Start an S Corporation in Minnesota

As a prospective small business owner, you have a laundry list of specific decisions to make. An important one is what type of business entity you form, which impacts how the IRS treats your business. This article digs into what it takes to build an S Corporation in Minnesota and why this may be the right choice regarding the business structure and tax treatment.

S Corporation in Minnesota: Key Takeaways

• An S Corp is a pass-through tax entity, meaning all revenue generated passes to its shareholders. S Corp status means a business doesn’t have to pay corporate tax on its income.

• The state of Minnesota doesn’t require you to undergo any state-level S Corporation election processes, meaning you only need to file with the IRS.

• Minnesota’s franchise tax ties into its corporate tax, meaning it’s charged at a 9.8% rate. As mentioned, this rate applies to all of a C Corp’s business earnings, though it only applies to a limited number of S Corp situations.

What Is an S Corporation?

An S Corp is a pass-through tax entity, meaning all revenue generated passes to its shareholders. S Corp status means a business doesn’t have to pay corporate tax on its income. Only the shareholders pay income tax on the money they receive.

In many ways, this is similar to the limited liability company (LLC) setup. 

The Minnesota government’s Employment and Economic Development[1] website notes that there are many similarities between an S Corporation (S Corp) and a C Corporation (C Corp).

Both require business owners to file Articles of Incorporation with the state, and both need the business entity to maintain a board of directors. They differ in their tax status with the IRS.

Your business pays corporate tax on all its earnings in a traditional C Corp. After that tax gets paid, the company’s income gets spread among its employees, who pay income tax on the money they receive. As a result, the income a C Corp generates is subject to double taxation.

That’s not the case in an S Corp.

The key differences between an S Corp and LLC are explained later in the article, with the main one being the organizational structure behind the tax entity.

Tax Considerations for an S Corporation in Minnesota

As S Corp status is a tax classification rather than a business structure, understanding the tax information related to the status will be helpful. Let’s dive into how taxes apply in the S Corp setup.

Minnesota Tax Treatment of S Corporations

The state of Minnesota has a corporate tax rate of 9.8%, which applies to all income a C Corp generates. Generally, an S Corp doesn’t have to pay this corporate tax on its revenue.

However, there are some cases where an S Corp pays this 9.8% tax, including the following:[2]

• Your business pays the tax on any passive income it generates in Minnesota, subject to federal taxes.

• You pay the 9.8% rate on any capital gains or built-in gains that are subject to federal tax.

• You must pay the 9.8% rate on your current year’s installment of the LIFO recapture tax, which your business pays upon converting from a C Corp to an S Corp.

S Corps may also have to pay a minimum fee, determined by completing Form M8, S Corporation Return,[3] if its payroll, property, and sales total $1.05 million or more for the tax year.

Minnesota Franchise Tax for S Corporations

Minnesota’s franchise tax ties into its corporate tax, meaning it’s charged at a 9.8% rate. As mentioned, this rate applies to all of a C Corp’s business earnings, though it only applies to a limited number of S Corp situations.

Beyond these limited situations, S Corp owners don’t have to pay any franchise tax to operate their businesses.

Pass-Through Taxation

Having mentioned pass-through taxation as one of the main benefits of S Corp status, it’s worth digging into this tax treatment.

The business doesn’t pay any corporate taxes on its revenue in a pass-through entity. Instead, all money the company generates passes through to its owners or shareholders.

These owners or shareholders declare the income on their personal tax returns, thus paying income tax on the money. How much income tax they pay depends on how much they earn from the business. In some cases, such as when you have a single-member LLC, you may also pay self-employment tax alongside your income tax.

The main benefit of having a pass-through entity is avoiding double taxation on your company’s earnings. As such, the owners or shareholders get to keep more of the money their companies earn if they meet the criteria for forming and maintaining an S Corp.

Requirements for Forming an S Corporation in Minnesota

The Minnesota Department of Revenue automatically accepts your company’s application for S Corp status[4] once you’ve been approved for the status by the Internal Revenue Service (IRS). As such, you don’t have to submit any additional forms beyond Form 2553, which goes to the IRS and is covered later in the article.

So, your company only needs to meet the following criteria to become an S Corporation, as defined by the IRS:[5]

• Be a domestic corporation, which means a limited liability company must convert to a corporate business entity to obtain S Corp status.

• Have a maximum of 100 S Corp shareholders.

• Only have allowable shareholders, which include the following:

  • Individuals

  • Estates

  • Some types of trusts

• Only offer a single class of stock to your shareholders.

• Be an eligible corporation, which means the following can’t apply for S Corp status:

  • Insurance companies

  • Domestic International Sales Corporations

  • Some types of financial institutions

Finally, your S Corp can’t accept any other corporations as shareholders, with partnerships and non-resident aliens also being barred from owning shares in an S Corp.

With such complicated requirements, obtaining S Corp status is a challenge. Swyft Filings handles that challenge for you with our fast, efficient, and accurate S Corp filing service.

Filing as an S Corp in Minnesota

So, you’ve decided that you don’t just want to form a Minnesota corporation. You want S Corp status. To obtain that status, follow these six essential steps for creating an S Corporation in Minnesota.

Step 1: Choose a Business Name

Before filing to create a business, you need to choose an appropriate business name. According to the Minnesota Secretary of State, that name needs to be different from any other business name it has on file by at least one letter or numeral.[6]

That gives you a lot of leeway when choosing a business name, as does Minnesota’s laws on “doing business as” (DBA) names. In Minnesota, DBA names are called “assumed names,” and your business may share an assumed name with another company.[7]

You can check for name availability via the Secretary of State’s website, though you must create an online account to do so.[8] If you want to make life easier for yourself when it comes to finding the correct name, Swyft Filings can run a free business name search on your behalf.

Assuming you’ve chosen the name of your S Corporation in Minnesota, you can opt to reserve the name.

Name reservation isn’t required by law. However, it protects your chosen name for up to 12 months, giving you plenty of time to file for business formation.[9]

Finally, it’s a good idea to trademark your name with the state. Having an official trademark makes it easier to contest illegitimate uses of your business name in court because you have a legal document to prove that you own the name.[10]

Step 2: Appoint Directors and a Registered Agent

With your business name chosen (and possibly reserved), it’s time to focus on your S Corp structure. As an S Corp is a type of corporation, you must have S Corp directors in place.

The corporation must have at least one director, who will likely be one of your S Corporation shareholders. Your directors don’t have to live in Minnesota, though they must be at least 18 years old and be named in your Articles of Incorporation.

Once you have at least one director, find a Minnesota registered agent. A registered agent is an individual or business entity that takes responsibility for several issues on your company’s behalf:

• Receiving legal notices, such as service of process and communications from the Secretary of State.

• Maintaining regular business hours to ensure they’re available to receive important documents.

• Keeping a physical street address registered with the Secretary of State.

  • This address cannot be a mailing service or P.O. Box.

All companies wishing to do business in Minnesota must have a registered agent.[11] The state also allows you, or a business member, to serve as your company’s agent.

That may seem like an attractive prospect. Serving as your own registered agent means you save a little money and can control how you receive legal notices. However, there are several issues with acting as your own agent that lead to many business owners choosing a third-party service:

• The need to register an address with the Secretary of State means your business has less privacy.

• You may receive sensitive legal notices during meetings with clients.

• Serving as your own registered agent creates an administrative burden.

• You’re forced to operate under regular business hours, which isn’t always possible for some establishments.

If you want to avoid these drawbacks of serving as your own agent, Swyft Filings offers a registered agent service for businesses in Minnesota. You get access to an online dashboard, where you can find all of your documents and the expertise of a company that understands filing requirements inside and out. 

Step 3: File Articles of Organization

With your name, directors, and registered agent in place, you’re ready to form your business. To do that, you’ll submit one of two forms, depending on whether you want to form an LLC or a C Corporation:

• LLC — Articles of Organization[12]

• C Corp — Articles of Incorporation[13]

In both cases, you’ll pay a filing fee of either $135 to submit the form via mail or $155 to submit it online via the Secretary of State website.

Assuming you wish to submit your forms via mail, address them to the following:

Minnesota Secretary of State — Business Services

Retirement Systems of Minnesota Building

60 Empire Drive, Suite 100

St Paul, MN 55103

The state of Minnesota doesn’t charge a franchise tax, meaning you only need to pay your filing fees to form a business. If the state accepts these forms, you are not approved for S Corp status. That comes later and requires you to submit documents to the IRS.

Upon approval of these forms, you officially have a business. If you’ve formed a Minnesota corporation, you must also submit an annual report, entitled an “Annual Public Benefit Report,” each year. Doing so keeps your business in good standing with the state. It costs between $35 and $55 to file this report.[14]

Step 4: Create an S Corp Operating Agreement

If you’ve created a corporation, your company’s bylaws are outlined as part of its corporate structure. That isn’t the case with an LLC, which means you may want to create an operating agreement, which will carry forward into your S Corp formation.

An operating agreement is a legally binding document that LLC business owners use to outline several elements of their businesses:

• All appropriate company bylaws

• The roles and responsibilities of each LLC member

• Protocols for business dissolution

• A process to follow if an LLC member decides to leave

An LLC doesn’t need an operating agreement to transact in Minnesota, nor is having one a requirement for S Corporation status. However, the agreement offers you more control over how you run your business, making it recommended for most.

Step 5: Apply for an Employer Identification Number

As an individual, you have a Social Security number, which the IRS uses to identify you for income tax purposes. Businesses that employ other people must pay employment taxes, which means the IRS needs a way to identify them just like it identifies individuals.

That’s where an Employer Identification Number (EIN) comes in.

An EIN is a nine-digit code the IRS assigns to businesses with employees. It’s not required to have an EIN if you have no employees in a sole proprietorship or single-member LLC. Nevertheless, it’s still worth applying for one for the following reasons:

• Most banks don’t allow you to open a business bank account without an EIN

• Having an EIN gives your business credibility

• You’re prepared for future business growth, which may include hiring employees

Getting an EIN is straightforward, with the application available via the IRS website. The IRS checks your online application as you complete it, meaning you’ll receive your EIN immediately upon completion.[15]

Step 6: File Form 2553 for S Corporation Election

With every other aspect of forming a business completed, you’re finally ready to file for S Corp status. Thankfully, the state of Minnesota doesn’t require you to undergo any state-level S Corporation election processes, meaning you only need to file with the IRS.

To do that, you must file Form 2553, Election by a Small Business Corporation.[16] This form allows you to name your S Corp’s shareholders and demonstrate that you meet the IRS’s requirements for S Corp formation.

Ideally, you’ll file this form in the tax year before the one in which you want S Corp status. However, the IRS allows you to file up to two months and 15 days into the current tax year, giving you some leeway.

All is not lost if you miss that deadline. If you have an LLC business entity, you can file Form 8832, Entity Classification Election,[17] alongside Form 2553 at any point during the year. Form 8832 allows you to reclassify your LLC as a corporation and file for S Corp status simultaneously.

Minnesota S Corp vs. Minnesota LLC

S Corp status offers plenty of benefits, especially related to tax treatment, over C Corp status. However, those with a limited liability company may wonder if an S Corporation election suits them.

After all, both are pass-through tax entities, meaning there’s less incentive to change for tax purposes. However, several reasons remain to consider S Corp status for a Minnesota LLC, as you’ll see in the following pros and cons of each structure.

Advantages of Starting an LLC in Minnesota

• There’s less paperwork to complete when forming an LLC, with the business ready to go once you’ve submitted your Articles of Organization.

• You have complete control over your membership and business structure with an LLC.

• You can still pass business income (and related taxes) to your LLC members.

Disadvantages of Starting an LLC in Minnesota

• Though an LLC offers some liability protection, a judge can choose to remove that protection in some cases.

• You’ll likely pay higher self-employment taxes with an LLC than an S Corp.

Advantages of Forming an S Corporation in Minnesota

• You get corporation-level liability protection with an S Corp.

• It’s often easier to attract investment with corporate status than it is as an LLC.

• You can draw a salary from an S Corp, meaning you don’t have to pay self-employment tax.

Disadvantages of Forming an S Corporation in Minnesota

• A lot of paperwork is involved in creating an S Corp, along with specific criteria to meet.

• Minnesota S Corps aren’t immune from corporate taxes, though they only apply in certain situations.

Ready to File for S Corp Status in Minnesota?

Entrepreneurs and small business owners can create more favorable tax situations when applying for S Corp status. However, there are also S Corp limitations to consider, which can make it difficult to file.

That’s where Swyft Filings comes in.

In addition to helping business owners create corporations and LLCs, we can help you file for an S Corporation in Minnesota. We handle the paperwork on your behalf, meaning you just need to provide us with the relevant details, and we’ll do the rest.

If you’d like to learn more, contact the Swyft Filings team to talk about setting up your S Corp today.

FAQs

What is an S Corporation in Minnesota?

Minnesota defines an S Corporation as a pass-through tax entity.

Does Minnesota recognize S Corporations?

Yes, Minnesota recognizes S Corps as defined by the IRS.

What is the turnaround time for filing for S Corp status with the IRS?

It can take up to 60 business days for the IRS to accept your application for S Corp status.

What is the difference between an S Corp and an LLC?

There are several differences, particularly regarding organizational structure and tax treatment.

What are the requirements for an S Corporation in Minnesota?

An S Corporation in Minnesota must meet the IRS’s S Corp formation and maintenance guidelines. These include:

• Be a domestic corporation, which means a limited liability company must convert to a corporate business entity to obtain S Corp status.

• Have a maximum of 100 S Corp shareholders.

• Only have allowable shareholders, which include the following:

  • Individuals

  • Estates

  • Some types of trusts

• Only offer a single class of stock to your shareholders.

• Be an eligible corporation, which means the following can’t apply for S Corp status:

  • Insurance companies

  • Domestic International Sales Corporations

  • Some types of financial institutions

Are taxes for LLCs and S Corps the same?

Not always, as LLC owners may have to pay self-employment taxes. Furthermore, S Corps may have to pay corporate tax on some of their incomes.

What is the S Corp tax rate?

S Corp shareholders pay tax at their personal income tax rate on almost all S Corp business income.

How do I dissolve an S Corporation in Minnesota?

To dissolve your Minnesota S corp, you must file Articles of Dissolution with the Secretary of State and close your business account via the Minnesota Department of Revenue.

Bibliography

1. Minnesota Employment and Economic Development. “The Difference Between ‘S’ and ‘C’ Corporations.” Accessed March 27, 2023.

2. Minnesota Department of Revenue. “S Corporation Taxes and Minimum Fee.” Accessed March 27, 2023.

3. Minnesota Department of Revenue. “2021 M8, S Corporation Return.” Accessed March 27, 2023.

4. Minnesota Department of Revenue. “S Corporation Filing Requirements.” Accessed March 27, 2023.

5. Internal Revenue Service. “S Corporations.” Accessed March 27, 2023.

6. Office of the Minnesota Secretary of State. “Start a Business.” Accessed March 27, 2023.

7. Minnesota Employment and Economic Development. “Naming Your Business.” Accessed March 27, 2023.

8. Office of the Minnesota Secretary of State. “How to Check Business Name Availability.” Accessed March 27, 2023.

9. Office of the Minnesota Secretary of State. “Name Reservation.” Accessed March 27, 2023.

10. Office of the Minnesota Secretary of State. “How to Register Trademarks and Service Marks.” Accessed March 27, 2023.

11. Minnesota Legislature. “2022 Minnesota Statutes.” Accessed March 27, 2023.

12. Office of the Minnesota Secretary of State. “Minnesota Limited Liability Company Articles of Organization.” Accessed March 27, 2023.

13. Office of the Minnesota Secretary of State. “Minnesota Business Corporation Articles of Incorporation.” Accessed March 27, 2023.

14. Office of the Minnesota Secretary of State. “Business Filing and Certification Fee Schedule.” Accessed March 27, 2023.

15. Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed March 27, 2023.

16. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed March 27, 2023.

17. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 27, 2023.