SPECIAL TYPES OF BUSINESS ORGANIZATIONS
S CORPORATIONS Both “S” and “C” corporations are created by filing articles of incorporation with the Secretary of State, after which the shareholders must decide whether to treat the corporation as an S corporation or as a C corporation for tax purposes. An S corporation is a corporation which meets Internal Revenue Service criteria for tax treatment as an S corporation rather than as a C corporation, and whose shareholders unanimously choose to be treated as an S corporation. An S corporation is subject to the provisions of Subchapter S of the Internal Revenue Code, whereas C corporations are taxed under Subchapter C of the Internal Revenue Code. A corporation that has a valid election to be taxed as an S corporation for federal purposes is also an S corporation for Minnesota tax purposes. The S corporation is subject to the taxing provisions in much the same manner as a partnership, i.e., the S corporation files an information tax return, Form 1120S, to report its income and expenses, but it is not separately taxed. Income (including, if certain requirements are met, capital gains) and expenses of the S corporation flow through to the shareholders in proportion to their shareholdings, and profits are taxed to the shareholders at the shareholders’ individual tax rates. For Minnesota purposes, the S corporation also pays a minimum fee, based on its Minnesota- sourced property, payroll and sales. See the Tax Rates section of this Guide. By contrast, the C corporation is a separate taxable entity. The C corporation reports its income and expenses on a corporation income tax return and is taxed on its profits at corporation income tax rates. Dividends distributed to the shareholders is taxable income to the shareholders. In contrast, all the income of an S corporation is taxable income to the shareholders whether or not the income is distributed to the shareholders as dividends. An S corporation is defined by statute as a domestic corporation (i.e., a corporation organized under the law of one of the states of the United States) which: • Does not have more than 100 shareholders; • Does not have any non-individual shareholders (other than estates, certain trusts, and certain tax exempt entities); • Does not have a nonresident alien as a shareholder, and • Does not have more than one class of stock. Certain corporations by statute are ineligible for S corporation status. If the corporation qualifies for S corporation status, the shareholders must formally choose to be so treated for tax purposes. This is accomplished by filing Form 2553 with the Internal Revenue Service on which all shareholders consent in writing to have the corporation treated as an S corporation. The election must be made in a timely manner, as prescribed by the Internal Revenue Service. The election is valid for the taxable year for which it is made, and for all succeeding taxable years of the corporation, until the election is terminated. Statutory procedures determine how the termination is accomplished. In general, S corporation status is terminated when it is revoked by vote of the shareholders, or when the corporation no longer meets the statutory criteria for S
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