Limited Liability: Owners of a LLC have the limited liability protection of a corporation.

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1 Type of Business Structures & Abbreviation Limited Liability Company (LLC) Description A Limited Liability Company (LLC) is generally accepted type of small business entity. For the majority of small business owners, the LLC offers the level of ownership and management flexibility that a corporation purely does not offer. This type of entity provides limited liability for its members. The LLC can be taxed as a pass-through entity or elect to be taxed as a corporation. The LLC provides its members with a great deal of flexibility when creating and managing the entity, making it extremely popular with closely held businesses. When starting an LLC, it is wise to create a Member Control Agreement governing the members of the LLC. The Member Control Agreement can determine the allocation of profits and losses, the power to govern the LLC, and create a board of governors, chief manager, and treasurer. Recommended For Owners of an LLC are called members. Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. It is often more flexible than a corporation and it is well suited for companies with a single owner. A Minnesota LLC is not a corporation; it is formed under specific state statutes that provide for the creation and regulation of this special type of business structure that has come to be commonly used and respected in business. When you form an LLC in Minnesota, it can be used to combine the limited liability features of a corporation with the flexibility and tax benefits of a partnership within the state of Minnesota. Advantages of LLC Limited Liability: Owners of a LLC have the limited liability protection of a corporation. Flexible Profit Distribution: Limited liability companies can select varying forms of distribution of profits. Unlike a common partnership where the split is 50-50, LLC have much more flexibility. No Minutes: Corporations are required to keep formal minutes, have meetings, and record resolutions. The LLC business structure requires no corporate minutes or resolutions and is easier to operate. Flow Through Taxation: All your business losses, profits, and expenses flow through the company to the individual members. You avoid the double taxation of paying

2 corporate tax and individual tax. Usually, this will be a tax advantage, but circumstances can favor a corporate tax structure. Disadvantages of LLC Limited Life: Corporations can live forever, whereas a LLC is dissolved when a member dies or undergoes bankruptcy. Going Public: Business owners with plans to take their company public, or issuing employee shares in the future, may be best served by choosing a corporate business structure. Added Complexity: Running a sole-proprietorship or partnership will have less paperwork and complexity. A LLC may federally be classified as a soleproprietorship, partnership, or corporation for tax purposes. Classification can be selected or a default may apply Ownership Members Personal Liability Members typically not liable for debts of LLC- See Minnesota Statute 322B.303 Formalities & Record Keeping Requirements Annual Report - Failure to submit a properly completed Minnesota Annual Report to the Minnesota Secretary of State on or before the due date may subject the Minnesota Corporation to being administratively dissolved in the state of Minnesota or having its authority to transact business in the state of Minnesota revoked by the Minnesota Secretary of State. Penalties may accrue for Minnesota Corporation Annual Reports which are submitted to the Minnesota Secretary of State after the due date. Taxation By default, no tax at the entity level if properly structured. Income/loss is passed through to members (as in a partnership or sole proprietorship). May opt to be taxed as C or S corporation. Tax Reporting Form Use this form to -

3 Schedule C (Form 1040) Profit or Loss from Business If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F. Schedule E (Form 1040) Supplemental Income and Loss If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F. Schedule F (Form 1040) Profit or Loss from Farming If the only member of the LLC is an individual, the LLC income and expenses are reported on Form 1040, Schedule C, E, or F. Schedule SE (Form 1040) Self-Employment Tax LLCs filing Schedule C or F Members of LLCs filing Schedule C or F are subject to self-employment taxes on earnings. LLCs filing Partnership Returns Generally, members of LLCs filing Partnership Returns pay self-employment tax on their share of partnership earnings. Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment.

4 W-2 and W-3 - Wage and Tax Statement; and Transmittal of Wage and Tax Statements Employees of all LLCs are subject to withholding tax. Report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees. Form W-2G - Certain Gambling Winnings Form Employer's Annual Federal Unemployment (FUTA) Tax Return Report gambling winnings from horse racing, dog racing, jai alai, lotteries, keno, bingo, slot machines, sweepstakes, wagering pools, etc. Report and pay FUTA tax if the company either: 1. Paid wages of $1,500 or more in any calendar quarter during the calendar year (or the preceding calendar year), or 2. Had one or more employees working for the company for at least some part of a day in any 20 different weeks during the calendar year (or the preceding calendar year). Form Employer's Quarterly Federal Tax Return If you are an employer, you must file a quarterly Form 941 to report: Form Employer's Quarterly Federal Tax Return for Farm Employees Wages you have paid, Tips your employees have received, Federal income tax you withheld, Both employers and employee s share of social security and Medicare taxes, and Advance earned income tax credit (EIC) payments. After you file your first Form 941, you must file a return each quarter even if you have no taxes to report. Form Employer s Annual Federal Tax Return This form was designed so the smallest employers (those whose annual liability for Social Security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter. The IRS will notify those employers who will qualify to file Form 944 in February of each year. Form 1040 U.S. Individual Income Tax Return Form 1065 U.S. Return of Partnership Income See 1040 Instructions Most LLCs with more than one member file a

5 Form Annual Summary and Transmittal of U.S. Information Returns 1099-A, B, C, CAP, DIV, INT, LTC, MISC, OID, PATR, R, S and, SA Important: Every corporation must file Forms 1099-MISC if, in the course of its trade or business, it makes payments of rents, commissions, or other fixed or determinable income (see section 6041) totaling $600 or more to any one person during the calendar year. Also, use these returns to report amounts received as a nominee for another person. For more details, see the General Instructions for Forms 1099, 1098, 5498, and W-2G partnership return, Form If you would rather file as a corporation, Form 8832 must be submitted. You do not need to file a Form 8832 if you want to file as a partnership. Transmit paper Forms 1099, 1098, 5498, and W- 2G to the IRS. Report the following: Acquisitions or abandonments of secured property; Proceeds from broker and barter exchange transactions; Cancellation of debts; Changes in corporate control and capital structure; Dividends and distributions; Interest payments; Payments of long-term care and accelerated death benefits; Miscellaneous income payments to certain fishing boat crew members, to providers of health and medical services, of rent or royalties, of nonemployee compensation, etc.; Original issue discount; Taxable distributions received from cooperatives; Distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc.; Proceeds from real estate transactions; and Distributions from an HSA, Archer MSA, or Medicare Advantage MSA. Form 1120 U.S. Corporation Income Tax Return If the only member of the LLC is a corporation, the LLC income and expenses are reported on the corporation s return, usually Form 1120 or Form 1120S

6 Form 1120-S U.S. Income Tax Return for an S Corporation If the only member of the LLC is a corporation, the LLC income and expenses are reported on the corporation s return, usually Form 1120 or Form 1120S Form 8832 Entity Classification Election If you prefer to file as a corporation instead of a disregarded entity, Form 8832 must be submitted. Otherwise, you do not need to file Form Management & Operation Members elect or appoint Managers and have the power to remove them. Managers may or may not be Members of the Minnesota LLC. Management for your Minnesota LLC may be defined in your Articles of Organization or, more commonly, in an Operating Agreement. Formation Requirements In any Minnesota LLC formation, articles of organization must be signed by at least two persons organizing the LLC and delivered, along with a copy, to the Minnesota Secretary of State for filing. State law requires that certain information be included in the articles of organization of your Minnesota LLC formation. This information must include: The LLC name The period of LLC's duration The name and address of each organizer The street address of the LLC's initial registered office The name of the LLC's initial registered agent at the above address LLC Minnesota Requirements for Name Filing Minnesota & Foreign Limited Liability Companies