Converting Your Minnesota Sole Proprietorship to an LLC in 2024

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Convert Minnesota Sole Proprietorship to LLC

As a small business owner in Minnesota, you may have started your business as a sole proprietorship due to its simplicity and low initial costs. However, as your business grows, you may want to start an LLC in Minnesota, which is more suitable for your needs. Converting your Minnesota sole proprietorship to an LLC can protect your assets and optimize your business’s growth potential.

In this comprehensive guide, Webinarcare Editorial Team will walk you through the step-by-step process of Converting your Minnesota Sole Proprietorship to an LLC, enabling you to make an informed decision for your business.

How to Convert your Minnesota Sole Proprietorship to an LLC

What is a Sole Proprietorship and Limited Liability Company?

A sole proprietorship is the simplest and most common form of business ownership, where a single individual owns and operates the entire business. A sole proprietorship has no legal distinction between the owner and the business, meaning the owner is responsible for all the business’s debts, liabilities, and obligations. 

On the other hand, a Limited Liability Company (LLC) is a legal business structure that combines the limited liability protection of a corporation with the pass-through taxation of a sole proprietorship or partnership. This means the owners, known as members, are not personally responsible for the company’s debts and liabilities. The company’s profits and losses are reported on the members’ tax returns. We reviewed some of the Best LLC Services and provided features as an add-on with their packages for you to check out.

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Having a sole properietorship had given you freedom and comfortability, but, starting an LLC in Minnesota has a lot to offer, which is why it is a highly recommended business structure. It is suggested that you speak with a legal professional first before you begin coverting your sole proprietorship to an LLC. They will understand what’s best for you and your company.

– WEBINARCARE EDITORIAL TEAM

Steps on Converting Minnesota Sole Proprietorship to an LLC

To convert Minnesota sole proprietorship to an LLC, you must follow the guidelines that include choosing a name for your LLC, appointing a Registered Agent, preparing for the Articles of Organization, creating an Operating Agreement, obtaining an EIN, opening a business bank account, registering for state tax and licenses, and lastly, informing clients and vendors of conversation.

Step 1: Choose A Name For Your LLC

The first step in converting your sole proprietorship to an LLC is selecting a unique and distinguishable name for your new entity. In Minnesota, there are specific naming requirements and restrictions that you must adhere to when choosing your LLC’s name:

  • The name must include “Limited Liability Company,” “LLC,” or “LLC.“
  • The name cannot include words or phrases that imply the company is engaged in activities it is not authorized to conduct.
  • The name must be distinct from other registered businesses in Minnesota.

In Minnesota, if you do not wish to file your LLC right away but want to hold the name that you have decided on, then you can reserve your LLC name for 1 year. You must file a name reservation application in the Minnesota Secretary of State to keep the name. 

You can register your business under a different legal name if your preferred name isn’t available. Once you have chosen a name, you can submit an application for a DBA (doing business as). In this manner, you can choose any name you desire for your business. A DBA allows a company to operate under the name of the person or entity who owns it. If you have decided to file for Minnesota DBA, you can file it in three methods, online, by mail, and in person filing. However, before filing a DBA, you should know that you need to renew your DBA from up to one year, which costs around $50 for online filing and $30 for offline filing.

You can check the availability of your desired business name by searching the Minnesota Secretary of State Business Filings Online‘s website.

Step 2: Appoint a Registered Agent

In Minnesota, all LLCs are required to appoint a Registered Agent. Registered Agent is a person or entity responsible for receiving and forwarding legal and tax documents on behalf of your Minnesota LLC, such as service of process, Minnesota Annual Report, and state tax notifications. Your Registered Agent must have a physical address in Minnesota and be available during regular business hours. In Minnesota, the cost of Registered Agent usually ranges from $50 – $150.

When selecting a Registered Agent, consider their reliability, knowledge of state requirements, and ability to manage sensitive legal documents. You can serve as your own Registered Agent, appoint another individual, or hire the Best Registered Agent Service.

Step 3: Prepare and File the Minnesota Articles of Organization

To officially form your Minnesota LLC, you must prepare and file Minnesota Articles of Organization with the Minnesota Secretary of State. The Articles of Organization is a legal document that outlines essential information about your  Minnesota LLC, including:

  • The LLC’s name
  • The Registered Agent’s name and address
  • The LLC’s purpose
  • The LLC’s duration (perpetual or for a specific term)
  • The names and addresses of the initial members or managers

In Minnesota, the filing fee for the Articles of Organization is $135. You can submit the document online through the Minnesota Secretary of State’s website or by mail. Processing times may vary, so check the website for current information.

Step 4: Create an Operating Agreement

Although not legally required, Minnesota Operating Agreement is a crucial document that outlines the structure, management, and financial arrangements of your Minnesota LLC. The operating agreement should include the following:

  • The roles and responsibilities of members and managers.
  • The process for admitting or removing members.
  • The allocation of profits and losses among members.
  • The procedure for making major decisions.
  • The process for dissolving the LLC.

Having a written Minnesota operating agreement can help prevent disputes and ensure a smooth operation of your LLC. It is advisable to work with Minnesota Business Attorney to draft an operating agreement that meets the specific needs of your business and complies with Minnesota laws.

Step 5: Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) in Minnesota, or Federal Tax Identification Number, is a unique nine-digit number issued by the Internal Revenue Service (IRS) to identify your business for tax purposes. With an EIN, you can open a business bank account, file tax returns, and hire employees.

To obtain an EIN for your Minnesota LLC, you can apply online on the IRS website, by mail, or by fax. The online application process is the fastest and most convenient method, as you will receive your EIN immediately upon completing the application. There is no fee to obtain an EIN.

The application of an EIN in Minnesota can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

Recommended: Professional services have the EIN included in their LLC formation package. We recommend using –

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Step 6: Opening of Minnesota Business Bank Account

When converting your sole proprietorship to an LLC, separating your personal and business finances is essential by opening a dedicated business bank account. Minnesota business bank account helps maintain limited liability protection and makes managing your business’s finances and taxes easier.

To open a business bank account in Minnesota, you will need the following documentation:

  • Your LLC’s Certificate of Formation
  • Your LLC’s EIN
  • Your LLC’s operating agreement (if applicable)
  • A resolution authorizing the opening of the account (if required by the bank)

You can check out the Best Banks in Minnesota, which offers the best fees, services, and convenience for your business needs.

Step 7: Register for Minnesota Taxes and Licenses

As an LLC in Minnesota, your business may be subject to various state taxes and licenses, depending on the nature of your operations. Common taxes and licenses include:

  • Sales Tax: If your LLC sells taxable goods or services, you must register for Minnesota sales tax permit and collect sales tax from your customers.
  • Employer Taxes: If your LLC has employees, you may be required to register for Minnesota unemployment insurance and workers’ compensation coverage.
  • Business License: Minnesota Business License is a legal document granted by a state government body that permits you to conduct business within the area under its jurisdiction. The price of business licenses and permits in Minnesota ranges from $50 – $300.

To ensure you comply with all applicable Minnesota tax and licensing requirements, you can check out the Minnesota Department of Revenue for more information.

Step 8: Inform Clients and Vendors of the Conversion

After converting your Minnesota sole proprietorship to an LLC, you must inform your clients, vendors, and other business contacts of the change. Update your contracts, invoices, and marketing materials with your new LLC name, and communicate the transition to ensure a smooth and professional process.

Ongoing Compliance For Minnesota LLCs

As an LLC in Minnesota, you are subject to ongoing compliance and reporting requirements, including:

  • Filing Annual Report with the Minnesota Secretary of State and pay the associated fee and which you can pay every 1 year (31st December).
  • Maintaining accurate and up-to-date records of your Minnesota LLC’s finances, meetings, and decisions. You can manage your finances using spreadsheets, accounting software, or becoming a CPA in Minnesota.
  • Adhering to any industry-specific licensing and regulatory requirements.

Benefits of Converting Minnesota Sole Proprietorship to an LLC

In converting Minnesota Sole Proprietorship, there are benefits that you should consider. Here are the benefits you must know before converting your sole proprietorship:

Limited Liability Protection

Converting a sole proprietorship to an LLC provides limited liability protection for the business owner. This means that the owner’s assets (such as their home or car) are separate from the business assets and are protected from being seized to pay off business debts or in case of a lawsuit.

Credibility and Professionalism

Minnesota LLC can help improve the credibility and professionalism of the business. Many customers and suppliers prefer dealing with an LLC, which shows commitment and stability.

Tax Flexibility

With Minnesota LLC, you can choose how your business will be taxed. It can be taxed as a sole proprietorship, a partnership, or a corporation. This allows you to choose the tax structure that best fits your business and may result in potential tax savings.

Easier Access to Funding

Minnesota LLC may have an easier time obtaining funding from banks and investors than a sole proprietorship. Many lenders and investors prefer to work with an LLC, as it demonstrates a commitment to the business and provides legal protection.

Ownership and Management Flexibility

Minnesota LLC allows you to have multiple owners (called members) and to divide ownership and management responsibilities among them. This can make growing your business easier or bring in new partners.

Enhanced Privacy

In some states, such as Minnesota, an LLC can offer more privacy than a sole proprietorship. This is because the business owner’s personal information may not be as public as it would be with a sole proprietorship.

Easier Transfer of Ownership

With Minnesota LLC, transferring business ownership to another person or entity is generally easier. This can be beneficial if you decide to sell your business, bring on new partners, or plan for succession.

Continuity of Existence

Unlike a sole proprietorship, which ceases to exist upon the death or incapacity of the owner, Minnesota LLC can continue to operate even if the owner passes away or becomes incapacitated. This provides stability and continuity for the business and its employees.

Compliance with Minnesota Requirements

Some states require certain types of businesses, such as those in the professional services industry, to operate as Minnesota LLC or another corporate entity. Converting your sole proprietorship to an LLC in Minnesota ensures that your business complies with these regulations and avoids potential legal issues.

Access to Additional Benefits

Minnesota LLC may be eligible for additional benefits, such as state-specific tax incentives or credits, not available to sole proprietorships. These benefits can help reduce your tax burden and support the growth of your business.

In summary, converting a sole proprietorship to an LLC in Minnesota can provide significant benefits, including limited liability protection, tax flexibility, increased credibility, and easier access to funding. It’s essential to carefully consider these advantages and consult with a legal or tax professional before deciding to convert your business structure.

FAQs

Is Minnesota a good state to form an LLC?
Yes, Minnesota is a good state to form an LLC because it offers favorable tax laws and limited liability protection.
How do I convert my Minnesota sole proprietorship to an LLC?
To convert your Minnesota sole proprietorship to an LLC, you must file articles of organization with the Minnesota Secretary of State.
Do I need a lawyer to convert my sole proprietorship to an LLC in Minnesota?
No, you do not need a lawyer to convert your sole proprietorship to an LLC in Minnesota, but it is always a good idea to seek legal advice.
Does Minnesota require an LLC to have an operating agreement?
No, Minnesota does not require an LLC to have an operating agreement, but it is recommended to have one to establish business rules and procedures.
What are the advantages of converting my Minnesota sole proprietorship to an LLC?
The advantages of converting your Minnesota sole proprietorship to an LLC include limited liability protection, potential tax savings, and increased credibility with customers and vendors.
How do I register my Minnesota LLC with the state?
To register your Minnesota LLC with the state, you must file articles of organization and pay the appropriate fee to the Minnesota Secretary of State.
Can a Minnesota LLC be taxed as an S corporation?
Yes, a Minnesota LLC can elect to be taxed as an S corporation if it meets certain requirements set forth by the IRS.
How do I change my Minnesota business name after forming an LLC?
To change your Minnesota business name after forming an LLC, you must file an amendment with the Minnesota Secretary of State and pay the appropriate fee.
What is the cost of forming an LLC in Minnesota?
The cost of forming an LLC in Minnesota is $155 for online filings or $135 for paper filings as of 2021.
Will my Minnesota LLC be required to obtain a business license?
Yes, your Minnesota LLC will be required to obtain a business license if it conducts business activities that require one.
Do I need to file a separate Minnesota state tax return if I have an LLC?
Yes, you will need to file a separate Minnesota state tax return if you have an LLC that generates income in the state.
Will I have to pay Minnesota sales tax for my LLC?
Yes, your Minnesota LLC will be required to pay sales tax if it sells taxable goods or services in the state.
Are there annual report requirements for Minnesota LLCs?
Yes, Minnesota LLCs are required to file an annual report and pay the $0 filing fee for the report.
How long does it take to form an LLC in Minnesota?
It takes between 3-5 business days for the state to process your Minnesota LLC filing, but expedited service is available for an additional fee.
Can I change the ownership structure of my Minnesota LLC?
Yes, the ownership structure of your Minnesota LLC can be changed through an amendment to the operating agreement or by filing a certificate of ownership change with the Minnesota Secretary of State.
Can a foreign LLC do business in Minnesota?
Yes, a foreign LLC can do business in Minnesota, but it must be registered as a foreign LLC with the Minnesota Secretary of State.
Do Minnesota LLCs need to have a registered agent?
Yes, Minnesota LLCs are required to have a registered agent who is available during normal business hours to receive legal documents and notices.
Is it easy to close down a Minnesota LLC?
Yes, it is relatively easy to close down a Minnesota LLC by filing articles of dissolution with the Minnesota Secretary of State.
Can I operate multiple businesses under one Minnesota LLC?
Yes, you can operate multiple businesses under one Minnesota LLC as long as they are similar in nature and relate to the same industry or business.
Can I form a Minnesota LLC to complete a one-time project?
Yes, you can form a Minnesota LLC to complete a one-time project, but you will have to follow the same filing process and pay the same fees as a regular LLC.
What if I have past-due taxes or unpaid debts for my Minnesota sole proprietorship?
You will need to settle any past-due taxes or unpaid debts for your Minnesota sole proprietorship before forming an LLC or they will transfer to the LLC and become its liabilities.
Can an LLC protect my personal assets in Minnesota?
Yes, an LLC can protect your personal assets in Minnesota by limiting the amount of liability you are personally responsible for in the event of a lawsuit or debt.
What happens if I don’t file the appropriate documentation for my Minnesota LLC?
If you do not file the appropriate documentation for your Minnesota LLC, your business may be subject to fines or penalties and may not be legally allowed to operate in the state.
Can I change the legal structure of my Minnesota LLC after it is formed?
Yes, you can change the legal structure of your Minnesota LLC after it is formed by filing a conversion or merger with the Minnesota Secretary of State.
How do I get an EIN for my Minnesota LLC?
You can get an EIN for your Minnesota LLC by contacting the IRS, or you can use an online service to get one quickly and easily.
Are there any residency requirements for Minnesota LLC members?
No, there are no residency requirements for Minnesota LLC members, but the LLC must have a registered agent who is an individual or corporation doing business in Minnesota.
Can minors own a Minnesota LLC?
No, minors cannot own a Minnesota LLC under state law, but they can be listed as beneficiaries or owners through a trust or other legal entity.
Can I run my Minnesota LLC from out-of-state?
Yes, you can run your Minnesota LLC from out-of-state, but you will need to have a registered agent located in the state and abide by Minnesota state laws and regulations.
What is an LLC in Minnesota?
An LLC is a limited liability company — a business structure type that combines the liability protections of corporations with the freedom and ease of operation of a partnership or sole proprietorship.
Why should I convert my Minnesota sole proprietorship to LLC?
By converting to an LLC, you can protect your personal assets from business liabilities and risks, and gain greater credibility, brand recognition, legal protections, and tax benefits.
How do I convert my Minnesota sole proprietorship to LLC?
You need to file Minnesota Articles of Organization with the Secretary of State, get an IRS EIN, draft an LLC Operating Agreement, and update your tax, license, permits, contracts, bank accounts, and insurance.
Can I be the only owner of my Minnesota LLC?
Yes, Minnesota allows single-member LLCs, which are LLCs with only one owner or member.
What taxes do I have to pay as a Minnesota LLC?
LLCs in Minnesota are subject to state taxes such as sales tax, corporate franchise tax, and state income tax, as well as federal taxes like self-employment tax, payroll tax, and income tax.
Does a Minnesota LLC need to have a registered agent?
Yes, every Minnesota LLC must have a registered agent, either an individual resident of Minnesota or a business entity authorized to do business in the state, to receive legal and government documents on behalf of the LLC.
How much does it cost to convert a Minnesota sole proprietorship to LLC?
The filing fee for Minnesota Articles of Organization is $155, but the total cost of conversion depends on factors such as attorney fees, state taxes, and professional services.
How long does it take to convert a Minnesota sole proprietorship to LLC?
Minnesota usually processes Articles of Organization within 10 business days, but the time to convert also depends on how quickly you draft and file the paperwork, gather supporting documents, and receive approvals.
Can I use the same business name for my Minnesota LLC as my sole proprietorship?
Yes, if the name is available and complies with Minnesota business naming rules, you can use the same or a different name for your LLC as your sole proprietorship.
Do I need to file any documents for dissolution if I convert my Minnesota sole proprietorship to LLC?
No, the conversion automatically dissolves your sole proprietorship and transfers its assets and liabilities to your LLC.
Can I convert my Minnesota LLC back to sole proprietorship?
No, once you form an LLC, it becomes a separate legal entity from you, and you cannot have a sole proprietorship with the same name as your LLC.
What if I change my mind after submitting Articles of Organization for my Minnesota LLC?
You can terminate or cancel your LLC within 90 days of formation without having to pay the annual fee or file a tax return.
Do I need to have a physical office location for my Minnesota LLC?
No, you can use your home or any physical or virtual address as your office for your Minnesota LLC.
Can I convert my Minnesota partnership to LLC?
Yes, you can convert any type of business entity to an LLC, including partnership, corporation, or sole proprietorship.
What are the advantages of converting a Minnesota partnership to LLC?
By converting to an LLC, you can reduce the personal liability and conflicts among partners, increase the tax flexibility and transparent management of your business, and gain other benefits specific to LLCs.
What is a Minnesota LLC Operating Agreement?
An LLC Operating Agreement is a legal document that outlines the internal organization, management, ownership, rights, financial obligations, responsibilities, and other key provisions of your Minnesota LLC.
Do I have to publish a notice for my Minnesota LLC?
No, Minnesota does not require LLCs to publish notices in newspapers as some other states do.
Can I convert my Minnesota LLC to a different state?
Yes, you can “foreign qualify” your Minnesota LLC in another state by filing the appropriate documents and paying the required fees.
What would happen if I convert my Minnesota sole proprietorship to a different business entity?
Converting your Minnesota sole proprietorship to a different entity — such as partnership, C corporation, or S corporation — would follow different legal and tax regulations and require different forms and procedures.
What are the differences between C corporation and LLC in Minnesota?
C corporations have more complex management, ownership, and taxation structures, and are subject to double taxation, while LLCs have more flexible ownership, management, and tax structures, and are subject to pass-through taxation.
What are the differences between S corporation and LLC in Minnesota?
S corporations are similar to C corporations but have fewer shareholders, and enjoy pass-through taxation like LLCs, but are subject to stricter financial requirements and management limitations.
Do I have to file annual reports for my Minnesota LLC?
Yes, Minnesota LLCs have to file an annual report together with the appropriate fee — currently $25 — to maintain their existence and good standing status.
Can a non-US citizen form a Minnesota LLC?
Yes, there are no citizenship or residency requirements to form an LLC in Minnesota, but non-US citizens or non-Minnesota residents may need to register as foreign entities or obtain special visas.
What if I want to sell my Minnesota LLC?
You can sell your Minnesota LLC by transferring ownership to a new member, consolidating with another LLC, merging with or acquiring another company, or liquidating and distribution the proceeds.
Do I need a lawyer to convert my Minnesota sole proprietorship to LLC?
No, you can follow the Minnesota instructions and use readily available resources such as online formation services, books, templates, and seminars to convert your sole proprietorship to LLC, but a lawyer can provide you with additional support, expertise, and assurance.
Can my Minnesota LLC choose a different tax classification than default?
Yes, Minnesota LLCs can choose to be treated as a different tax entity than the default classification — sole proprietorship for single-member LLC and partnership for multi-member LLC — as long as it meets certain IRS requirements and files the appropriate forms.
Can a Minnesota LLC hold real estate?
Yes, Minnesota LLCs can hold real estate as long as they follow the appropriate state and federal laws and regulations, manage their finances and taxation, and properly transfer and maintain the title.
What are the major benefits of owning a Minnesota LLC?
Some of the major benefits of owning a Minnesota LLC are protection of personal assets, limited liability, simple and flexible management structure, pass-through taxation, brand recognition, and financial credibility.

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Conclusion

Converting your Minnesota sole proprietorship to an LLC is a significant decision that can provide valuable benefits, such as limited liability protection, tax advantages, and enhanced credibility. Following the steps outlined in this guide and consulting with legal and financial professionals, you can successfully navigate the conversion process and position your business for future growth and success.

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