LLC vs S-Corp | What Entrepreneurs Need to Know in Minnesota

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LLC vs S-Corp in Minnesota

When starting a small business in the Minnesota, one of the most important decisions you’ll make is choosing the right legal structure. Two popular options for small businesses are electing for S Corporation (S-Corp) or forming an LLC in Minnesota. Both offer certain advantages and drawbacks, making it crucial to understand their differences and determine the best fit for your business. 

If you want to know more about LLC vs. S-Corporation, which is better and suitable for the business you will form, you should consider a few things. Before we get through this article, you should understand LLC vs. S-Corporation in Minnesota. 

Webinarcare Editorial Team will help you define and understand the difference, and you must be guided by all the factors gathered in this article.

LLC Vs. S-Corporation in Minnesota

LLC vs. S-Corporation: Definition

A limited liability company is a type of business structure that guards against the impact of business liabilities on your personal assets. However, while not a typical business structure, the S Corp is a tax status you can register with the IRS. Unlike an LLC, an S-Corp does not offer personal asset protection. The two are explained in detail here:

What is an LLC in Minnesota?

A legal corporate organization that protects personal assets is a limited liability company (LLC). With this setup, the LLC member or owner can protect their personal assets if their company faces financial difficulties or becomes the subject of legal action. In some unique circumstances, the opposing party may pursue your personal assets if your firm is sued in court. When you are held personally accountable for the company’s debt, this is called “piercing the corporate veil.”

By creating an LLC in your state, you can take advantage of the pass-through tax benefit, which means that your personal income will be used to determine your income tax obligations rather than the revenue generated by your firm. 

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What is an S-Corp in Minnesota?

Unlike a limited liability company (LLC) or other business structures, Minnesota S-Corporation is not a type of corporate entity. It’s a tax classification that, though in various ways for corporations and LLCs, might lead to considerable financial savings. S-Corporations are similar to LLCs, except that the Internal Revenue Service recognizes them as corporations for taxation purposes. 

A well-known alternative to the LLC is the S-corp. In contrast to a traditional C-corp, an S-corp is better suited for small and medium-sized firms, such as those with 100 total stockholders. 

LLC Vs. S-Corporation in Minnesota

Creating a business in Minnesota requires careful consideration, especially when deciding whether a state LLC or an S-Corporation is more advantageous. An LLC is a legal corporate structure, but an S-Corporation is a tax categorization which some small firms are eligible for. Forming Minnesota Corporations and LLCs can elect S-Corporation taxation by filing paperwork with the Internal Revenue Service (IRS). Making an S-Corporation may be less formal than establishing an LLC, and it typically offers less security. Additionally, S-Corporation in Minnesota does not offer the same safeguards that business owners seek in an LLC. When starting a business, thinking about your alternatives from a legal and tax perspective is important.

It is suggested that you speak with a legal professional before you begin setting up an LLC. They’ll understand what’s best for you and your company. To safeguard your personal assets from business debts, you can always start an LLC in Minnesota.

– WEBINARCARE EDITORIAL TEAM

Tax Difference Between LLC and S-Corp in Minnesota

There is a distinction between an LLC and an S-Corporation regarding taxation. Based on the differences in Federal and State taxes, you can determine whether S-Corporation or LLC in Minnesota is best for your business.

Federal Taxes 

There are a few federal tax factors to consider when selecting whether to operate an LLC or S-Corporation in Minnesota. Tax differs in terms of Pass-Through Taxes and Self-Employment Taxes.

  • Pass-Through Taxes: LLC and S-Corporation in Minnesota are the same regarding pass-through taxation at the federal level. LLCs and S-Corporations do not pay federal income taxes as separate legal entities because of pass-through taxation. Only their owners must pay federal income taxes on their portions of the business income. The company does not pay twice the tax in this kind of taxation. Unlike LLCs and S-Corporations, C-Corporations in Minnesota are mandated to have double taxation. It means that they must pay federal taxes at the entity level.
  • Self-Employment Taxes: Most LLC owners choose S-corporation taxation in Minnesota to reduce their self-employment taxes. This is because if you own an S-corporation, you are not required to be self-employed. Instead, you can join the company as an employee and receive regular salary benefits. On the other hand, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings in calculating their self-employment tax. Distribution of shares defines S-Corporation shareholders in terms of their corporate incomes. 

Consider the following scenario: you are the sole owner of an LLC in Minnesota with a $200,000 annual profit. And $150,000 is a fair wage in your area for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $200,000 profit. However, if your business is taxed as a state S-corp, you must only pay payroll taxes on the standard wage of $150,000. The remaining $50,000 will still be subject to income tax.

Minnesota State Taxes

At the state level, there aren’t any significant tax differences between regular LLCs and S Corporation LLCs. In terms of the annual LLC fee in Minnesota, it costs $0, which can be paid to the MS Secretary of State. Of course, before forming the whole LLC, you must pay the initial fee of $155 (online and $135 by mail or in-person) to the Minnesota Secretary of State.

LLC Vs. S-Corp Ownership Comparison

LLCs and S-Corporations in Minnesota have different ownership requirements that can impact your choice of business structure. Here’s a comparison of the key ownership requirements for each structure:

1. Number of Owners

Minnesota LLC: An LLC can have any number of owners, called members, from starting Minnesota Single Member LLC to multiple members LLC. There is no upper limit on the number of members an LLC can have.

Minnesota S-Corporation: An S-Corporation is limited to a maximum of 100 shareholders (owners). This restriction can be a limiting factor for businesses that plan to have many owners or seek outside investment.

2. Type of Owners

Minnesota LLC: An LLC can have various owner types, including individuals, corporations, other LLCs, trusts, and estates. Non-resident aliens can also be members of an LLC, like forming a Foreign LLC in Minnesota.

Minnesota S-Corporation: S-Corporations have more restrictive ownership requirements. Only U.S. citizens and resident aliens can be shareholders of an S-Corporation. Additionally, other corporations, LLCs, and certain types of trusts and estates are not eligible to be S-Corporation shareholders.

3. Classes of Ownership

Minnesota LLC: An LLC offers flexibility regarding ownership classes. Members can have varying levels of management rights, profit distribution rights, and voting rights, creating different classes of membership interests.

Minnesota S-Corporation: S-Corporations are limited to only one class of stock. While shareholders’ voting rights may differ, all shareholders must have equal rights to profit distribution and liquidation proceeds.

4. Profit Distribution

Minnesota LLC: Profit distribution in an LLC is flexible, allowing members to allocate profits and losses in any proportion they choose. This can be outlined in the Minnesota Operating Agreement.

Minnesota S-Corporation: Profits and losses in an S-Corporation must be distributed to shareholders based on the percentage of shares each owns. This can be less flexible than the profit distribution options available to an LLC.

Minnesota LLC offers more flexibility in ownership requirements, allowing for a greater variety of owner types, multiple classes of membership interests, and flexible profit distribution. In contrast, an S-Corporation has more restrictive ownership requirements, limiting the number and type of shareholders, allowing only one class of stock, and requiring proportional profit distribution based on share ownership. Consider these differences when deciding which business structure best fits your needs and goals.

Which is easier to incorporate in Minnesota: LLC or S-Corp?

Filing an LLC or S-Corporation in Minnesota requires planning and time. Even though it is not as simple as it appears, something manageable keeps it from being too difficult. LLC and S-Corporations can be formed using Registered Agent. To establish an LLC in Minnesota, you must submit the Articles of Organization to the Minnesota Secretary of State. Your Articles of Organization must include information about your Minnesota LLC, as well as payment of the associated filing fee.

Furthermore, you must submit additional papers to make the Minnesota S-Corporation election. Fill out Form 8832 to notify the Internal Revenue Service that you prefer to tax your LLC as a corporation rather than a partnership. Then you’ll submit Form 2553 to select S-Corporation status.

Remember that you must file annual tax returns and reports after forming your LLC to remain legally compliant.

Who Pays More Taxes in Minnesota: LLC or S-Corp?

Taxes for LLCs and S-Corporations in Minnesota depend on the tax purposes and the profit generated. LLCs are typically taxed at personal rates, and LLC owners can be treated as separate companies with their own federal tax identification numbers. You can check the Minnesota LLC Cost for detailed information.

Minnesota S-Corporation owners, on the other hand, must be paid a salary that includes Social Security and Medicare taxes. On the other hand, the owner can receive dividend income or some of the leftover profits without being classified as an employee and thus will not be subject to Social Security and Medicare taxes on that money.

Should I Incorporate Minnesota LLC as an S-Corporation?

Forming an LLC may be advantageous because your business assets are separate from your personal assets if you are a sole proprietor. You are not restricted from converting your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and follow more regulations, it is ideal for larger companies with more shareholders.

How do you convert LLC to S-Corporation in Minnesota?

You must submit Form 2553, Election by a Small Business Corporation, to the IRS to elect S-corp taxes if you want to form an LLC as an S-Corporation in Minnesota. A Form 2553 must be submitted by 75 days following the creation of your S-Corp or by 75 days following the start of the tax year in which the election is to be effective. 

You must also submit Form 8832, Entity Classification Election if your LLS-Corp has passed the deadline of 75 days and you wish to elect to be taxed as a corporation. You would collectively transmit Forms 2553 and 8832 via certified mail from the USPS. You can send your Form 2553 to the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520​ in Minnesota.

FAQs

What is the difference between an LLC and an S-corp in Minnesota?
An LLC is a type of structure that combines the liability protection of a corporation with the tax flexibility of a partnership, while an S-corp is a corporation that elects to be taxed like a partnership.
Is it better to form an LLC or an S-corp in Minnesota?
The best choice ultimately depends on your unique business needs, goals, and priorities. Consult with a legal or financial advisor to determine the best structure for your business.
What are the advantages of forming an LLC in Minnesota?
Advantages include limited liability protection, simplified management structures, pass-through taxation, and flexibility in ownership and management.
What are the advantages of forming an S-corp in Minnesota?
Advantages include limited liability protection, pass-through taxation, and increased credibility when dealing with customers, suppliers, and investors.
Can non-residents form an LLC or an S-corp in Minnesota?
Yes, non-residents can form both LLCs and S-corps in Minnesota, but they must comply with the state’s business laws and tax regulations.
What are the residency requirements for owners and managers of Minnesota LLCs and S-corps?
There are no residency requirements for owners or managers of either LLCs or S-corps in Minnesota.
How do I form an LLC or an S-corp in Minnesota?
To form an LLC in Minnesota, you must file articles of organization with the Minnesota Secretary of State. To form an S-corp in Minnesota, you must first form a standard corporation and then file an election form with the IRS.
How much does it cost to form an LLC or an S-corp in Minnesota?
The cost to form an LLC or an S-corp in Minnesota varies depending on the type of business, the state fees, and other factors. You should consult with a legal or financial advisor for a personalized estimate.
Can an LLC or an S-corp be formed online in Minnesota?
Yes, both LLCs and S-corps can be formed online in Minnesota through the Secretary of State’s website.
What legal requirements are there for Minnesota LLCs and S-corps?
LLCs and S-corps in Minnesota must comply with state laws for annual reporting, maintaining records and accounting practices, and complying with state and federal tax regulations.
What kinds of businesses are suitable for forming an LLC or an S-corp in Minnesota?
Both LLCs and S-corps can work for most types of businesses, but there are certain industries and business models that may benefit more from one structure versus the other. It’s important to consult with an advisor to determine the right structure for your specific business.
Can a foreign LLC or an S-corp do business in Minnesota?
Yes, both foreign LLCs and S-corps can do business in Minnesota through the proper registration and compliance procedures.
Can a Minnesota LLC or an S-corp do business in other states?
Yes, a Minnesota LLC or S-corp can do business in other states by registering as a foreign entity in those states.
Can an LLC or an S-corp be dissolved in Minnesota?
Yes, both LLCs and S-corps in Minnesota can be dissolved by filing a certificate of dissolution with the Secretary of State.
Are there specific rules for the names of Minnesota LLCs and S-corps?
Yes, Minnesota has specific naming rules for entities, including selecting a unique and distinguishable name and avoiding misleading or illegal names.
How many owners can an LLC or an S-corp have in Minnesota?
LLCs can have an unlimited number of owners, while S-corps can have no more than 100 shareholders.
Can non-US citizens own an LLC or an S-corp in Minnesota?
Yes, non-US citizens can own both LLCs and S-corps in Minnesota, but they may have additional tax and legal implications to consider.
Are there different tax rules for Minnesota LLCs and S-corps?
Yes, Minnesota LLCs and S-corps have different tax rules and regulations. It’s important to consult with a tax professional for guidance.
Is Minneapolis a good location for forming an LLC or an S-corp in Minnesota?
Minneapolis can be a good location for forming an LLC or an S-corp due to its business-friendly environment, educated workforce, and access to financing options.
Can you add new owners to an LLC or an S-corp in Minnesota?
Yes, both LLCs and S-corps can add new owners through a transfer of membership or stock shares, but there are different rules and requirements for each structure.
Do LLCs and S-corps need to file taxes in Minnesota?
Yes, both LLCs and S-corps must file state income taxes in Minnesota, in addition to federal taxes.
Can Minnesota LLCs and S-corps elect to be taxed as a C-corp?
Yes, both LLCs and S-corps in Minnesota can choose to be taxed as a C-corp for federal tax purposes, but this option may not be suitable for all businesses.
Are Minnesota LLCs and S-corps required to hold annual meetings?
It is recommended that both LLCs and S-corps hold regular meetings to discuss business matters and keep owners and shareholders informed, but it is not a legal requirement in Minnesota.
What is an LLC in Minnesota?
An LLC in Minnesota is a type of business structure that provides limited liability protection to its owners.
What is an S-Corp in Minnesota?
An S-Corp in Minnesota is a type of business structure similar to an LLC that allows income and losses to pass through to shareholders.
Which entity should I choose between an LLC and an S-Corp in Minnesota?
The choice between an LLC and S-Corp in Minnesota depends on several factors such as ownership structure, tax obligations, and management style.
What are the ownership requirements for an LLC in Minnesota?
In Minnesota, an LLC requires at least one member.
What are the ownership requirements for an S-Corp in Minnesota?
In Minnesota, an S-Corp requires one to 100 shareholders.
How is an LLC taxed in Minnesota?
LLCs in Minnesota can be taxed as sole proprietors, partnerships, or corporations.
How is an S-Corp taxed in Minnesota?
S-Corps in Minnesota are not subject to federal income taxes but are responsible for state income taxes.
Are there any formation fees for an LLC in Minnesota?
Yes, there is a $135 fee for forming an LLC in Minnesota.
Are there any formation fees for an S-Corp in Minnesota?
Yes, there is a $135 fee for forming an S-Corp in Minnesota.
What legal requirement do I need to fulfill before starting an LLC in Minnesota?
Before starting an LLC in Minnesota, you need to file articles of organization with the Minnesota Secretary of State.
What legal requirement do I need to fulfill before starting an S-Corp in Minnesota?
Before starting an S-Corp in Minnesota, you need to complete and file a form with the IRS and submit articles of incorporation with the Secretary of State.
What are the annual maintenance requirements for an LLC in Minnesota?
An LLC in Minnesota must file an annual report and pay a $25 fee.
What are the annual maintenance requirements for an S-Corp in Minnesota?
An S-Corp requires an annual meeting of shareholders and board of directors, as well as an annual report filing with the Minnesota Secretary of State.
Can an LLC in Minnesota convert to an S-Corp later?
Yes, an LLC in Minnesota can convert to an S-Corp later if the business meets all the S-Corp qualification requirements.
How many people can be shareholders for an S-Corp in Minnesota?
An S-Corp in Minnesota can have one to 100 shareholders.
Is there a limit on the number of members for an LLC in Minnesota?
There is no limit to the number of members an LLC can have in Minnesota.
Is there a residency requirement to form an LLC or S-Corp in Minnesota?
There is no residency requirement to form an LLC or S-Corp in Minnesota.
Can a non-resident of Minnesota own an LLC or S-Corp in Minnesota?
Yes, a non-resident can own an LLC or S-Corp in Minnesota.
Can an LLC or S-Corp in Minnesota be managed by non-resident members or shareholders?
Yes, an LLC or S-Corp in Minnesota can be managed by non-resident members or shareholders.
Are there any personal liabilities associated with owning an LLC in Minnesota?
Personal liabilities are limited in the case of an LLC in Minnesota.
Are there any personal liabilities associated with owning an S-Corp in Minnesota?
Personal liabilities are limited in the case of an S-Corp in Minnesota.
Can an LLC or S-Corp in Minnesota be treated as a separate legal entity?
Yes, both an LLC and S-Corp in Minnesota can be treated as a separate legal entity.
Can owners put money toward healthcare expenses and plan in an LLC or S-Corp in Minnesota?
Yes, this is possible in both an LLC and S-Corp depending on a few factors from the employer.
Are the organizational documents of LLCs and S-Corps confidential in Minnesota?
The organizational documents of LLCs and S-Corps filed with the Minnesota Secretary of State are public record.
Can an LLC or S-Corp be formed by just one person in Minnesota?
Yes, one person can form both an LLC and S-Corp in Minnesota.
Will new LLCs and S-Corps be given quick approval in Minnesota?
It usually takes seven to ten business days for the state of Minnesota to approve LLCs and S-Corps.
What will happen if an LLC or S-Corp fails in Minnesota?
Liability protection generally depends on the type of issue the business is facing, the mode of operation, and proper legal procedures.
What actions can I take if I want to close my LLC or S-Corp in Minnesota?
If planning on closing your LLC, it needs to be formal and the Minnesota Secretary of State needs to be notified. If dissolving an S-Corp, the Corporation filings must be surrendered to the state, accompanied by the state’s fees.

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Conclusion

Ultimately, choosing an LLC and an S-Corp in Minnesota will depend on your business goals, management preferences, and tax considerations. It’s essential to consult with a legal or financial advisor to determine which structure is best for your business in Minnesota and help you navigate the formation process. Making an informed decision will set your business up for success and ensure you’re well-positioned for growth and profitability.

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