A Guide To STARTING A BUSINESS IN MINNESOTA 42nd Ed 2024

Who Is the Taxpayer? Sole Proprietorship. In a sole proprietorship, the taxpayer is the individual business owner. The proprietor is taxed on the entire net income from the business, regardless of whether the income is withdrawn for personal use or retained in the business. This is the case for both federal and Minnesota tax purposes. Partnership. The partnership itself is not a taxable entity. The partnership serves as a conduit through which income, deductions and credits are passed through to the individual partners. Each partner is taxed on his or her share as defined in the partnership agreement. All income of the partnership is taxed to the partners, whether or not it is actually distributed. The partnership itself files an information return which reports partnership income and distributions to the partners. This is the case for both federal and Minnesota tax purposes. Corporation. A corporation is a separate legal and taxable entity. For tax purposes, the corporation may be a “C corporation” (taxed under Subchapter C of the Internal Revenue Code and corresponding sections of Minn. Stat.) or it may elect to be treated as an “S corporation” (taxed under Subchapter S of the Internal Revenue Code and corresponding sections of Minn. Stat.). Both C corporations and S corporations file federal and Minnesota tax returns. In the case of a C corporation, the corporation itself is the taxpayer and pays tax on corporate profits. After taxes are paid any remaining corporate profits may be distributed to shareholders in the form of dividends. The shareholders are then taxed on the dividends they receive from the corporation. In general, an S corporation is taxed in a manner similar to a partnership; that is, the income, deductions and credits of the corporation are passed through to shareholders and are taxed to shareholders at their individual tax rates. These rules become more complicated in the case of an S corporation that was taxed as a C corporation at some time prior to electing to be taxed as an S corporation. It is worth noting here that because a corporation is an entity separate from its owners, if the owner (and/or members of the owner’s family) performs services for the corporation, these persons are considered to be employees of the corporation. Thus, the corporation will be required to comply with most of the laws and regulations and reporting requirements applicable to employers, including filing employment tax forms. Limited Liability Company. Both multi-member and single member Limited Liability Companies have the option of being taxed as a corporation (where the LLC pays taxes on its income) or as a pass-through entity (where income passes through to the owner or owners to be reported on personal income tax returns). A multi-member LLC files an election to be taxed as a corporation or pass-through by checking the appropriate box on IRS Form 8832. A single member LLC desiring to be taxed as a “disregarded entity” (like a sole proprietorship) does not need to file Form 8832 but does need to file Form 8832 if it wishes to be taxed as a corporation. What Tax Forms Are Used? Note: Income tax forms identified here apply to the 2020 tax year. Amendments to the Minnesota tax laws and federal Internal Revenue Code may change these requirements. Sole Proprietorship. Federal: The sole proprietor reports income and expenses from the business on Schedule C (Form 1040) and any related forms and schedules. The net income or loss from the business is then transferred to the proprietor’s individual Form 1040. The sole proprietor uses

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