How to Start an S-Corporation in Minnesota (2024 Guide)

Start an S-Corporation in Minnesota

If you want to start an LLC in Minnesota, there are things that you should consider. Minnesota is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Minnesota, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Minnesota if qualified for the limitations and requirements.

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How to Form an S-Corporation in Minnesota?

To create S-Corp in Minnesota, you must follow the below guidelines that include forming a business name, hiring a Registered Agent, filing your Articles of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Minnesota

After you have decided on the idea to start an S-Corp in Minnesota, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Minnesota Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Minnesota.
  • Limit of restricted words that need a license in Minnesota
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Registered Agent

The next step in starting an S-corp in Minnesota is hiring a Registered Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Registered Agent in Minnesota.

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Step 3: File For Articles of Organization

The Articles of Organization is an important document to start your limited liability company (LLC). Minnesota Articles of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Articles of Organization to be filed in MS Secretary of State, you need to pay a filing fee of $135. In Minnesota, the filing fee of forming an LLC is $155 (online and $135 by mail or in-person).

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Step 4: Creating an Operating Agreement

After you have filed your Articles of Organization, the next step is to create an operating agreement in Minnesota. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Minnesota can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

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Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Articles of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Minnesota, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Ogden, UT 84201 Fax: 855-214-7520 .

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Minnesota, including:

  1. Filing Fees: When forming a corporation in Minnesota, you must file Articles of Incorporation with the Minnesota Secretary of State and pay a filing fee of $155 for filing online and in-person, and $135 for filing by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Minnesota are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Minnesota General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Minnesota are subject to the annual franchise tax, which can financially burden some businesses.

In an Minnesota S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Minnesota franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-Corporation in Minnesota?
It is a type of business structure that allows corporate income, deductions, and credits to be passed through to individual shareholders for federal tax purposes.
How do I form an S-Corporation in Minnesota?
To form an S-Corporation in Minnesota, you need to file Articles of Incorporation form with the Secretary of State and obtain approval from the Minnesota Department of Revenue for S-Corp status.
Can anyone form an S-Corporation in Minnesota?
No, only U.S. citizens and permanent legal residents can form an S-Corporation in Minnesota.
How many shareholders are allowed in an S-Corporation in Minnesota?
Minnesota law allows for no more than 100 shareholders in an S-Corporation.
What is the liability protection of an S-Corporation in Minnesota?
In Minnesota, an S-Corporation offers liability protection to its shareholders to a certain extent.
How do I pay myself from an S-Corporation in Minnesota?
Minnesota S-Corporation shareholders must pay themselves reasonable salaries that are subject to Social Security and Medicare taxes. Any profits remaining after salary payments can be distributed to shareholders as dividends.
How do I choose a business name for my S-Corporation in Minnesota?
Minnesota law requires that every S-Corporation have a unique business name. You can check on availability through the Minnesota Secretary of State’s online database.
Is it mandatory to have a physical address when forming an S-Corporation in Minnesota?
Yes, a physical address is required when registering an S-Corporation in Minnesota.
Can I change the business address of my S-Corporation in Minnesota?
Yes, you can change the business address of your S-Corporation in Minnesota by filing the appropriate form with the Secretary of State.
Do I need to register my S-Corporation in Minnesota with the Minnesota Department of Revenue for tax purposes?
Yes, all S-Corporations in Minnesota must register with the Minnesota Department of Revenue.
What are the tax requirements for S-Corporations in Minnesota?
S-Corporations in Minnesota are subject to state corporate income tax and sales tax, if applicable. Shareholders are also responsible for reporting their share of operating profits and losses on their Minnesota personal income tax returns.
Do S-Corporations need to file annual reports in Minnesota?
In Minnesota, S-Corporations are not required to file annual reports with the Secretary of State.
Can an S-Corporation in Minnesota have a single shareholder?
Yes, a Minnesota S-Corporation can have a single shareholder, but it cannot exceed 100 shareholders in total.
Can an LLC convert to an S-Corporation in Minnesota?
Yes, an LLC can convert to an S-Corporation in Minnesota by filing the appropriate form with the Secretary of State.
Can an S-Corporation in Minnesota be owned by another S-Corporation?
No, an S-Corporation in Minnesota cannot be owned by another corporation
What is the process for dissolving an S-Corporation in Minnesota?
The process for dissolving an S-Corporation in Minnesota involves filing a Certificate of Dissolution with the Secretary of State and acquiring proper tax clearance from the Department of Revenue.
Can an out-of-state corporation become an S-Corporation in Minnesota?
Yes, an out-of-state corporation can become an S-Corporation in Minnesota.
Do Minnesota S-Corporations have to pay franchise tax?
Yes, Minnesota S-Corporations are required to pay franchise tax.
Can a Minnesota S-Corporation issue multiple classes of stock?
No, a Minnesota S-Corporation can only issue one class of stock.
Is there a specific structure required for Minnesota S-Corporations?
No, there are no specific structure requirements for S-Corporations in Minnesota.
What are the annual fees associated with establishing an S-Corporation in Minnesota?
The one-time filing fee for a Minnesota S-Corporation is $135 Fee but, S-Corporations are not subject to an annual franchise tax.
Who regulates S-Corporations in Minnesota?
S-Corporations in Minnesota are primarily regulated by the Minnesota Secretary of State and the Minnesota Department of Revenue.
What is the shareholder range for distributing profits in a Minnesota S-Corporation?
Profits in a Minnesota S-Corporation are distributed to shareholders based on their ownership percentage.
How do I confirm if a business name is available for my S-Corporation in Minnesota?
You can lookup available Minnesota business names on the Minnesota Secretary of State website.
Can I establish an S-Corporation in Minnesota as a sole proprietor?
No, an S-Corporation requires at least 2 members.
How much does it cost to form an S-Corporation in Minnesota?
To form an S-Corporation in Minnesota, there’s a $135 filing fee.
What is the benefit of owning an S-Corporation in Minnesota?
The primary advantages of owning an S-Corporation in Minnesota include limited liability protection and pass-through taxation.
Can anyone incorporate in Minnesota?
No, corporations in Minnesota may only be formed by individuals or organizations that meet Minnesota’s residency requirements.
What are the requirements for starting an S-Corporation in Minnesota?
You must first file articles of incorporation with the Minnesota Secretary of State and then meet additional state and federal requirements to qualify for S-Corporation status.
What is the cost to start an S-Corporation in Minnesota?
The filing fee for articles of incorporation in Minnesota is $135, but you may also incur other costs for legal or professional services.
How long does it take to start an S-Corporation in Minnesota?
It can take several weeks for the Minnesota Secretary of State to process your articles of incorporation and for the IRS to approve your S-Corporation election, so it’s best to plan ahead.
Do I need to have a registered agent in Minnesota to start an S-Corporation?
Yes, you must appoint a registered agent that has a physical address in Minnesota for service-of-process purposes.
Can a non-resident of Minnesota form an S-Corporation in the state?
Yes, as long as you meet the requirements for forming a Minnesota corporation and appoint a registered agent with an address in the state.
Is there a minimum investment amount required to start an S-Corporation in Minnesota?
No, there is no minimum investment amount required to start a corporation in Minnesota.
Do all shareholders have to be Minnesota residents to start an S-Corporation in the state?
No, it is not required for all shareholders to be Minnesota residents to form an S-Corporation in the state.
Are S-Corporations required to file state taxes in Minnesota?
Yes, S-Corporations in Minnesota are required to file state taxes, in addition to federal income taxes.
Are there any tax advantages to forming an S-Corporation in Minnesota?
Yes, S-Corporations may provide tax advantages, such as allowing shareholders to pass through losses to their personal income taxes.
Can S-Corporations in Minnesota have different classes of stock?
Yes, S-Corporations in Minnesota may have different classes of stock, but each class must have the same voting rights.
Is a board of directors required for an S-Corporation in Minnesota?
Yes, Minnesota S-Corporations are required to have a board of directors, even if the corporation only has one shareholder.
Is there a minimum age requirement to serve as a shareholder or director in a Minnesota S-Corporation?
No, there is no minimum age requirement to serve as a shareholder or director in a Minnesota S-Corporation.
Are there any residency or citizenship requirements for serving as a director or officer in a Minnesota S-Corporation?
No, there are no residency or citizenship requirements for serving as a director or officer in a Minnesota S-Corporation.
Do S-Corporations in Minnesota have to hold annual meetings?
Yes, Minnesota S-Corporations are required to hold annual meetings of shareholders and directors.
Are S-Corporations in Minnesota required to obtain a business license or permit?
Yes, S-Corporations in Minnesota are required to obtain any necessary business license or permit for their specific industry.
How do I obtain an S-Corporation tax ID number (EIN) in Minnesota?
You can obtain a tax ID number (EIN) for your Minnesota S-Corporation by applying online with the IRS.
What is the liability protection for shareholders in a Minnesota S-Corporation?
Shareholders in a Minnesota S-Corporation typically have limited liability protection, meaning that they are not personally liable for the debts or obligations of the corporation.
Can an S-Corporation in Minnesota change their tax status after formation?
Yes, an S-Corporation in Minnesota can revoke their S-Corporation election and convert to a C-Corporation at any time.
What is the difference between an LLC and an S-Corporation in Minnesota?
Both LLCs and S-Corporations provide liability protection for owners, but S-Corporations are taxed differently and have strict ownership and management requirements.
Can I change the name of my Minnesota S-Corporation after formation?
Yes, you can change the name of your Minnesota S-Corporation by filing articles of amendment with the Minnesota Secretary of State.
Are S-Corporations in Minnesota required to file an annual report?
Yes, S-Corporations in Minnesota are required to file an annual renewal with the Secretary of State and pay a fee.
What is a dissolution agreement for a Minnesota S-Corporation?
A dissolution agreement outlines the procedure for closing and dissolving a Minnesota S-Corporation and dividing assets among shareholders.
Can a Minnesota S-Corporation be converted to another type of entity?
Yes, a Minnesota S-Corporation can be converted to a different entity type, such as a C-Corporation or LLC, by filing the appropriate paperwork with the Secretary of State.
Can I merge my Minnesota S-Corporation with another entity?
Yes, a Minnesota S-Corporation can merge with another entity as long as all legal requirements are met and the plan is approved by the board and shareholders.
Are there any potential drawbacks to forming an S-Corporation in Minnesota?
S-Corporations may have more restrictions and requirements compared to other entity types, such as limitations on the number of shareholders and classes of stock.
Do I need to hire a lawyer to start an S-Corporation in Minnesota?
It is not required to hire a lawyer, but it may be helpful to consult with a legal professional to ensure compliance with state and federal laws.
Can I elect S-Corporation status for an existing corporation in Minnesota?
Yes, existing corporations in Minnesota can elect S-Corporation status by filing Form 2553 with the IRS.
What are the ongoing compliance requirements for S-Corporations in Minnesota?
Ongoing compliance requirements include filing annual tax returns, holding annual meetings, and complying with state and federal regulatory requirements.

Also Read

Why You Should Start Minnesota S Corp

One of the key benefits of forming a Minnesota S Corporation is the tax advantages it offers. Unlike a traditional C Corp, an S Corp is considered a pass-through entity. This means that the company’s profits and losses are passed through to the shareholders’ personal tax returns. In essence, this can lead to potential tax savings as the company itself does not pay federal income taxes.

Additionally, S Corporations in Minnesota offer flexibility in terms of profit distribution. Owners have the ability to take a reasonable salary and then distribute the remaining profits as dividends. This can result in potential tax savings as the salary is subject to normal income tax rates while the dividends are taxed at a lower rate.

Moreover, forming an S Corp in Minnesota can help protect your personal assets. By creating a separate legal entity, you limit your personal liability for the business’s debts and obligations. This can provide a layer of protection for your personal assets in the event of a lawsuit or bankruptcy.

In addition, an S Corporation in Minnesota can also enhance your credibility and professionalism. Having the designation of an S Corp can signal to potential customers, partners, and investors that your business is serious and committed to long-term success. It can also help attract top talent who may feel more secure working for a company with structured governance and legal protection.

Furthermore, forming an S Corporation in Minnesota can make it easier to raise capital. S Corps are allowed to have up to 100 shareholders, which can make it easier to bring on investors and raise funds for growth. Additionally, the structured governance of an S Corp can help build trust with potential investors, making it more likely for them to invest in your business.

Overall, starting a Minnesota S Corporation can offer a range of benefits for entrepreneurs looking to grow and protect their businesses. From tax advantages to liability protection, an S Corp can provide greater flexibility and credibility that can help take your business to the next level. Considering the potential benefits, forming an S Corp in Minnesota may be a smart strategic move for any business owner looking to maximize their success.

Conclusion

Forming an S-Corporation in Minnesota can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

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