with more than one member will be taxed as a partnership unless it elects to be taxed as a corporation and a Limited Liability Company with only one member will be taxed as a sole proprietorship (a “disregarded entity”) unless it elects to be taxed as a corporation. The applicable Regulations appear in 26 C.F.R. § 301.7701-1, et. seq. A Limited Liability Company that is taxed as a partnership or as a corporation must obtain its own tax ID numbers. A Limited Liability Company with only one member that is taxed as a sole proprietorship generally does not need to obtain separate federal or state tax identification numbers unless it has employees or pays federal excise taxes, in which case it will obtain tax ID numbers and use them to remit employment taxes or pay excise taxes. Business income and losses of a Limited Liability Company that is taxed as a partnership or as a sole proprietorship are passed through to the members, included in their taxable income, and taxed at each member’s income tax rate. As with a corporation, liability for business debts and obligations generally rests with the entity rather than with the individual owners. A Limited Liability Company is not subject to many of the restrictions that apply to S corporations (unless it elects to be taxed as a corporation and wishes to be taxed as an S corporation). All members of a Limited Liability Company may participate in the active management of the company without risking loss of limited personal liability. Minnesota adopted a new Limited Liability Company Act (Minn. Stat. Chapter 322C) that became effective August 1, 2015. Minnesota Limited Liability Companies formed on or after that date are subject to the new act, and may be managed by the members, by a board of governors, or by a manager. Other Forms of Organization. Other forms of organization available to Minnesota businesses include professional organizations, cooperative associations, business trusts, and certain variations of these forms of organization. These types of organizations are established and regulated by statute and involve complex legal, financial and accounting issues. Organizing under any of these forms should not be attempted without competent professional advice. Because of their highly specialized nature, these forms of organization are not addressed in detail in this Guide. Changing the Form of Organization. Note that although the discussion in the above paragraphs is also applicable when changing the form of business organization, (e.g., when converting a sole proprietorship to a corporation), a business owner is strongly urged to seek professional assistance when doing so, because unintended consequences may result, often including significant tax consequences. For example, contracts entered into by the business may or may not be assignable to the new entity. Also, there may be tax costs to changing the form of organization, such as when an S corporation becomes a C corporation. Minnesota law also authorizes conversions in either direction between corporations and Limited Liability Companies (including with organizations from other states that permit conversion from or into a Minnesota entity). The converting organization must adopt a plan of conversion that must be approved governors in accordance with the entity’s governing statute. Upon approval, articles of conversion are drafted and filed with the Secretary of State who then will issue a certificate of conversion and a certificate of incorporation or certificate of organization if the resulting organization is a Minnesota corporation or Limited Liability Company. Again, these changes can produce significant tax consequences and should be undertaken only when these are fully understood. For example, a conversion of a corporation into a Limited Liability Company that is taxed as a partnership is treated for income tax purposes as a taxable liquidation of the corporation, which can produce taxable gain to both the corporation and its shareholders.
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