C Corporation A C corporation pays corporate income tax on its profits. If profits are distributed as dividends, shareholders pay personal income tax on those dividends — sometimes called “ double taxation .” Key Features: • The corporation files its own income tax return (Form 1120 at the federal level). • Minnesota imposes a corporate franchise tax based on income earned in the state. • Shareholders pay personal income tax on dividends they receive. S Corporation (if eligible) An S corporation allows profits (and some losses) to pass through directly to shareholders, avoiding most corporate-level tax. Key Features: • Taxation: The corporation files an informational return; shareholders report profits and losses on their personal tax returns. • Eligibility: o Only one class of stock o No more than 100 shareholders o Shareholders must be U.S. citizens or residents (not other corporations or partnerships) • Family Aggregation Rule: The IRS allows certain family members to be treated as one shareholder for the 100-shareholder limit. Other Considerations • Shareholders who work in the business are employees, not self-employed — payroll and withholding rules apply. • Corporations must maintain formal records, hold meetings, and follow corporate governance requirements. • Corporations must obtain their own federal and state tax ID numbers A closely held corporation A closely held corporation is any corporation whose shares are held by a relatively small number of shareholders. The Minnesota Business Corporation Act defines a closely held corporation as one which does not have more than 35 shareholders. Most closely held corporations are relatively small business enterprises, in which all shareholders tend to be active in the management of the business. In Minnesota, the business corporation law is geared to small corporations, so a separate law is not necessary, and all corporations operate under one law.
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