How to Start an S Corp in Minnesota
Minnesota has a lot to offer locals and visitors alike — whether you seek a simple, small-town feel or access to big cities. The “North Star State” consistently ranks among the best places to live and start a business.
If you plan to launch your new venture in Minnesota, you can benefit by forming an S corporation (S corp). Business owners enjoy low taxes, an affordable cost of living, and easy-to-manage administrative processes in Minnesota’s growing economy.
This guide will walk you through the process of forming your Minnesota S corp and provide tips to help you keep it in good standing with the state.
Want to form an S corp elsewhere? Check out our other How to Start an S Corp guides to learn more.
Recommended: If you have at least $60,000 in net earnings, an S corp may offer tax advantages. Let Northwest start your S corp today.
Factors to Consider Before Starting an S Corp in Minnesota
Before forming an S corp, you have to consider the following factors:
- Is an S corporation the best strategy for your business?
- S corporation restrictions
- Are S corp tax advantages right for you?
Is an S Corporation the Best Strategy for Your Business?
For help with choosing the right structure for your business, visit our Choosing a Business Structure guide.
S Corporation Restrictions
S corps have several restrictions, such as being limited to one class of stock and 100 shareholders. Read our What Is an S Corporation guide for full details.
Are S Corp Tax Advantages Right for You?
An S corporation is a tax designation that can be elected by a limited liability company (LLC) or corporation. With an S corp, business owners are considered employees of the company and must receive a reasonable salary. Since all S corps technically have employees, the s corp must run payroll.
In order to benefit from a Minnesota S corp tax designation, your business needs to make enough money to offset payroll expenses. Furthermore, S corps are beneficial for business owners who take large distributions in addition to their salary.
To learn more about the tax advantages of an S corp, read our LLC vs. S corp guide and take a look at our S corp tax calculator.
For a Free Consultation With a Tax Professional
How to Form a Minnesota S Corp
There are two main ways to start an S corp:
- By forming an LLC and electing S corp tax status from the IRS when you request your employee identification number (EIN)
- By forming a corporation and electing S corp status from the IRS
We recommend forming an LLC because it’s simpler and more cost-effective.
Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.
Steps for Forming an LLC and Electing S Corp Status in Minnesota
Starting a Minnesota LLC and electing S corp tax status is easy. You can use our guides to start an LLC with the S corp status yourself, or you can hire a service provider like Northwest to guide you through this process.
There are five basic steps to start an LLC and elect S corp status:
Step 1: Name Your LLC
Step 2: Choose a Registered Agent
Step 3: File the Articles of Organization
Step 4: Create an Operating Agreement
Step 5: Get an EIN and File Form 2553 to Elect S Corp Tax Status
Step 1: Name Your LLC
Choosing a company name is the first and most important step in starting your LLC in Minnesota.
Be sure to choose a name that complies with Minnesota naming requirements and is easily searchable by potential clients.
1. Follow the naming guidelines for a Minnesota LLC:
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Your name must include the phrase “limited liability company” or the abbreviation “LLC.”
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Your name cannot contain the words "corporation" or "incorporated" or abbreviations of either word.
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Your name cannot imply that the LLC is organized for a non-permitted purpose.
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Your name cannot include words that could confuse your LLC with a government agency (FBI, Treasury, State Department, etc.).
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Certain restricted words (e.g. Bank, Attorney, University) may require additional paperwork and a licensed individual to be part of your LLC.
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Your name must be distinguishable from any existing business in the state.
You can also read the Minnesota state statute about LLC naming guidelines for more information.
2. Is the name available in Minnesota? You can use the business entity search on the Minnesota Secretary of State website to see if your desired LLC name is available.
3. Is the URL available? We recommend checking to see if your business name is available as a web domain. Even if you don't plan to create a business website today, you may want to buy the URL in order to prevent others from acquiring it.
Step 2: Choose Your Minnesota Registered Agent
You must elect a registered agent for your Minnesota LLC.
An LLC registered agent will accept legal documents and tax notices on your LLC's behalf. You will list your registered agent when you file your LLC's Articles of Organization.
Many business owners choose to hire a registered agent service. Many of these services will form your LLC for a small fee and include the first year of registered agent services for free.
Step 3: File the Minnesota LLC Articles of Organization
The Minnesota LLC Articles of Organization is used to officially register an LLC.
File Your Minnesota Articles of Organization
OPTION 1: File Online With the Minnesota Secretary of State
File Online- OR -
OPTION 2: File by Mail or in Person
Download FormState Filing Cost: $155 online and in person, $135 by mail, payable to the Secretary of State (Nonrefundable)
Filing Address:
Minnesota Secretary of State — Business Services
Retirement Systems of Minnesota Building
60 Empire Dr., Suite 100
St Paul, MN 55103
Step 4: Create an LLC Operating Agreement
An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.
For more information, read our Minnesota LLC Operating Agreement guide.
Our operating agreement tool is a free resource for business owners.
Step 5: Get an EIN and Complete Form 2553 on the IRS Website
An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business.
EINs are free when you apply directly with the IRS.
Elect S Corp Tax Status
During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.
Visit our Form 2553 Instructions guide for detailed help with completing the form.
This is the form to elect S corp tax status for your LLC:
Ready to start saving on your taxes?
We recommend using a formation service to start your Minnesota S corp for you, so you can focus on the things that matter most - growing you business.
Keep Your Minnesota S Corp Compliant
Once you get your Minnesota S corp up and running, you’ll want to keep your business in good standing by following state laws and guidelines. Minnesota requires businesses to file an annual renewal as well as pay state taxes each year.
Minnesota S Corp Annual Renewal
You must file your annual renewal — also known as an annual report — each year with the Minnesota Secretary of State. The purpose of the annual renewal is to update the state government on any changes to your business’s address or contact information. The state government also uses this information to track state taxes.
Even if your business doesn’t make a profit, you must still file an annual renewal before December 31 every year. The state of Minnesota can dissolve your business if you fail to file on time. While your business may be taxed as an S corp, it’s still technically an LLC, so you should file the same annual renewal that other LLCs file.
Check out our Minnesota Annual Renewal guide for step-by-step filing instructions.
Minnesota S Corp Taxes
S corporations benefit from pass-through taxation, meaning the business’s profits pass-through to S corp owners’ individual tax returns. S corp owners make money from their reasonable salary and distributions, and Minnesota S corp owners will need to pay various taxes.
Federal Self-Employment Taxes
Self-employment taxes cover social security and medicare. The self-employment tax rate is 15.3%, and money you take as salary will be subjected to the self-employment tax. However, distributions are not subjected to this tax.
Federal Income Taxes
Your federal income taxes will depend on your tax bracket, and the cutoffs for individual tax brackets as well as the percent owed will change each year. Both your salary and distributions are subjected to federal income tax.
Minnesota Income Taxes
Minnesota has a graduated state income tax, ranging from 5.35% to 9.85%. Similar to federal income taxes, Minnesota’s income tax rates change based on your individual income bracket.
Compared to other states, Minnesota’s income tax rate is fairly high. While some states have income tax rates that exceed 10%, a handful have no income tax.
Minnesota Tax ID Number & Sales Tax Registration
After you form your business, you’ll likely need to obtain a tax ID number from the Minnesota Department of Revenue. As you fill out the form to obtain your tax ID number, you’ll encounter a prompt to also register for state sales tax. Your Minnesota tax ID number will then serve as your sales tax permit.
Minnesota Sales and Use Tax
Minnesota has a 6.875% state sales tax rate, and many local jurisdictions levy their own sales tax in addition to this. However, Minnesota caps local sales tax rates at 2%.
In Minnesota, sales tax depends on your business’s industry. The Minnesota Department of Revenue provides sales tax industry guides to help business owners understand how sales tax impacts their particular industry.
Additional State Taxes
The Minnesota Department of Revenue lists various miscellaneous taxes businesses may need to pay based on their industry, number of employees, and location. A few examples of these miscellaneous Minnesota taxes include:
- Environmental Taxes and Fees
- Fiduciary Tax
- Gambling Taxes
- Mining and Mineral Taxes
- MinnesotaCare Taxes
- Solar Energy Production Tax
- Wind Energy Production Tax
Visit the Minnesota Department of Revenue website for more information.
Minnesota Local Taxes
Local laws and taxes in Minneapolis differ from those in St. Peter. Regardless of your business’s location in Minnesota, you should familiarize yourself with your local jurisdiction to determine how any local laws may impact your business’s taxes and daily operations.
Start a Minnesota S Corp FAQ
An S corporation (S corp) is a tax designation that an LLC or a corporation can elect.
No. The default taxes for an LLC and taxes for an S corp are not the same.
With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax.
With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.
S corp owners are required to earn a “reasonable” salary, which basically means a fair market rate based on the individual’s qualifications as well as their duties and responsibilities at the company. The purpose of this requirement is to prevent S corp owners from paying themselves an artificially low salary in order to pay less self-employment tax.
A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employee salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.
LLCs and corporations that operate under a “doing business as” (DBA) name can choose the S corp election.
There isn't a one-size-fits-all answer for where you should form your S corp. You'll find the most success and savings by choosing a location that best meets your business’s needs — and that’s likely where you plan to primarily operate.
Given Minnesota’s supportive business climate and abundance of resources to help businesses grow, you can benefit from starting your S corp in this state.
If you already established your business as an LLC in Minnesota, you can update its tax status to the S corp tax designation. The process of setting up your business as an S corp is similar to forming an LLC. You just need to file Form 2553 with the IRS.