---
url: 'https://www.fmjlaw.com/employment-law-considerations-for-non-employees-in-minnesota-including-llc-members-founders-nonprofit-organization-members-etc/'
title: 'Employment Law Considerations for Non-Employees in Minnesota, Including LLC Members, Founders, and Nonprofit Organization Members'
author:
  name: Adam
  url: 'https://www.fmjlaw.com/author/adam-brownfmjlaw-com/'
date: '2026-03-04T23:15:35+00:00'
modified: '2026-03-05T13:56:35+00:00'
type: post
summary: 'Learn how Minnesota employment laws apply to founders, nonprofits, and business owners, and when to seek legal help.'
categories:
  - Article
  - Thought Leadership
tags:
  - employee
  - Employment
  - founder
  - HR
  - independent contractor
  - LLC
  - nonprofit
  - startup
published: true
---

# Employment Law Considerations for Non-Employees in Minnesota, Including LLC Members, Founders, and Nonprofit Organization Members

Many business owners and executives are aware of the distinction between an “employee” or an “independent contractor,” but not everyone working with an organization fits into one of these categories. Under Minnesota employment law, there are other considerations that may apply to members of limited liability companies (LLCs), members of nonprofit organizations, and startup founders, which may fall outside traditional employment classifications and could create significant legal risks involving wage claims, discrimination laws, tax treatment, and shareholder disputes.

## Are LLC Members Considered Employees Under Minnesota Law?

Unless they specifically elect to be taxed as a corporation, LLCs are treated as partnerships by the Internal Revenue Service (“IRS”). And under longstanding IRS guidance, partners cannot be paid as employees. This means that members of an LLC cannot be “employees” of the LLC, even if they hold only a very small number of units, and even if they work full-time for the company. LLC members receive a K-1, not a W-2 or 1099. Technically LLC members are considered owners, not employees or partners. If they receive a regular paycheck in addition to profits that income is sometimes referred to as “guaranteed payments.”

“Profits interests” are a form of incentive equity for executives of LLCs, similar to stock options. Upon the grant of membership interests an executive can no longer be considered an employee, however. Some companies have developed a workaround to avoid this issue by granting profits interests in a holding company that owns the operating LLC for which the executive is actually employed.

Employment law attorneys typically assume that everyone in the workforce is either an employee or independent contractor. Even owners of a corporation, if they also work for the business, typically receive a salary and a W-2 for their efforts and are both a shareholder and an employee. For the reasons described above, however, members of an LLC are not employees. So, consider an executive hired to work full-time on behalf of an LLC as chief operating officer. If she receives a salary plus 100 membership units (or profits interests), she is not an employee. So how do we refer to her? Usually the answer is “service provider.” For example, instead of an employment agreement, she might have a “service provider agreement.” And, she might have non-solicitation restrictions that apply after she stops “providing services” not after termination of “employment.”

Other consequences arise as well. As a non-employee, this executive may not be eligible for certain employee benefits. 401(k) plans may be amended to allow “compensation” under the plan to include “earned income” not just W-2 income. Certain group health plans may not be as flexible when it comes to pre-tax contributions but may allow after-tax contributions. Whether myriad other laws protecting “employees,” such as discrimination laws, whistleblower protection, or payment of wages statutes apply to service providers is an open question to be determined on a case-by-case basis.

## Do Startup Founders Need to Be Paid Under Federal and Minnesota Wage Laws?

When two or more people get together to form a startup company, disputes about compensation sometimes ensue. So-called “founders” often work for many months without compensation in hopes of building sweat equity in what will become a profitable business. But what if one founder becomes impatient and demands compensation for services rendered before the company has begun generating revenue? Owners of at least 20 percent of a company are exempt from minimum wage requirements under the Federal Labor Standards Act (“FLSA”). [USDOL Fact Sheet # 17B](https://www.dol.gov/agencies/whd/fact-sheets/17b-overtime-executive) States:

*Under a special rule for business owners, an employee who owns at least a bona fide 20-percent equity interest in the enterprise in which employed, regardless of the type of business organization (e.g., corporation, partnership, or other), and who is actively engaged in its management, is considered a bona fide exempt executive. The salary level and salary basis requirements do not apply to such business owners.*

(citing 29 CFR § 541.101). In other words, under federal law, an owner of at least 20 percent of a company need not be paid anything. That rule does not apply to state law, however. Under the Minnesota Fair Labor Standards Act, (MFLSA), “any individual employed in a bona fide executive, administrative, or professional capacity” is exempt from minimum wage but must receive a salary. *See* [Minn. Stat. § 177.23, subd. 7(6)](https://www.revisor.mn.gov/statutes/cite/177.23) and [§ 177.24](https://www.revisor.mn.gov/statutes/cite/177.24). The minimum salary requirement to be exempt under state law is low, either $155 or $250 per week. *See* Minnesota Rules sections 5200.0190 and 5200.0200. To be exempt under Minnesota’s “executive” category, however, the individual needs to “manage” other employees, which is often not the case when there are only two founders. In that situation, an administrative exemption may be the best option.

## Can a Minnesota Nonprofit Expel a Member Without Legal Risk?

Nonprofit organizations and associations sometimes feel the need to expel a member. When that happens, the former member may initiate a lawsuit seeking to be reinstated, but these types of claims are usually not successful. See, for example, *[Jensen v Duluth Area YMCA](https://law.justia.com/cases/minnesota/court-of-appeals/2004/opa040807-1116.html)* (Minn. Ct. App. 2004). In that case, the Plaintiff (Jensen), had his YMCA membership terminated after he allegedly shoved some children on the running track. The Minnesota Court of Appeals held that he could not assert a claim for equitable relief under the Minnesota Nonprofit Corporation Act because an action by a member against a non-profit requires “at least 50 members with voting rights or ten percent of the members with voting rights, whichever is less” to join in any claim for equitable relief, such as reinstatement. *See* [Minn. Stat. § 317A.751](https://www.revisor.mn.gov/statutes/cite/317a.751). The Court also affirmed dismissal of a breach of contract claim because Jensen did not have any actual monetary damages.

It is important to note that a Minnesota non-profit corporation may have no members, non-voting members, or voting members. Whether members in non-profit organizations have contractual rights depends on the type of membership structure and the terms of its bylaws. Non-profits should review their bylaws to avoid expensive litigation by expelled members, while allowing some minimal due process.

## Conclusion

Not everyone working in our economy falls into the simple dichotomy of employee or independent contractor. Leaders of nonprofits, LLCs, and startup companies should understand these distinctions so that misunderstandings do not lead to expensive litigation or tax penalties. For example, an organization might need legal assistance when:

- An LLC member is demanding employee benefits

- A founder is asserting unpaid wage claims

- A nonprofit member threatens litigation after expulsion

- The organization is restructuring compensation for executives with profits interests

- The organization needs advice on how to comply with both state and federal wage laws

The attorneys at FMJ Law can help with these and many other scenarios.  Please reach out to [John Ella](https://www.fmjlaw.com/professional/v-john-ella/) or other members of our [HR & Employment](https://www.fmjlaw.com/practice-area/hr-employment/), [Commercial and Employment Litigation](https://www.fmjlaw.com/practice-area/litigation/), and [Business Law](https://www.fmjlaw.com/practice-area/general-corporate-business/) teams.

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