LLC vs S-Corp in Minnesota

Making choices as an entrepreneur is a big challenge, especially when choosing what business structure to form in Minnesota. When it comes to a business structure, you can choose whether to have a C-corporation, S-corporation, Sole Proprietorship or an LLC in Minnesota. Before you start Minnesota LLC filing, you must compare which structure suits you. You might be considering two popular options: a Limited Liability Company (LLC) or an S Corporation (S-Corp). Both of these structures offer distinct advantages and protections, but selecting the right one depends on various factors, including your business goals, tax preferences, and management style.

If you are confused with Minnesota LLC vs. S-Corporation, and thinking which one is better and more suitable for the business that you will form, there are a few things that you should consider. Before we get through this article, you should understand what an LLC and S-Corporation mean in Minnesota.

LLC vs. S-Corp: Definition

While forming an LLC, you must follow some major steps. It is a business structure that protects your personal assets from getting affected by business liabilities. On the other hand, the S Corp is not a conventional business structure, but it is tax status that your can file with the IRS. S Corp does not provide personal asset protection like an LLC. Here are the detailed definitions of the two-

What is an LLC in Minnesota?

A limited liability company (LLC) is a formal business structure that provides personal asset protection. Under this structure, the LLC owner/member can save his/her personal assets in case the business is in debt or is being targeted with a lawsuit. In some special cases, if your company is legally sued, the other party can go after your personal assets. This is called piercing the corporate veil, where you become personally liable for the company’s debt.

Forming an LLC in Minnesota gives you a pass-through tax benefit where you don’t have to pay an income tax based on your business revenue; instead, the income tax will be calculated based on your personal income.

What is an S-Corp in Minnesota?

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

S-corp is a prominent alternative to the LLC. Unlike a conventional C-corp, S-corp is more suitable for small and medium businesses, such as businesses with 100 shareholders.

LLC Vs. S-Corporation: Which is More Preferable in Minnesota?

In Minnesota, forming a business is crucial since you need to be adequate in your decision, especially when you think if Minnesota LLC or an S-Corporation in Minnesota is preferable. An S-Corporation is a tax classification that some small businesses are qualified for, whereas an LLC is a legitimate company form. By submitting a document to the Internal Revenue Sector (IRS), corporations and LLCs can choose S-Corporation taxation. An S-Corporation can be less formal than forming an LLC and doesn’t normally provide the same protection. Also, unlike LLC, S-Corporation in Minnesota doesn’t provide the same protections entrepreneurs seek from an LLC. It’s important to consider your options when launching a business from a legal and tax point of view.

It is better to consult a legal professional before you set up an LLC or S-corp. We shared basic differences and how you can form an LLC and S-corp. But it is always recommended to consult a professional before making any decision.
– LLCBuddy Editorial Team

Tax Difference Between Minnesota LLC and S-Corp in Minnesota

There is a difference between LLC and S-Corporation when it comes to paying taxes. Based on Federal and State Tax differences between the two, you can determine if S-Corporation or LLC in Minnesota is suitable 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 in terms of 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 are required to 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 scenario where you are the only owner of an LLC in Minnesota with a $150,000 annual profit. And let’s say that $100,000 is a fair wage in your location for someone doing the same job as you. Under the default LLC taxation, you must pay self-employment taxes on the entire $150,000 profit. But, if your company is taxed as a Minnesota S-Corp, you will only be responsible for paying payroll taxes on the standard wage of $100,000. Income tax will still apply to the remaining $50,000.

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 that 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).

On the other hand, you also need to pay taxes if you form an S-Corporation in Minnesota; besides, you must pay the S-Corp filing fee and an annual report fee after a year of establishing your S-Corp. You must also go to the MS Secretary of State to pay this.

How do Minnesota LLCs and S-Corporations Handle Liability Protection?

In Minnesota, you have no personal responsibility for the financial and legal liabilities of an LLC you will form. An S-Corporation does not provide liability protection because it is a tax designation rather than a distinct business entity. Whatever liability defense an S-Corporation provides is provided by the underlying business entity that chose the tax status. You will have the liability protection the LLC offers if it chooses S-Corporation status for tax purposes.

LLC Vs. S Corporation Ownership Requirements Comparison

Strict ownership requirements exist for LLCs and S-Corporations in Minnesota. LLC ownership regulations are strict because a new member can only be accepted with the approval of all existing members. On the other hand, S-Corporation ownership regulations are also strict because only specific people are permitted to become shareholders. Also, an S-Corporation can’t have more than 100 shareholders and needs one class of stock.

The following are the reasons why some cannot be shareholders in the S-Corporation in Minnesota.

Insurance business
Domestic and International sales corporations
Partnerships
Corporations
Unauthorized Immigrants
Certain financial institutions

Although you know most of the reasons regarding the ownership requirements of both LLC and S-Corporation, you should still seek legal advice in preparation for your business and it is best to visit LLCBuddy for your Minnesota LLC or Minnesota S-Corp.

Which is Easier to File in Minnesota: LLCs or S-Corporations?

Filing an LLC or S-Corporation in Minnesota takes time and preparation. Even though it is not as easy as it seems, something manageable still makes it not difficult. LLC and S-Corporation can be filed by Minnesota Registered Agent. However, in order to establish an LLC in Minnesota, you must submit a Articles of Organization to the Minnesota Secretary of State. Your Articles of Organization must contain information for your LLC, along with payment of the associated filing fee.

In addition, you need to submit more papers to make the Minnesota S-Corporation election. File a Form 8832 to inform the Internal Revenue Sector (IRS) that you prefer to tax your LLC as a corporation rather than a partnership. Then you will then submit Form 2553 to choose S-Corporation status.

Do not forget that you must submit annual tax returns and reports after creating your LLC in order to maintain legal compliance.

Important Information

Who Pays More Taxes, an LLC or S-Corporation?

Taxes differ for LLC and S-Corporation in Minnesota because it depends on the tax purposes and how much profit will be generated. Usually, LLCs are frequently taxed at personal rates and LLC owners can elect to be treated as a separate company with its own federal tax identification number.

On the other hand, owners of S-Corporations must receive a salary that includes Social Security and Medicare taxes. The owner, however, can get dividend income or some of the leftover profits, but not as an employee; thus, they won’t be subject to Social Security and Medicare taxes on that money.

Should I Convert an LLC to S-Corporation?

Since your business assets are separated from your personal assets if you’re a sole proprietor, it may be advisable to form an LLC. You are not restricted to modifying the structure of your LLC to an S-Corporation. Although an S-corporation must have a board of directors, a maximum of 100 shareholders, and adhere to more regulations, it would be ideal for more companies with more shareholders.

How to Structure an LLC to S-Corporation?

To structure an LLC to S-Corporation in Minnesota, you must submit Form 2553, Election by a Small Business Corporation, to the IRS in order to choose S-corp taxation. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or not more than 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, in order 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 .

FAQs

What are the advantages of forming a LLC in Minnesota?

LLCs in Minnesota offer owners limited liability and flexible management options. LLCs in Minnesota also provide owners with the ability to divide profits among multiple members according to the company’s operating agreement.

What are the advantages of forming an S-Corp in Minnesota?

S-Corps in Minnesota provide owners with limited liability protection and the ability to divide profits among shareholders according to the company’s operating agreement. S-Corps in Minnesota also allow owners to take a salary and pay self-employment taxes in order to lower their overall tax burden.

What taxes apply to LLCs in Minnesota?

LLCs in Minnesota are subject to federal income taxes, as well as state and local taxes. LLCs may also be subject to self-employment taxes.

What taxes apply to S-Corps in Minnesota?

S-Corps in Minnesota are subject to federal income taxes, as well as state and local taxes. S-Corps may also be subject to self-employment taxes.

Is there a minimum capital requirement for LLCs in Minnesota?

No, there is no minimum capital requirement for LLCs in Minnesota.

Is there a minimum capital requirement for S-Corps in Minnesota?

No, there is no minimum capital requirement for S-Corps in Minnesota.

Is there a limit to the number of members a LLC in Minnesota can have?

Yes, a LLC in Minnesota is limited to a maximum of 35 members.

Is there a limit to the number of shareholders an S-Corp in Minnesota can have?

Yes, an S-Corp in Minnesota is limited to a maximum of 75 shareholders.

How much does it cost to form a LLC in Minnesota?

The cost of forming a LLC in Minnesota varies depending on the services chosen and the complexity of the company.

How much does it cost to form an S-Corp in Minnesota?

The cost of forming an S-Corp in Minnesota varies depending on the services chosen and the complexity of the company.

How long does it take to form a LLC in Minnesota?

The time required to form a LLC in Minnesota depends on the complexity of the company and the services chosen. Typically, the process takes about two weeks.

How long does it take to form an S-Corp in Minnesota?

The time required to form an S-Corp in Minnesota depends on the complexity of the company and the services chosen. Typically, the process takes about two weeks.

Do LLCs in Minnesota need to file a Minnesota Annual Report?

Yes, LLCs in Minnesota are required to file an Annual Report with the Minnesota Secretary of State.

Do S-Corps in Minnesota need to file a Minnesota Annual Report?

Yes, S-Corps in Minnesota are required to file an Annual Report with the Minnesota Secretary of State.

What documents are required to form a LLC in Minnesota?

The documents required to form a LLC in Minnesota include Articles of Organization, an Operating Agreement, and a Registered Agent.

What documents are required to form an S-Corp in Minnesota?

The documents required to form an S-Corp in Minnesota include Articles of Incorporation, an Operating Agreement, and a Registered Agent.

Does a LLC in Minnesota need to be registered with the Minnesota Secretary of State?

Yes, a LLC in Minnesota must be registered with the Minnesota Secretary of State.

Does an S-Corp in Minnesota need to be registered with the Minnesota Secretary of State?

Yes, an S-Corp in Minnesota must be registered with the Minnesota Secretary of State.

Does a LLC in Minnesota need to have an Operating Agreement?

Yes, a LLC in Minnesota must have an Operating Agreement.

Does an S-Corp in Minnesota need to have an Operating Agreement?

Yes, an S-Corp in Minnesota must have an Operating Agreement.

Does a LLC in Minnesota need to have a Registered Agent?

Yes, a LLC in Minnesota must have a Registered Agent.

Does an S-Corp in Minnesota need to have a Registered Agent?

Yes, an S-Corp in Minnesota must have a Registered Agent.

Does a LLC in Minnesota need to have an annual meeting?

Yes, a LLC in Minnesota must hold an annual meeting.

Does an S-Corp in Minnesota need to have an annual meeting?

Yes, an S-Corp in Minnesota must hold an annual meeting.

Is there an income tax rate difference between a LLC and an S-Corp in Minnesota?

Yes, LLCs in Minnesota are subject to personal income tax rates, whereas S-Corps in Minnesota are subject to corporate income tax rates.

Are LLCs in Minnesota subject to corporate income tax rates?

No, LLCs in Minnesota are subject to personal income tax rates.

Are S-Corps in Minnesota subject to personal income tax rates?

No, S-Corps in Minnesota are subject to corporate income tax rates.

Are LLCs in Minnesota subject to double taxation?

No, LLCs in Minnesota are not subject to double taxation.

Are S-Corps in Minnesota subject to double taxation?

No, S-Corps in Minnesota are not subject to double taxation.

Does a LLC in Minnesota need to maintain corporate formalities?

Yes, a LLC in Minnesota must maintain corporate formalities such as holding annual meetings and keeping accurate financial records.

Does an S-Corp in Minnesota need to maintain corporate formalities?

Yes, an S-Corp in Minnesota must maintain corporate formalities such as holding annual meetings and keeping accurate financial records.

Why Minnesota LLC Vs S Corp is So Important

One of the key distinctions between a Minnesota LLC and an S Corp is the level of flexibility and ease of management that each structure offers. An LLC is a more straightforward entity to set up and maintain, making it an attractive option for small businesses and startups. LLCs also provide more flexibility in terms of ownership structure and management, allowing business owners to customize the organization to meet their specific needs.

On the other hand, an S Corp offers certain tax advantages that can make it a more appealing option for some businesses. S Corps are pass-through entities, meaning that profits and losses are passed through the business to the owners’ personal tax returns. This can result in potential tax savings for business owners, as they may be able to avoid double taxation on corporate profits.

Another important factor to consider when choosing between a Minnesota LLC and an S Corp is liability protection. Both structures offer limited liability protection, which means that owners are not personally liable for the debts and obligations of the business. However, an LLC may provide slightly more protection in certain circumstances, as it is a separate legal entity from its owners.

Additionally, the cost and complexity of maintaining an S Corp should also be taken into consideration. S Corps are subject to more stringent regulatory requirements, such as holding regular board meetings and keeping detailed corporate records. This can create additional administrative burdens and expenses for business owners, which may not be feasible for all companies.

Furthermore, the decision between a Minnesota LLC and an S Corp can also have implications for long-term growth and expansion. An S Corp may be a better option for businesses that plan to bring on outside investors or go public in the future, as it is a more recognized and established structure in the eyes of investors and lenders. On the other hand, an LLC can provide more flexibility for owners who wish to reinvest profits back into the business without the pressure of shareholder expectations.

In conclusion, the decision between a Minnesota LLC and an S Corp is an important one that should not be taken lightly. Both structures offer unique advantages and drawbacks that must be carefully weighed against the specific needs and goals of the business. By understanding the differences between the two entities and seeking advice from legal and financial professionals, business owners can make an informed decision that sets their company up for long-term success.

Conclusion

Even though you can choose a different corporate structure, consider whether it will primarily assist your organization. Striking the perfect balance between corporate benefits and legal protection that suits your particular needs is important. In forming an LLC or S-Corp in Minnesota, you must be aware that every detail is well-formed so that starting your business will be successful. And, if you would like us to help you form a Minnesota LLC and S-Corp in Minnesota, read our other business guides.