Minnesota S Corporation: Everything You Need to Know
A Minnesota S-corporation is a business structure that has elected for the S-corp status for the purpose of taxation under the provisions of the federal tax laws. 3 min read
A Minnesota S-corporation is a business structure that has elected for the S-corp status for the purpose of taxation under the provisions of the federal tax laws. It offers the dual benefits of limited personal liability and income pass-through for the purpose of taxation.
Business owners need to know how a Minnesota S-corporation is treated and how it's different from a C-corporation.
S-Corp Advantages and Disadvantages
An S-corp owner, working as an employee of the business, pays payroll taxes only on the amount of his salary. He need not pay self-employment tax on the whole business income.
However, an S-corp has some disadvantages too:
- While creating an S-corp, you must file the documents with the Secretary of State.
- An S-corporation must file estimated payroll taxes every quarter.
- An S-corp must maintain certain formalities in order to retain its limited liability benefit.
Differences Between Minnesota C-Corporations and S-Corporations
It's important to identify the tax treatment that is most beneficial in your case. Choosing the right tax status can save you money for years. While forming a Minnesota corporation, you should know the differences between a regular C-corp and an S-corp and learn the procedure for electing S-corp status for your corporation.
An S-corporation is subject to certain restrictions; you should be aware of them. You should discuss your case with your legal advisor or a tax consultant before choosing between a C-corp and an S-corp structure in Minnesota.
There is a common misconception that the S-corporation status must be elected at the time of incorporation. When you form a corporation in Minnesota, it originally exists and continues as a C-corporation, unless and until you proactively elect for S-corp status.
In order to convert your Minnesota Corporation into an S-corporation, you must seek the special tax status from the Internal Revenue Service (IRS). This can be done by filing Form 2553. All of the shareholders of the corporation must consent to this election. You can seek the S-corporation status anytime after forming the corporation, either immediately or even years after formation.
Most states honor the federal S-corp election for state tax purposes. However, some states may require you to file a separate S-corporation election at a state level. A few states may not offer all the tax exemptions granted by the IRS.
Find out from your tax advisor whether you need to file a separate state-level S-corp election for Minnesota and what additional taxes would apply to your Minnesota S-corporation.
An S-corporation can revert to a C-corporation by submitting a request to the IRS. However, after reverting to the C-corp structure, it must continue with the December 31 fiscal year as it did during its existence S-corp. It cannot make the S-corp election again for another five years.
C-Corporation and S-Corporation: Differences
A C-corporation is treated as a separate entity from its owners or shareholders. It's liable to pay income tax at the corporate level. C-corp shareholders pay income tax only on the income they receive as dividends from the corporation.
Now when a C-corporation pays dividends to its shareholders, the shareholders pay personal income tax on the dividends they receive despite the fact that income tax has already been paid at the corporate level. In common parlance, this is referred to as “double taxation”. An S-corporation, being a pass-through entity, saves you from double taxation.
An S-corporation with two or more shareholders is required to file a K-1 tax return, but it does not pay any income tax at the corporate level on the profits it has reported. The S-corp shareholders include their respective shares of the corporation's profits on their individual tax returns and pay the taxes at personal level.
An S-corporation also offers an advantage in the event of business losses. Unlike in the case of a C-corporation, S-corp shareholders can set off their share of business losses against their personal taxable income. However, the offset losses cannot exceed the amount of their "basis" or investment in the corporation, after some adjustments.
Remember that an S-corporation cannot have more than 25 percent of its gross income from passive sources.
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