Corporations obtain this status by filing an “S” election with the Internal Revenue Service. No additional filing is necessary for the State of Minnesota. The “S” corporation will, however, need to file an information return for both federal and state taxes. New corporations must elect “S” status no more than two months and fifteen days after the beginning of their first tax year. The limitations that apply to election of “S” status are: • The corporation can have no more than 100 shareholders; • All individual shareholders must be U.S. citizens or permanent residents; non-individual shareholders must be trusts, estates, or certain non-profit entities; • The corporation can have only one class of stock Note also, that shareholder’s must pay income tax on their share of any corporate dividends even if the money was not paid out to shareholders but retained in the corporation. This “phantom taxation” is usually addressed by a shareholder agreement requiring the corporation to distribute at least enough profit to enable shareholders to pay the tax. “C” corporations file federal and state income tax returns using their Federal Employer Identification Number and their State of Minnesota Tax Identification Number. “S” corporations file their federal information returns using their Federal Employer Identification Number. For both “C” and “S” corporations, filings for federal employment insurance are made using their Federal Employer Identification Number. Both “C” and “S” corporations file state unemployment tax payments using a state unemployment number obtained from the Unemployment Insurance Division of the Minnesota Department of Employment and Economic Development which will also determine the initial applicable rate of tax.
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