by one person. The owner of a sole proprietorship is personally liable for all debts and obligations of the business.

An LLC, or limited liability company, is a business structure that provides limited liability to its owners. This means that the owners of an LLC are not personally liable for the debts and obligations of the business, which is considered a separate legal entity.

Who is it best for?

Sole proprietorships are best for businesses that are:

  • Small. Sole proprietorships are the simplest and most common form of business ownership. They are easy to set up and operate, and they do not require any special registration or licensing. However, the lack of legal separation between the business and the owner can be a major disadvantage.
  • Low-risk. Sole proprietorships are best for businesses that have a low risk of being sued. If the business fails, the owner’s personal assets, such as their home or car, can be taken to satisfy the business’s debts.
  • New. Sole proprietorships are best for businesses that are just starting out. They are easy to set up and operate, and they do not require a lot of capital.

If you are considering starting a business, you should carefully weigh the pros and cons of sole proprietorships before making a decision.

How to set up a sole proprietorship in Minnesota

Starting a sole proprietorship in Minnesota is a relatively simple process. There is no formal registration process required, and you can begin operating your business as soon as you start selling goods or services. However, there are a few steps you should take to protect yourself and your business, including choosing a business name and obtaining a business license.

Is there any formal paperwork filed to establish this type of business?

No formal paperwork is needed to establish a sole proprietorship. However, paperwork may be involved in other necessary tasks to keep your business in compliance with state guidelines.

Naming your business

One of the first decisions you will likely make about your business surrounds its name. For a sole proprietorship, there are two main ways you can go about this: using your own legal name or following the process to set up a “doing business as” name. 

Using your own name

Because Minnesota considers sole proprietors and their businesses the same legal entity, the two also use the same name and Social Security Number for all legal and business tax purposes. By definition, a sole proprietorship will use the owner’s legal name – so if your name is Jack Taylor, your business is also known as Jack Taylor without any additional steps being necessary. 

Setting up a DBA

For business owners that want to use another name for their business, Minnesota allows this to happen through the process of filing an assumed name. Also known as a DBA or trade name, this is a name that a business uses for the public but not as their formal government name. To do this, you will need to file a Certificate of Assumed Name Registration with the Minnesota Secretary of State and pay the filing fee. The name you choose cannot be in use by another business in Minnesota or violate other naming rules of the state. 

Minnesota licenses 

The only state-level permit that is generally required in Minnesota is the seller’s permit, which allows Minnesota businesses to collect sales tax and pay it back to the Department of Revenue. Local governments may also require general business licensing for each business, local zoning clearances, or specific permits related to your type of business. 

Additionally, some professions are required to have licensing through the state, so it is important you check to be sure you are not required to have further licensing.

Minnesota taxes

Sole proprietorships are pass-through entities, which means that the profits and losses of the business are passed through to the owner’s personal tax return. The owner then reports the profits or losses on Schedule C of their Form 1040. The owner pays taxes on the profits at their individual income tax rate.

In addition to income taxes, sole proprietors may also be liable for self-employment taxes. Self-employment taxes are a combination of Social Security and Medicare taxes. The self-employment tax rate is 15.3%, which is split evenly between the employer and the employee. As a sole proprietor, you are both the employer and employee, so you are responsible for paying the entire 15.3% self-employment tax.

Sole proprietors can deduct business expenses from their income taxes. This can include things like rent, utilities, office supplies, and travel expenses. To deduct business expenses, you must keep accurate records of all of your business-related income and expenses.

Pros

  • Easy to set up and operate
  • No special registration or license requirements
  • No annual reports or other ongoing requirements
  • Owner has complete control over the business
  • All profits go to the owner

Cons

  • No liability protection means the owner is personally liable for all debts and obligations of the business
  • Difficulty raising capital
  • Limited access to business loans, business bank accounts, and credit
  • Limited tax benefits

FAQs

Do I need a separate business license for my sole proprietorship?

In Minnesota, sole proprietors generally do not need a state-level business license. However, depending on your specific business activities, you may need to obtain local permits or licenses. Check with your city or county offices for any requirements.

Are there any specific tax obligations for sole proprietors in Minnesota?

As a sole proprietor in Minnesota, you are required to report your business income and expenses on your personal income tax return (Form M1). You must do the same on forms submitted to the Internal Revenue Service (IRS), like Form 1040. You may also need to pay self-employment taxes, including Social Security and Medicare taxes.

Do I need to register for sales tax as a sole proprietor in Minnesota?

If your sole proprietorship sells taxable goods or services in Minnesota, you generally need to register for a sales tax permit with the Minnesota Department of Revenue. This allows you to collect and remit sales and use tax on eligible transactions.

What are my personal liability risks as a sole proprietor in Minnesota?

As a sole proprietor, you have unlimited personal liability for the debts and obligations of your business. This means your personal assets can be at risk. Consider obtaining liability insurance to protect yourself and separate your personal and business finances to minimize risk.

Can I hire employees as a sole proprietor in Minnesota?

important to note that if you have employees, you will have additional responsibilities, such as withholding and remitting payroll taxes, providing workers’ compensation insurance, and adhering to employment laws and regulations. 

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