The first step in starting a business in Minnesota is having a good business idea. Maybe you already have an idea picked out, or maybe you are still deciding on one. Regardless, you can check out our library of business ideas to get detailed industry information, trends, costs to start, tips, and lots more.

Once you have identified a viable business opportunity, conducting thorough market research to evaluate its feasibility is important. Researching current trends and customer preferences will help you determine if there is enough demand for your product or service. Additionally, evaluating your value proposition and testing your product or service with potential customers can help refine your offering before launch.

Starting a business in Minnesota requires careful planning and preparation, and a well-researched business plan tips the odds of success more in your favor.

This strategic document serves as a roadmap for your entrepreneurial journey, guiding you through the various legal, financial, and operational aspects of your venture. A well-crafted business plan not only helps you identify and address potential challenges but also will be required by most lenders and investors considering your project.

Related: How to write a business plan

The next step in starting a business in Minnesota is selecting a business structure (also referred to as a business entity). A business structure is how a business is legally set up to operate and defines its legal status, liability, tax obligations, and other aspects of its operation. Choosing the right business entity is essential because it determines your personal liability level, the ease of raising capital, and the tax implications of your business.

Minnesota has four common types of business entities: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). Understanding the unique characteristics of each will help you make an informed decision about the best structure for your business.

Sole Proprietorship
Pros: Simple to set up, complete control of business decisions, and minimal legal requirements.
Cons: Unlimited personal liability, limited funding options, and difficulty transferring ownership.
Tax Structure: Pass-through taxation, where business income is reported on the owner’s personal tax return.
Legal Requirements: No formal registration is required, but you may need to file for an Assumed Name (also referred to as a DBA or “Doing Business As”) if using a business name different from your legal name.
Best Suited For: Small businesses with minimal legal risks and owners who prefer complete control.

General Partnership
Pros: Simple to establish, shared decision-making, and broader access to financial resources.
Cons: Unlimited personal liability for partners, potential for partner disagreements, and shared responsibility for partner’s actions.
Tax Structure: Pass-through taxation, where business income is reported on each partner’s personal tax return.
Legal Requirements: No formal registration is required, but a written partnership agreement is highly recommended.
Best Suited For: Small businesses with multiple owners who share a common vision and have a low risk of legal disputes.

Corporation (C Corporation or S Corporation)
Pros: Limited liability for shareholders, easier access to funding, and separate legal identity.
Cons: Complex and costly setup, double taxation (for C Corporations), and extensive record-keeping requirements.
Tax Structure: C Corporations are subject to double taxation (corporate tax and shareholder’s personal tax on dividends), while S Corporations have pass-through taxation with certain restrictions.
Legal Requirements: Register with the Minnesota Secretary of State, create bylaws, issue shares, and hold regular board meetings.
Best Suited For: Medium to large businesses seeking external investment and aiming for long-term growth.

Related: How to register a Minnesota corporation

Limited Liability Company (LLC)
Pros: Limited liability for members, flexibility in management structure, and pass-through taxation.
Cons: Complex setup compared to sole proprietorship or partnership, and potential state-level tax complications.
Tax Structure: Pass-through taxation, where business income is reported on each member’s personal tax return.
Legal Requirements: Register with the Minnesota Secretary of State and Regulatory Affairs and create an Operating Agreement.
Best Suited For: Businesses that desire the liability protection of a corporation with the tax benefits and flexibility of a partnership.

Related: How to form an LLC in Minnesota 

Launching a new business in Minnesota requires entrepreneurs to comply with various business licenses, registration requirements, and permits, depending on their industry. For instance, restaurants will need a food license from the Department of Health, businesses selling goods and certain services within Minnesota will need to register for a Tax ID Number with the Minnesota Department of Revenue, and businesses hiring employees will need to apply for an Employer Identification Number with the Internal Revenue Service.

Related: What business licenses and permits are needed in Minnesota?

Keeping your business and personal finances separate is an important step for any business. A few reasons to separate personal and business funds include:

Simplified Tax Preparation: Separating your personal and business expenses simplifies tax preparation, making it easier to claim business deductions and comply with IRS regulations.
Accurate Financial Records: Keeping separate accounts enables you to maintain accurate financial records, which is essential for tracking cash flow, creating financial statements, and making informed business decisions.
Personal Asset Protection: In the case of legal disputes or debts, separating personal and business finances helps protect your personal assets from being seized to cover business liabilities.
Professionalism: Having a business bank account enhances your professionalism when dealing with clients, vendors, and potential investors.

In Minnesota, there are a variety of funding options available to support the growth and development of your business, such as:

Conventional Bank Loans
Advantages: Lower interest rates, predictable monthly payments, and various small business loan products tailored to business needs.
Disadvantages: Lengthy application process, collateral requirements, and stringent credit score qualifications.
Eligibility Conditions: Strong credit score and sufficient collateral.
Application Process: Contact a local bank or credit union and submit a loan application, along with supporting documents (e.g., financial statements, tax returns, and a detailed business plan).

Small Business Administration Loan Guarantees
Advantages: Lower down payments, longer repayment terms, and competitive interest rates.
Disadvantages: Lengthy and complex application process and specific eligibility requirements.
Eligibility Conditions: U.S.-based for-profit business, owner equity investment, demonstrated need for financing, and a sound business purpose.
Application Process: Find an SBA-approved lender, complete the SBA loan application form, and submit supporting documentation (e.g., personal financial statement, business financial statements, and projected financial statements).

Microloan Programs
Advantages: Accessible to businesses with limited credit history, smaller loan needs, and flexible repayment terms.
Disadvantages: Higher interest rates and smaller loan amounts compared to traditional loans.
Eligibility Conditions: Start-ups or existing small businesses with limited credit history or collateral.
Application Process: Contact a local microloan provider, such as a Community Development Financial Institution (CDFI) or a non-profit lender, and submit a loan application along with supporting documents (e.g., business plan, financial projections, and personal financial statement).

Investors
Advantages: Access to larger funding amounts, valuable mentorship, and strategic connections.
Disadvantages: Equity dilution, potential loss of control, and a longer due diligence process.
Eligibility Conditions: High-growth potential, scalable business model, and a solid management team.
Application Process: Research and network with potential investors, prepare a compelling pitch deck, and engage in due diligence discussions.

Related: Understanding the different types of business funding

Hiring employees is a complex and often overwhelming process for a new business owner as there are multiple agencies to register with, such as the Minnesota Department of Employment and Economic Development, and the Department of Labor and Industry.

Employers are responsible for reporting new hires, verifying employees are eligible to work in the U.S., income tax withholding, unemployment insurance, unemployment taxes, and payroll withholding taxes, including Social Security and Medicare.

Related: Steps to hiring your first employee in Minnesota

Insurance is crucial to running a successful business, as it helps protect you, your employees, and your company from unforeseen risks and financial losses. Without proper insurance coverage, you risk facing significant costs in case of accidents, lawsuits, or natural disasters, which could jeopardize the sustainability and growth of your business. A few types of insurance policies to consider include:

General Liability Insurance
Protects your business against claims of third-party bodily injury, property damage, and personal or advertising injury.
– Risk of not having it: You could face substantial legal and medical expenses if a customer is injured on your premises or if your business causes damage to someone else’s property.

Workers’ Compensation Insurance
Required by law in Minnesota for businesses with employees, workers’ compensation insurance covers medical expenses and lost wages for work-related injuries or illnesses.
– Risk of not having it: Failure to carry workers’ compensation insurance can result in fines, penalties, and liability for employee medical costs and lost wages.

Property Insurance
Covers damage to your business property, such as buildings, equipment, inventory, and furniture, caused by events like fire, theft, or natural disasters.
– Risk of not having it: Without property insurance, you may face significant costs to repair or replace damaged or stolen property, which could disrupt your operations and negatively impact your bottom line.

Business Interruption Insurance
Provides coverage for lost income and operating expenses when a covered event, such as a fire or natural disaster, forces your business to temporarily close or relocate.
– Risk of not having it: Without business interruption insurance, you may struggle to cover ongoing expenses and payroll during a temporary shutdown, which could threaten your business’s survival.

Related: Types of insurance your business may need

Small business owners in Minnesota have to pay several types of taxes, such as income taxes, sales and use taxes, property taxes, and payroll taxes. Filing taxes accurately and on time is crucial for small business owners in Minnesota. Proper tax filing ensures compliance with state and federal tax regulations, helps avoid penalties and interest, and maintains a positive business reputation.

Fortunately, there are several ways that small business owners can ensure their taxes are filed correctly and on time by using pen & paper, a spreadsheet or software such as QuickBooks, Wave, or Xero.

Related: Setting up accounting for a business