Start a Minnesota S Corp

Initiating S corporation status for your business in Minnesota can be a strategic tax move, especially for those looking to optimize their tax outcomes. An S corp, designated under Subchapter S of the Internal Revenue Code, enables profits and losses to flow directly to shareholders, sidestepping the double taxation commonly seen with traditional C corporations. This guide is crafted to demystify the process of adopting S corp status in Minnesota, underlining the tax savings, procedural steps, and essential considerations specific to the state.

For business owners in Minnesota, transitioning a limited liability company (LLC) or a corporation to S corp status can yield substantial tax benefits. Notably, LLCs electing S corp status may see potential savings on self-employment taxes, as this structure allows members to be treated as employees for tax purposes. This guide will explore the pathway to achieving S corp status in Minnesota, focusing on eligibility requirements, necessary documentation, and the impact on your business operations, ensuring you’re well-prepared to capitalize on the tax advantages of this election.

Minnesota S Corp Filing Requirements

For the IRS to accept your application for S corp election, you must meet the filing requirements of the Internal Revenue Code. Specifically, to qualify for S corporation status, an entity must:

• Be a domestic LLC or corporation
• Have no more than 100 shareholders or members (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Only have one class of stock
• Have only allowable shareholders or members, which includes individuals, certain trusts, and estates. The shareholders/members may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

If your business meets these conditions, you can apply for S corp election. 

Considerations for Minnesota S Corp Taxes

In an S corp, the business itself doesn’t usually pay income tax at the federal level, just the individual owners. This is unlike the taxation for a C corp, in which profits are taxed at both the business and personal levels. But what about Minnesota income tax?

If you’ve elected to become an S corporation at the federal level, Minnesota automatically accepts you as an S corp for state income tax purposes. However, S corps, like most business entities in Minnesota, must pay a minimum fee, based on the sum of its Minnesota-sourced property, payroll, and sales. The good news is that (as of this writing in 2023), the fee is $0 if this sum is less than $960,000.

How to Form an S Corp in Minnesota

To get a Minnesota S corp, you’ll need to create either an LLC or a C corporation (the default form of corporation) if you haven’t already done so. Then, you’ll file an election form with the IRS.

Starting a Minnesota LLC

1. Name your Minnesota LLC
2. Appoint a registered agent in Minnesota
3. File Minnesota Articles of Organization
4. Create an operating agreement
5. Apply for an EIN
6. Apply for S Corp status with IRS Form 2553

For more details on all of these steps and more, visit our “Start a Minnesota LLC” page.

Forming a Corporation in Minnesota

1. Name your Maryland corporation
2. Appoint Directors
3. Choose a Maryland Statutory Agent
4. File the Maryland Articles of Incorporation
5. Create Corporate Bylaws
6. Draft a Shareholder Agreement
7. Issue shares of stock
8. Apply for Necessary Business Permits or Licenses
9. File for an EIN and review tax requirements
10. Submit Your Corporation’s First Annual Report
11. Apply for S Corp status with IRS Form 2553

If you’d rather form a Minnesota corporation, there are considerably more steps to follow, including filing Articles of Incorporation. See the instructions on our Minnesota corporation page.

Recommended: Start a South Dakota Corporation

File the form 2553 to apply for S corp election

When your LLC or C corporation formation is accepted by the state, you need to file Form 2553, Election by a Small Business Corporation, with the IRS to get S corp status. 

The IRS requires that you complete and file your Form 2553: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One caveat for LLCs wishing to file as an S corp: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

Note that all of the shareholders or members must sign the consent statement portion of the form. For more information on when and how to file Form 2553, visit the IRS website.

Keeping Your S Corp Compliant

Whether your S corp is an LLC or a corporation, you’ll need to perform certain ongoing tasks to keep them in compliance. Minnesota requires LLCs and corporations to file an annual renewal, known in other states as an annual report. The filing provides the state government with up-to-date information about your business. 

Corporations have additional ongoing compliance requirements. Every corporation doing business in the state must file an annual business activities report with the Department of Revenue.

Unless the bylaws (see bylaws definition) or Articles of Incorporation say otherwise, corporations in Minnesota are also required to hold annual shareholder meetings at a time and place established in the bylaws. Keeping corporate records is another requirement for Minnesota corporations. See Articles of Incorporation definition.

Note that these may not be the only ongoing requirements for your Minnesota S corporation. For example, you may have business licenses and/or permits that need to be renewed regularly.

S Corp for Minnesota LLCs and Corporations: Pros and Cons

Having an S corp election gives a different set of pros and cons for an LLC and Corporations.

Advantages of S Corp Status for LLCs

The pluses of filing as an S corp for an LLC aren’t exactly the same as they are for C corporations. An LLC without S corp election already has pass-through taxation, so the benefits of S corporation election for an LLC come from federal self-employment tax. We’ll explain more.

Social Security and Medicare Taxes 

The members of a normal LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means you pay self-employment tax (Social Security and Medicare, which add up to about 15.3%) on all profits they receive from the LLC. This is double the taxes they’d pay when working for someone else because their employer would pay half of them.

Dividing Salary and Profits

But when the members elect S corp status, they can be compensated by the LLC in two ways, by receiving their share of the profits and by being employed by the LLC. Once they do that, they only pay taxes for Social Security and Medicare on their salary and not the profits they receive. Depending on factors such as how profitable your company is, the savings could add up to a lot. (Note that the members will still pay income and all other applicable taxes on their share of the profits and any other taxable income.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One provision to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $0.11 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable” to the IRS? While the terms aren’t 100% defined, the IRS seems to consider “reasonable” to be something similar to what others in your field are earning for similar work.

Advantages of S Corp Status for C Corporations

For a C corporation, filing as an S corp has these advantages:

Pass-Through Taxation

One major drawback for traditional corporations is what’s known as “double taxation.” When the corporation makes money, the IRS taxes those profits on the business level on a corporation tax return. And when those profits are ‌distributed to the shareholders, they’re taxed a second time on the shareholders’ personal tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation.”

Writing Off Your Losses

Just as company profits pass through to the owners of an S corp, so do the business’s losses. Unlike the shareholders of a C corporation, S corp owners can write off the business’s losses on their personal income statements. 

Qualified Business Income Deduction

Under the terms of the 2017 Tax Cuts and Jobs Act, some S corp owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.” The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details). 

Disadvantages of S Corp Status for LLCs

S corp status can also have drawbacks for LLCs, though:

More Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means additional paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to start. Your taxes will be more complicated, as well.

Stricter Requirements 

S corps have more qualifying conditions than a standard LLC. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have such limitations.

Extra IRS Scrutiny

Because of the “reasonable salary” restrictions, the IRS monitors LLCs filing as S corps more closely to ensure they’re not shortchanging Social Security and Medicare. That could mean a greater chance of being audited.

Disadvantages of S Corp Status for C Corporations

S corporation status also has its downsides for C corps:

One Class of Stock

Corporations can sometimes attract investors by offering preferred stock, but the IRS doesn’t allow this for S corps.

Limited Number of Shareholders

An S corp is limited to 100 shareholders, while a C corporation has no such restriction.

Limited Types of Shareholders

All S corp shareholders must be U.S. citizens, or certain trusts or estates. You also can’t have corporations or partnerships as shareholders. 

More IRS Attention

Because of the extra restrictions on S corps, the IRS watches them more closely to see if they’re in compliance. Thus, your corporation is more likely to get audited.

S Corp Tax Calculator

The S Corporation tax calculator below lets you choose how much to withdraw from your business each year, and how much of it you will take as salary (with the rest being taken as a distribution.) It will then show you how much money you can save in taxes.

Disclaimer: The savings estimate provided by this tool is for informational purposes only and should not be considered financial, tax, or legal advice. Actual savings may vary depending on individual circumstances and other factors. We recommend consulting with a qualified tax or legal professional before making any decisions regarding your business entity. ZenBusiness, Inc. is not responsible for any actions taken based on the information provided by this tool. Use of this tool does not establish any client relationship with ZenBusiness, Inc.

State and Federal Resources

For additional information about how S corps are treated in Minnesota and other important tax info, see the Minnesota Department of Revenue website. The IRS website provides more information on the federal guidelines for S corporations. We recommend having a trusted tax professional by your side. They can guide you through legal and financial challenges so that you can stay in compliance while maximizing your tax savings.

Start a Minnesota LLC with S corp election today

Are you ready to form a Minnesota LLC with S corp status? Our S corp service can help you do that. We also offer other services to help you run and grow your business. Contact us today to see how we can help make your dream business a reality.