LLC vs. S Corp in Minnesota 2024: A Comprehensive Comparison

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LLC vs. S Corp in Minnesota: Understanding the Differences

Embarking on the entrepreneurial journey in Minnesota, also known as The North Star State, is an exciting and transformative experience. Minnesota LLC and S Corporation are two popular options that often top the list of considerations for entrepreneurs. This article serves as your comprehensive guide, comparing LLC vs. S Corp in Minnesota and ultimately assisting you in determining the best fit for you.

Dive into business formation with confidence and clarity as LLCBase expert analysis simplifies the complexities of LLCs and S Corps, shedding light on their unique advantages and drawbacks. So, let’s explore the fascinating world of LLCs and S Corps and set your business on the path to success in Minnesota.

What are an LLC and an S-Corp

A Limited Liability Company (LLC) is a popular legal business structure that offers a combination of benefits from both corporations and partnerships. It is specifically designed to provide personal asset protection to its owners, known as members. This protection ensures that the owner’s personal assets are separate from the business liabilities, such as debts and lawsuits.

In Minnesota, forming an LLC involves several steps, including paying an initial filing fee. Additionally, LLCs in Minnesota are required to pay an annual fee of $0 to maintain their legal status and stay compliant with the state regulations.

An LLC in Minnesota offers an attractive option for entrepreneurs seeking a flexible business structure with added liability protection and favorable tax treatment.

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On the other hand, an S-Corporation, or S-Corp, is not a separate legal business entity like an LLC. Rather, it is a tax classification that existing corporations and LLCs can elect. A business can bypass double taxation by opting for this tax status, as the profits and losses are directly passed through to the owner’s personal tax return. Starting an S Corp in Minnesota  allows business owners to report and pay taxes on their business income as part of their individual income tax filings, eliminating the need for separate corporate taxes.

In Minnesota, it is crucial for business owners considering this tax classification to fully understand the implications and requirements of being an S-Corp in Minnesota. This includes adhering to specific rules and regulations related to ownership, shareholder limits, and tax filing deadlines. If you want to start an S-Corp, LegalZoom will help you every step of the way!

LLCs and S-Corporations Comparison

Let’s explore the comparison between LLCs and S-Corporations to help you make an informed decision.

1. Taxation Differences in Minnesota

One of the main differences between LLCs and S-Corporations in Minnesota lies in how they are taxed. LLCs are typically subject to pass-through taxation, meaning the business profits and losses are reported on the owner’s personal tax return. In contrast, S-Corporations must adhere to specific tax requirements, including distributing salaries to shareholders and adhering to the state’s income tax rate.

  • Federal Taxes: When choosing between an LLC or S-Corporation in Minnesota, it’s essential to consider several federal tax factors. These factors include differences in Pass-Through Taxes and Self-Employment Taxes.
  • Pass-Through Taxes: Both LLCs and S-Corporations in Minnesota benefit from pass-through taxation at the federal level. Due to pass-through taxation, these entities do not pay federal income taxes as separate legal entities. Instead, their owners are required to pay federal income taxes on their share of the business income. This type of taxation prevents the company from being taxed twice. In contrast, C-Corporations in Minnesota are subject to double taxation, meaning they must pay federal taxes at the entity level and their owners’ taxes.
  • Self-Employment Taxes: Many LLC owners in Minnesota opt for S-Corporation taxation to reduce their self-employment taxes. An S-Corporation owner is not considered self-employed; they can become an employee of the company and receive regular salary benefits. Conversely, an LLC member must include their guaranteed payments and a portion of the LLC’s earnings when calculating their self-employment tax. Share distributions determine the corporate income of S-Corporation shareholders. For example, suppose you are the sole owner of an LLC in Minnesota with an annual profit of $150,000 and a fair wage for someone in your location doing the same job as you is $100,000. Under the default LLC taxation, you must pay self-employment taxes on the $150,000 profit. However, if your company is taxed as an S-Corp in Minnesota, you would be responsible for paying payroll taxes only on the $100,000 standard wage. Income tax would still apply to the remaining $50,000.
  • Minnesota State Taxes: No major tax differences exist between regular LLCs and S-Corporation LLCs at the state level. For filing an annual report in Minnesota, it costs $0, which can be paid to the MS Secretary of State. Additionally, before forming the LLC, you must pay $155 (online and $135 by mail or in-person).

On the other hand, if you form an S-Corporation in Minnesota, you will also need to pay taxes. This includes the S-Corp filing fee and an annual report fee after establishing your S-Corp for one year. You must also go to the MS Secretary of State to make these payments.

2. Liability Protection

LLCs and S-Corporations in Minnesota provide liability protection for their owners. This means that the owner’s personal assets are protected from business debts and lawsuits. However, S-Corporation status does not offer the same level of protection as an LLC, as it is primarily a tax designation.

The following factors exclude certain individuals and entities from becoming shareholders in an S-Corporation in Minnesota:

  • Insurance businesses
  • Domestic international sales corporations
  • Partnerships
  • Corporations
  • Unauthorized immigrants
  • Specific financial institutions

While understanding the ownership requirements of LLCs and S-Corporations in Minnesota is essential, seeking legal counsel when establishing your business is still advisable. For assistance with your Minnesota LLC or Minnesota S-Corp, consider consulting with professionals.

3. Ownership Requirements and Restrictions

LLCs and S-Corporations in Minnesota have specific ownership requirements and restrictions. For instance, an LLC can have unlimited members, while an S-Corporation is limited to 100 shareholders. Additionally, S-Corporations can only have one class of stock and must follow strict rules regarding shareholder eligibility.

Easier to File in Minnesota: LLCs or S-Corporations

While filing an LLC or S-Corporation in Minnesota requires time and preparation, proper planning can make the process manageable. Both LLCs and S-Corporations can be filed through the Minnesota Registered Agent.

To start an LLC in Minnesota, you must submit the Articles of Organization to the Minnesota Secretary of State. This document should contain all the necessary information for your LLC, along with the payment of the associated filing fee.

On the other hand, if you want to elect S-Corporation status for your Minnesota LLC, you will need to submit additional paperwork. First, file Form 8832 with the Internal Revenue Service (IRS) to indicate your preference to tax your LLC as a corporation rather than a partnership. Next, submit Form 2553 to choose S-Corporation status.

Remember, maintaining legal compliance is crucial for your LLC. This means submitting annual tax returns and reports after establishing your business entity.

With that, we’ve carefully curated a list of the best LLC services in Minnesota to support and guide you through filing an LLC and S-Corp. Check them out!

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Filing Process for LLCs vs. S-Corporations in Minnesota

Forming an LLC in Minnesota involves several crucial steps. To start, you must file Articles of Organization with the Minnesota Secretary of State and pay the associated filing fee of $155 (online and $135 by mail or in-person). Once your LLC is established, you must comply with annual reporting and tax requirements.

On the other hand, if you want to elect an S-Corporation status for your existing LLC or corporation, the process is slightly different. Firstly, you must file Form 8832 with the Internal Revenue Service (IRS) to classify your LLC as a corporation for tax purposes. Then, you must submit Form 2553 to the IRS to choose S-Corporation status. In Minnesota, the S-Corporation filing fee is $155 for filing online and in-person, and $135 for filing by mail.

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The LLC formation and S-Corporation election processes can be completed through three ways, online, by mail and in-person. Online incorporation is available at Get the online form from Secretary of State, fill it up, and submit. Don’t refresh the page during the process. It will erase everything. , while offline incorporation can be done at Send the form by mail or drop it off in person to Minnesota Secretary of State — Business Services, Retirement Systems of Minnesota Building, 60 Empire Drive, Suite 100, St Paul, MN 55103. . It is essential to stay up-to-date with any ongoing reporting and tax requirements for your chosen business structure.

The filing process for LLCs and S-Corporations in Minnesota varies slightly, with each requiring specific forms and fees. It’s essential to consider the unique requirements of each business structure before making a decision. Consulting with a legal or financial advisor can provide valuable guidance on which structure best suits your business in Minnesota.

FAQs

What is a Limited Liability Company (LLC) and a S Corporation?
A Limited Liability Company (LLC) and an S Corporation are both types of business entity structures.
Are LLCs and S Corporations taxed as individuals or corporations?
Both LLCs and S Corporations are not taxed as corporations, instead they are pass-through entities which means that their income and losses pass through to their individual owners.
Can an LLC or S Corporation have more than one owner?
Yes, both an LLC and an S Corporation can have more than one owner, also known as members for an LLC and shareholders for an S Corporation.
How much does it cost to set up an LLC or an S Corporation in Minnesota?
LLC filing fees in Minnesota are $135 while filing fees for S Corporation are $155.
What is the liability protection for LLCs and S Corporations in Minnesota?
Both LLCs and S Corporations provide limited liability protection to their owners in Minnesota.
Can a non-Minnesota resident own an LLC or S Corporation in Minnesota?
Yes, non-Minnesota residents can own both LLCs and S Corporations in Minnesota as long as they comply with the State’s entity formation requirements.
Is it easier to set up an LLC or S Corporation in Minnesota?
Setting up an LLC is generally considered to be easier than setting up an S Corporation in Minnesota, primarily because LLCs have fewer corporate formalities to follow and less required paperwork.
Does a Minnesota LLC need to have an operating agreement?
Yes, Minnesota requires LLCs to have an operating agreement, as it is the governing document that outlines how the business will be run.
Can an LLC or S Corporation in Minnesota have only one owner?
Yes, an individual can own both an LLC and an S Corporation in Minnesota.
Does a Minnesota S Corporation have limits on the number of shareholders?
Yes, Minnesota S Corporations have a limit of one hundred shareholders.
Can Minnesota S Corporation issues stock?
Yes, a Minnesota S Corporation can issue stock to its shareholders, just like any other corporation.
Can LLCs in Minnesota choose how they are taxed?
Yes, LLCs in Minnesota can choose to be taxed either as a sole proprietor or a corporation.
Is an LLC required to pay state and federal taxes in Minnesota?
Yes, Minnesota LLCs are required to pay state taxes and file state tax returns, just like any other business entity.
Can Minnesota LLCs file as an S Corporation for tax purposes?
Yes, Minnesota LLCs can file as S Corporations for tax purposes, but certain rules must be followed, including the number and identity of the owners.
Can a LLC be set up as a nonprofit in Minnesota?
No, LLCs must have a for-profit purpose and can’t be set up as nonprofits in Minnesota.
Can an S Corporation in Minnesota be owned by a trust?
Yes, an S Corporation in Minnesota can be owned by a trust, but it must be a valid trust in order to be recognized as a shareholder.
Can LLCs in Minnesota hire employees and contractors?
Yes, LLCs in Minnesota can hire employees and contractors to help run their businesses.
Can S Corporations in Minnesota hire employees and contractors?
Yes, S Corporations in Minnesota can hire employees and contractors as well.
Can LLCs and S Corporations in Minnesota have a Registered Agent located outside of the state?
No, both LLCs and S Corporations in Minnesota are required to have a registered agent located within the state.
Can LLCs and S Corporations in Minnesota change their business entity structure after being formed?
Yes, both LLCs and S Corporations in Minnesota can change their entity structure, but the business needs to dissolve and re-form under the new entity type.
Are there any sales taxes that LLCs and S Corporations in Minnesota need to collect and remit?
Yes, LLCs and S Corporations in Minnesota must collect and remit sales taxes on certain goods and services sold in the state.
Can LLCs and S Corporations in Minnesota expand or operate in other states?
Yes, both LLCs and S Corporations in Minnesota can expand their operations to other states, but must register as a foreign entity in each state where they intend to do business.
Can LLCs in Minnesota be owned by corporations?
Yes, a corporation can be an owner, or member, of a Minnesota LLC.
Can LLCs and S Corporations in Minnesota hold meetings via teleconference or video conference?
Yes, Minnesota LLCs and S Corporations can hold meetings and conduct business virtually as long as all attendees can communicate with each other.
Can an S Corporation in Minnesota elect to become a closely held corporation?
No, Closely held corporations are a separate legal concept and are not available for election.
Are there annual reporting requirements for LLCs and S Corporations in Minnesota?
Yes, Minnesota LLCs and S Corporations must file an Annual Renewal with the state each year.
Are there annual fees for LLCs and S Corporations in Minnesota?
Yes, both LLCs and S Corporations in Minnesota are required to pay an annual renewal fee.
Can an existing corporation convert to an LLC in Minnesota?
Yes, a corporation can be converted into a Minnesota LLC, but the same procedures for forming a new LLC must be followed.
Can an S Corporation in Minnesota distribute profits every month?
Yes, but distribution must be recorded properly as dividends to avoid IRS audit and further liability.
Can termination of an LLC or S Corporation in Minnesota result in automatic forfeiture?
Yes, if LLCs or S Corporations fail to file the Annual Renewal or don’t meet state taxation/nondelinquency requirements, Minnesota can dissolve or forfeit the entity.

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Conclusion

Navigating the world of business structures and filings may seem daunting, but with the right information and guidance, you can confidently make the best decision for your unique entrepreneurial journey. Remember, the path to success is paved with well-informed choices and a clear understanding of your business goals. So, take the time to research, consult with professionals, and weigh the pros and cons of LLCs and S-Corporations in Minnesota.

As you embark on this exciting adventure, remember that a strong foundation built on sound legal and financial principles will be the backbone of your thriving enterprise. Embrace the challenge, stay curious, and always remember your passion and vision. Visit LLCBase today to access valuable resources, expert guidance, and personalized support tailored to your needs. Don’t wait any longer – let us help you realize your entrepreneurial dreams. 

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