If you can brave the cold, launching a business in Minnesota has many advantages: cosmopolitan cities offering a high quality of life, an abundance of forests and lakes for when you need to escape to nature, and people that are some of the friendliest you’ll find in the country. While the state’s tax rates are above average, the positives outweigh the negatives.
To help you succeed in your venture, we’ve produced this comprehensive step-by-step guide to starting a business in Minnesota. We’ll walk you through some of the most challenging aspects of getting a company off the ground, from drafting a business plan to acquiring the specialty licenses and permits you’ll need to operate legally in the Land of 10,000 Lakes.
Minnesota small business statistics at-a-glance
- 513,118 small businesses are active in Minnesota, which is 99.5% of the state’s total businesses.
- 1.2 million Minnesotans are employed by small businesses, accounting for 47.8% of the state’s workforce.
- The health care and social assistance industry is the leading small business employer industry in the state, followed by accommodation and food services, and manufacturing.
- 83.96% of new entrepreneurs in Minnesota start their businesses by choice rather than out of necessity.
- 77.45% of Minnesota startups are still active after their first year of existence.
- Minnesota startups create 4.24 new jobs on average in their first year.
- The state’s tax climate is not among the most business-friendly, Minnesota placed 45th in Tax Foundation’s 2020 State Business Tax Climate Index.
Starting a business in Minnesota in 12 steps
1. Develop an idea
Every successful business starts with a good idea. Ask yourself these questions:
- Which product or service can your business provide that doesn’t already exist on the market?
- How does your business idea refine an existing product or service?
Determine your personal strengths and interests: developing an idea that suits your personality and positive traits will provide motivation to put in the long hours necessary in addressing the myriad challenges you’ll face in getting your business off the ground.
Figure out how to market your expertise: if your business idea is not something you totally believe in and can sell effectively, it will be much harder to succeed.
2. Do the research
Once you have an idea, it’s time to put it through the wringer and decide if it’s viable in the market. Conduct market research to arrive at answers to these key questions:
- Is there a demand for your product/service in Minnesota?
- Who is your target market?
- Do existing businesses in Minnesota offer a similar product/service?
- What makes your business unique compared to the competition?
Coming up with satisfactory answers may require refinement, or even a total overhaul, of your original idea. Be patient: you’ll only want to proceed with the next steps after determining that a niche exists in the Minnesota market for your business idea.
3. Draft a business plan
Now it’s time to write the blueprint of your business. A great business plan should chart the path of your company from infancy to success while being able to attract investors to provide financing.
Your business plan ought to include the following sections:
- Executive summary – An overview of your business and why it will be successful
- Description of business – Explain the advantages of your business and the problems it solves
- Market research – Provide research on your industry, target market, and potential competitors
- Organization and staff – Detail the nuts and bolts of your business; how it’s structured and who will run it
- Product or service description – State what you are selling or offering
- Marketing plan – Explain your strategy for attracting customers
- Fundraising – The money you’ll need in the next five years to grow your business and how you’ll spend it
- Financial forecast – Data and balance sheets providing a financial forecast for your business
- Appendix – An optional section with supporting and/or requested documents like resumes, letters of reference, permits, etc.
4. Secure funding
Every business needs money to get off the ground. In fact 82% of businesses that fail do so because of a lack of cash flow, U.S. Bank found in a recent study. Your business plan should include a detailed estimate of the funds you’ll need to cover expenses for at least a year, so now it’s time to acquire the money.
If you aren’t wealthy enough to self-fund your business, you can choose from a number of other funding options. These include a loan from the U.S. Small Business Administration, taking out a loan from a commercial bank, launching an equity crowdfunding campaign, or securing funding from an angel investor or venture capitalist group active in Minnesota].
An angel investor is a wealthy individual who invests their personal finances in a startup, typically in the beginning stages, whereas a VC is a group of investors that will fund a business throughout its existence.
Which route you choose depends on the specifics of your business: angel investors typically invest smaller sums to help get a startup off the ground, while VCs invest larger sums of money in exchange for a greater say in the operations of a business. Smaller startups usually opt to pursue funding from angel investors.
Minnesota offers an angel investor tax credit of 25% to investors that make equity investments in startups in high technology, and related fields. Investors are eligible for a maximum credit of $125,000 a person, and residents from outside the state are also eligible. The tax credit provides an incentive for investors to fund local businesses and stimulates activity in the state startup scene.
Minnesota Angel Investors and VCs
- Gopher Angels – A highly active angel group that has invested $15M in 50 Minnesota companies, to date.
- Brightstone Venture Capital – A Minneapolis-based VC firm active since 1985 with a focus on early-stage investment opportunities in the tech and life sciences fields. The firm manages a $100 million dollar venture fund, and initial investments range from $250K to $10 million.
- Stone Arch Capital – A private equity firm based in Minneapolis with a focus on funding early-stage companies throughout the Midwest.
Additional Investor Resources
- AngelList: Minnesota Angel Investors – An exhaustive directory of 4,959 (and counting) investors seeking funding opportunities in Minnesota.
- Venture Lake: Investment – A directory of venture capital firms and other investment resources based in Minnesota.
5. Decide on a legal business entity
The form of business entity you choose will affect many factors going forward. There are 3 main options to decide from:
- Sole proprietorship – The name for running a business by yourself. Legally, you and your business are one and the same, with no separate legal entity for your business. A partnership is legally identical to a sole proprietorship, except that it comprises two or more people.
- Corporation – A complex legal structure that is a separate entity (providing legal protection to owners) from the owner and comprises directors, officers, and shareholders.
- LLC – AKA “Limited Liability Company”, this is a hybrid entity between a sole proprietorship and a corporation that possesses advantages of both. An LLCs provides the liability protection of a corporation, yet isn’t subject to double taxation as the profits go through your personal tax return.
Nowadays, LLCs are the option of choice for small business owners as they are easy to manage and provide the benefits of a corporation while lacking their complex structure. Taxwise, they operate more like a sole proprietorship.
You may want to consult with an attorney to help decide which entity works best for your business.
6. Register your business
By deciding the entity your business will take, you’re ready to take the next step and register your business with the state of Minnesota. This process varies depending on whether you are establishing a sole proprietorship, an LLC, or a corporation.
For sole proprietorships
If you plan to use your given name to do business in Minnesota, no special filings are required. However, the state requires those that use a business name different from their legal name to file a Certificate of Assumed Name.
First, run a search with the Minnesota Secretary of State to confirm that your chosen business name is available in the state. Then, create an account on the SoS to file your Certificate of Assumed Name online. The filing fee is $30. The last step is publishing your Certificate of Assumed Name with a qualified newspaper for two issues in the county where your business is based.
For LLCs and corporations
The law in all 50 states requires those forming either a corporation or LLC to appoint a registered agent to handle process notices and other government correspondence on a business’s behalf. Business owners with a physical address in Minnesota can appoint themselves, however, hiring a professional is inexpensive ($50-$200 a year) and will ensure that documents are properly filed.
Once you assign a registered agent, perform a search to make sure that your chosen business name is available. Then, you can proceed to file the necessary application to form your business in the state, which is different for LLCs and corporations.
Those forming an LLC must file Articles of Organization. This can be done online, in person or through the mail. Filing online costs $155, while filing through the mail costs $135. Afterward, you must renew each year, at no cost.
To form a corporation, you must file Articles of Incorporation. Filing can be done online with the SoS, in-person at the customer counter, or via postal mail. The filing fee is $135 for mailed applications or $155 for online filing. Annual renewal is required once a year, which is free of charge.
7. Acquire federal and state tax IDs
Now you should obtain a Federal Employer Identification Number (EIN), which is like a social security number for a business and allows you to open bank accounts, handle payroll, and file taxes.
Each state has its own laws and taxes regarding businesses. Visit the Minnesota Department of Revenue website for information on taxes and fees that may apply to your business, and instructions on how to pay them.
8. Open business banking and credit accounts
Opening a bank account for your business is crucial because it allows you to separate company assets from your personal assets, and makes filing taxes a lot easier. This is a recommended step, even if you are operating a sole proprietorship.
It’s also a wise idea to obtain a credit card for your business because it will help you isolate business expenses and build up credit for your company, which may help in securing investment in later stages.
Banks operating in Minnesota good for small businesses
9. Get the necessary licenses and permits
Depending on the type of business you are opening, you may need to apply for a number of permits and licenses to operate legally. For example, a restaurant will need a liquor license, and a pawn shop will need a reseller’s license. The paperwork may prove a hassle, but it’s a necessary ordeal that will protect you from fines, lawsuits, and other legal hazards.
The Minnesota state government hosts a page with information that’ll help you determine which licenses, permits, or certifications you’ll need to operate legally in the state. You can also search for licenses by topic at the Minnesota E-licensing portal.
10. Choose a location
Whether you are running an online business or opening a restaurant, location is everything. Be aware of the demographics of the neighborhood or town that you are considering: Are the local residents likely to visit your business? Will nearby competitors take a share of your potential profits?
The Twin Cities of St. Paul and Minneapolis and surrounding communities offer the best environment in the state for entrepreneurs to start a new business, boasting low unemployment and a well-educated populace with over 50% of residents having a degree from a higher learning institution.
As home to the Mayo Clinic and an IBM campus, Rochester, the largest Minnesota city outside the Twin Cities area, is a great destination for those launching a startup in the health care or biotech fields.
11. Get insured
No matter what type of business you form, buying insurance coverage to protect yourself in the case of property damage or legal action is a good idea. In fact, businesses with employees are required by the federal government to have two types of insurance, while others are strongly encouraged, or required at the state level, depending on your business type. Consult with a licensed insurance agent to find out which types of insurance you should get.
Required forms of insurance:
- Workers’ compensation: Covers medical costs and disability benefits if an employee is injured or becomes ill on the job.
- Unemployment insurance: Provides benefits to workers after a loss of job through no personal fault.
Recommended forms of insurance:
- Professional liability insurance: Covers losses as a result of property damage, medical expenses, libel, slander, and negligence claims.
- Commercial property insurance: Covers property damage to business owned properties and possessions as a result of fire, theft, or storm.
- Disability insurance: Provides short-term benefits for employees suffering an illness or injury. Required in certain states such as California, New York, and Hawaii.
12. Develop an internet presence
Establishing an identity on the web is an important investment in a business’s future development. Here are some key steps in the process:
- Register a domain name for a company website (You can use domain.com, Bluehost, GoDaddy.com, Namecheap.com). Design the website and fill it with content.
- Create profiles on the popular social media services (Twitter, Facebook, Instagram)
- Register a Google profile for your business
- Create accounts on review sites such as Yelp, Google Reviews, and TripAdvisor
Minnesota small business resources
- Minnesota Secretary of State: Start a Business – Register or renew your business with the state.
- Minnesota Department of Revenue: Businesses – Read up on the state taxes that may apply to your business, register for a Minnesota tax ID number, and file taxes online.
- Minnesota E-licensing – Search state licenses by topic or agency and get connected to the agencies that issue them.
- Minnesota Small Business Development Center – A statewide organization that offers free consulting to Minnesota small business owners
- The University of St. Thomas Small Business Development Center – Another SBDC affiliated with the University of St. Thomas and located in the Twin Cities.
- MinneInno – An excellent source of news regarding the Twin Cities startup scene.
- Greater MSP – Get hard facts about living and doing business in the Minneapolis/St. Paul region
- SCORE Minneapolis – The Minneapolis chapter of the nation’s leading business mentorship organization.
- Treehouse Health – A Minneapolis-based incubator dedicated to boosting startups in healthcare and related fields. Accepted applicants are granted office space and a small investment in their company.
- Mayo Clinic Business Accelerator – An accelerator/incubator program founded jointly by the city of Rochester and the Mayo Clinic. Offers affordable office and co-working space, along with consulting services.