Minnesota LLC vs S Corp: Taxes, Minimum Fee and When to Elect
Minnesota LLC vs S Corp: Taxes, Minimum Fee and When to Elect
Most people ask whether they should form an LLC or an S corp, but that framing mixes two different things. An LLC is a legal entity you form with the Minnesota Secretary of State. An S corp is a federal tax status that an LLC or a corporation can elect with the IRS. The real decision is how your LLC is taxed: by default, as a partnership or a disregarded single-owner entity, or as an S corp. This guide explains how Minnesota treats each option, what the state minimum fee costs, and when a Minnesota S corp is worth considering.
This is informational content, not legal or tax advice. Entity and tax choices depend on your facts. Talk with a qualified attorney and a CPA before you make an election.
The Short Answer
Minnesota has no separate LLC income tax. A default LLC passes its income through to its owners, who pay Minnesota individual income tax on their share. An S corp also passes income through to its shareholders, but it still owes the state minimum fee under Minn. Stat. 290.0922 once the business is large enough to owe it. For many small businesses, the minimum fee is $0. The S election is a federal decision that Minnesota follows, so the tax math in this state depends on both federal rules and the Minnesota fee schedule.
Side-by-Side Comparison
| Item | Default LLC | LLC with S election | C corporation |
|---|---|---|---|
| Formation filing | Articles of Organization: $155 online or in person, $135 by mail | Same as the LLC it is | Articles of Incorporation: $155 |
| Annual renewal | $0, due December 31 | $0, due December 31 | $0, due December 31 |
| Entity-level income tax | None | None; income passes through | 9.8 percent corporation franchise tax |
| Minimum fee (Minn. Stat. 290.0922) | Exempt for a single-owner LLC reporting only on the owner's return; applies to a multi-member LLC taxed as a partnership | Applies | Applies, on top of the franchise tax |
| Owner tax | Individual rates of 5.35, 6.80, 7.85 and 9.85 percent on Minnesota income | Same individual rates on each shareholder's share | Shareholders pay individual tax on dividends they receive |
The Secretary of State filing is the same for an LLC whether or not it elects S status. The difference shows up on your tax returns, payroll records and the minimum fee calculation.
How a Default LLC Is Taxed in Minnesota
A single-owner LLC that reports only on the owner's individual return is not a separate taxpayer for this purpose. It does not pay the minimum fee. A multi-member LLC taxed as a partnership files as a partnership and does pay the minimum fee.
The owners then pay Minnesota individual income tax on their share of the income under Minn. Stat. 290.06. Minnesota's individual rates are graduated across four brackets: 5.35, 6.80, 7.85 and 9.85 percent. Your share of the profit is taxed at the owner level whether or not you take the money out, which is one reason owners pay attention to profit allocations.
How a Minnesota S Corp Is Taxed
Minnesota follows the federal S election. If the IRS accepts your election, the corporation's income generally passes through to the shareholders, who report their share on their Minnesota returns at the same individual rates. Minnesota does not add a second layer of tax on that income at the entity level.
The difference is the minimum fee. S corporations pay the Minn. Stat. 290.0922 minimum fee, the same as partnerships do. The federal rules that matter most for an S corp are outside Minnesota law and include:
- Eligibility. S corporations face limits on who can own shares and on how many classes of stock they can have.
- Reasonable salary. Owners who work in the business generally must be paid reasonable W-2 wages before they take distributions. The IRS looks closely at owner pay that is set unusually low.
- Timing. The federal election has its own deadlines, and a late election can cost you a tax year of planned treatment. Confirm the timing with a CPA.
The Minnesota Minimum Fee, Step by Step
The minimum fee is based on your Minnesota property, payroll and sales, not on your profit. Revenue's 2026 schedule works like this:
| Minnesota property, payroll and sales | Minimum fee |
|---|---|
| Under $1,280,000 | $0 |
| Rising brackets above $1,280,000 and below $51,280,000 | $260, $770, $2,560 and $5,140, in order as the brackets rise |
| $51,280,000 or more | $12,830 |
The exact bracket edges sit between those two thresholds, and this guide does not state them. Check the bracket that matches your figures on the Department of Revenue website at revenue.state.mn.us before you rely on any number.
Two practical points follow from the schedule. First, a small S corp or partnership with less than $1,280,000 of Minnesota property, payroll and sales owes no minimum fee. Second, a fast-growing business can move up the ladder quickly, so the fee should be part of any election decision you model.
The C Corporation Comparison
A C corporation pays the 9.8 percent corporation franchise tax on its income, plus the minimum fee. Its shareholders then pay individual tax on any dividends they receive, so profits can be taxed at the corporate level and again when paid out. For most small businesses that want to keep profits in the company, this double layer is the main reason an S election or a default LLC is usually the better fit. A C corporation can still make sense for businesses that plan to raise outside capital or retain large earnings, and that is a question for your CPA.
The Pass-Through Entity Tax (PTE)
Minnesota also has a pass-through entity tax election. According to law-firm alerts, legislation signed May 27, 2026 extended the PTE through tax year 2027. Under those alerts, the tax is computed at 9.85 percent of the Minnesota taxable income of the electing owners.
Treat that description as a starting point, not a settled rule. Check the Pass-Through Entity Tax page on the Department of Revenue website for the election deadline, the eligibility rules and how the election is made before you rely on it. Confirm the details with Revenue and your CPA, because the election changes who pays the tax and when.
When an S Election Makes Sense
An S election is usually worth modeling when most of the following are true:
- Profit is well above what the owner needs to live on. Owner-employees pay payroll tax on their reasonable salary, and distributions above that salary generally are not subject to the same payroll tax. That federal difference is the main reason for the election, and the savings grow with profit.
- Owners can justify a reasonable salary. If the salary you can support is low relative to the profit, the IRS may challenge it, and the savings shrink.
- The minimum fee is small compared with the savings. Model the fee at your expected Minnesota property, payroll and sales, using the schedule above.
- You can handle payroll and extra filings. An S corp runs payroll, files payroll returns and needs cleaner bookkeeping than a default LLC.
- Your ownership is simple. Owners who are individuals or certain trusts fit the S corp rules. Foreign owners, entities that are not eligible, or investors who want different classes of stock usually rule an S corp out.
An S election usually does not make sense when profit is low or uneven, when owners want flexible profit allocations, or when the business expects to bring in investors the S rules cannot accommodate. In those cases, the extra payroll and compliance cost can exceed the tax savings.
Formation Costs and Annual Requirements
Both entity types file with the Secretary of State at sos.mn.gov. The filing fees are:
- LLC Articles of Organization: $155 online or in person, which is expedited, or $135 by mail, which is not expedited. Minnesota does not require publication for LLC formation.
- Corporation Articles of Incorporation: $155. Minnesota does not require publication for corporation formation either.
- Annual Renewal: $0 for both entity types, due December 31 every year. Missing the deadline causes termination (LLC) or dissolution (corporation) without further notice, and reinstatement costs $65 by mail or $85 online or in person for an LLC on the current Secretary of State schedule.
The LLC name must include the words 'limited liability company' or the abbreviation 'LLC,' and it cannot include 'corporation' or 'incorporated.' You can search existing names on the Secretary of State's business search at mblsportal.sos.mn.gov/Business/Search.
If you will operate under a name other than your legal name, you need a Certificate of Assumed Name. It costs $50 online or in person, or $30 by mail, and it must be published for two consecutive issues in a qualified legal newspaper in the county of your principal place of business.
Registration, Licensing and Sales Tax
Minnesota has no general statewide business license. Registering with the Department of Revenue for a Minnesota Tax ID and a Sales and Use Tax account is a registration, not a license, and you need it before making taxable sales. The state sales tax rate is 6.875 percent, and local taxes are added on top. Licensing is handled by trade or activity through individual agencies, and the state's central lookup is License Minnesota at mn.gov/elicense. Local rules also apply. Minnesota has 87 counties, about 853 cities and about 1,780 townships, and Minneapolis and St. Paul each license by category rather than issuing a general business license.
Common Mistakes
- Electing S status without modeling the minimum fee and payroll costs. The tax savings on paper can shrink once you add the fee and the extra compliance work.
- Setting owner pay too low. A thin salary invites IRS scrutiny and undermines the election.
- Missing the December 31 renewal. The renewal costs $0, but skipping it can terminate or dissolve the entity.
- Treating the PTE as settled. Confirm the election window and rules with Revenue before you plan around it.
Next Steps
- Estimate your Minnesota property, payroll and sales for the next two years and find your bracket on the Revenue schedule.
- Model profit, owner salary and distributions under both the default LLC and the S corp treatment.
- Check the name and file the Articles of Organization or Incorporation with the Secretary of State.
- Register with the Department of Revenue before your first taxable sale.
- Ask a CPA to confirm the federal S election timing, reasonable salary and the PTE election.
Official Sources
- Minnesota Secretary of State: https://www.sos.mn.gov/
- Minnesota Department of Revenue: https://www.revenue.state.mn.us/
- Internal Revenue Service: https://www.irs.gov/
This guide is informational only and is not legal or tax advice. Fees and rules change, so confirm current figures with the named agency before you file. Consult a qualified attorney and CPA for your situation.