How to Start 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 an 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.

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 not starting a corporation with the S corp tax status because the S corp negates all of the benefits of a corporation.

Recommended: If you have an existing LLC, visit our How to Convert an LLC to S Corp guide.

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.

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:

Once you have your Minnesota S corp up and running, you will want to be sure to keep your business in good standing by following state laws and guidelines. Minnesota requires businesses to file an annual renewal, and you will have to pay Minnesota state taxes each year. 

Minnesota S Corp Annual Renewal

Also known as an annual report, your annual renewal must be filed each year with the Minnesota Secretary of State. The purpose of the annual renewal is to update the state government with any changes to your business’s address or contact information. The state government uses this information to track state taxes. 

Even if your business does not make a profit, you must file an annual report before December 31st of each 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 corporation, your business entity is still technically an LLC, so you should file the same annual report that 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 gradual state income tax ranging from 5.35% to 9.85%. Similarly to the federal income tax, Minnesota’s gradual income tax rate changes based on your individual income bracket. Compared to other states, Minnesota’s income tax rate is fairly high. Some states have income tax rates over 10%, but a handful of states also have income tax rates of 0%. 

Minnesota Tax ID Number & Sales Tax Registration

After you form your business, you will likely need to obtain a Tax ID Number from the Minnesota Department of Revenue. While you are filing out the proper paperwork to obtain your Tax ID Number, you will be prompted 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

The state of Minnesota has a 6.875% state sales tax rate, and many local jurisdictions also levy their own sales tax in addition to this. However, local sales tax rates are capped at 2%. Sales tax looks different based on your industry, and Minnesota’s Department of Revenue has 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 and regulations that your business may be responsible for based on your industry, number of employees, and location.

Below are a few examples of miscellaneous Minnesota taxes:

• Environmental tax
• Fiduciary tax
• Gambling tax
• Mining and mineral tax
• MinnesotaCare tax
• Solar energy production tax
• Wind energy production tax

Check out the Minnesota Department of Revenue website for additional information.

Minnesota Local Taxes

Local laws and taxes in Minneapolis differ from those in St. Paul. No matter where your business is located at within Minnesota, you will want to familiarize yourself with your local jurisdiction and determine how any local laws may impact your business taxes and daily operations.