SPECIAL TYPES OF BUSINESS ORGANIZATIONS
S CORPORATIONS Requirements and Considerations Formation and Election
• Both S and C corporations begin with filing Minnesota Business Corporation | Articles of Incorporation with the Office of the Minnesota Secretary of State. Fee for filing. At this stage, there is no distinction: both are simply business corporations under Minnesota law. • S corporation status is not automatic—it is a tax election made by filing IRS Form 2553, Election by a Small Business Corporation with unanimous written consent from all shareholders. This allows the corporation to be taxed under Subchapter S of the Internal Revenue Code, rather than Subchapter C (the default). • Once the IRS approves the S election, Minnesota honors that status—no state-specific S-corp election is required. Eligibility for S Corporation Status • Strict requirements govern S corp eligibility: • No more than 100 shareholders. • Shareholders must be individuals, certain trusts, or estates; no non-individuals except these exceptions. •All shareholders must be U.S. citizens or resident aliens; nonresident aliens are not permitted. • Only one class of stock is allowed (voting-rights differences are allowed, but not differences in distribution/ownership priority). • Some corporations (such as certain financial institutions and insurance companies) cannot elect S corp status due to statutory exclusions. Tax Treatment • S corporations are pass-through entities for tax purposes: income, losses, deductions, and credits “pass through” to shareholders, who report them on their individual tax returns, similar to a partnership. S corporations do not pay federal income tax at the corporate level. • Profits are taxable to shareholders whether or not distributed as dividends. • For Minnesota tax purposes, the S corporation must file Form M8, S Corporation Return and is subject to a minimum fee based on Minnesota-sourced property, payroll, and sales if it meets the state threshold. • C corporations, by contrast, are separate taxable entities—profits are taxed to the corporation, and dividends are taxed again to shareholders, resulting in “double taxation.”
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