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STARTING AND OPERATING A BUSINESS IN MINNESOTA Copyright © 2009, Michael D. Jenkins CHAPTER 18
CONTENTS OF THIS CHAPTER:
I. INTRODUCTION Minnesota has a fairly typical tax and legal structure under which businesses must operate, except that business personal property, including both tangible and intangible personal property, is generally exempt from property tax. However, tax rates, especially on corporations, are some of the highest in the country, and as a state with a long history of being very pro-union, Minnesota also tends to impose more complex labor and other regulations on businesses than almost any other state, with the possible exceptions of New York and California. Like most states, Minnesota imposes a personal income tax, a franchise (income) tax on corporations, a sales and use tax, and various excise taxes, with property taxes imposed at the local level. The state has also adopted a limited liability company (LLC) law, and a limited liability partnership (LLP) law, so that businesses operating in Minnesota in LLC or LLP form may obtain the advantages of limited liability, without incorporating or becoming subject to corporate taxation, generally. Until recently, the state's economy was fairly robust, in terms of the level of unemployment, average per capita income levels, and other economic measures, but economic conditions have deteriorated rapidly in the last year. For example, in April, 2008, the state's unemployment rate was only 5.4%, but has since risen sharply to 8.1% in April of 2009, although Minnesota's jobless rate is still significantly lower than the national unemployment rate of 8.9% for the same month. To view the latest federal Bureau of Labor Statistics unemployment rate data for Minnesota or any other state, visit the BLS website. II. LEGAL ENTITIES -- FILING FEES AND REPORTING REQUIREMENTS. (a) In General. A business that operates in Minnesota can do so as a sole proprietorship, a general or limited partnership, a corporation, or a limited liability company. In addition, like the federal tax law, the state income tax law also recognizes S corporations, for income tax purposes, and generally allows the income or losses of an S corporation to "flow through" and be taxed or deducted at the shareholder level, rather than taxing the corporation itself as an entity. However, unlike other states, Minnesota imposes a minimum fee (tax) on S corporations, regular ("C") corporations, partnerships, and LLC's, based on their payroll, property, and gross receipts in the state, even if the business generates no net income. This tax applies, in addition to any other income or franchise taxes, to all but very small businesses -- those with total payroll, property and gross receipts of under $500,000, or sole proprietorships. See Section IV(a) for more details on this "minimum fee" tax on business entities. Minnesota law provides for limited liability partnerships, in which no partner is liable for certain debts of the partnership, somewhat like a corporation or LLC, but with fewer legal formalities than are required for either a corporation or an LLC. Each of the above entities is discussed below, along with the basic requirements for forming such an entity and any general ongoing (non-tax) reporting requirements that are applicable to it. The tax treatment of each form of legal entity is discussed in Section IV(c) below. (b) Sole Proprietorships. In general, sole proprietorships in Minnesota can be established with no formalities. However, as noted in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, as well. No separate tax form filing is required, generally, for a sole proprietorship, under the Minnesota income tax law. Instead, as with the Schedule C on your federal Form 1040, you simply report the net income or loss from your sole proprietorship on your state personal income tax return. See Section IV(c) for information on the Minnesota income tax and filing requirements for individuals. Operating as a sole proprietor in Minnesota is generally much simpler than as any other kind of business legal entity. As a sole proprietor, if you have no employees, you are not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage for yourself. Also, a sole proprietorship is the only form of business legal entity that is not subject to the Minnesota annual "minimum fee" (tax), discussed in Section IV(a). However, if your sole proprietorship operates under an assumed or fictitious business name, you are required to register the name with the secretary of state and then publish a notice in a legal newspaper in the county where you have offices, as discussed in Section IV(g). Also, if you will be selling tangible personal property or providing certain types of services, you will need to register for and collect Minnesota sales taxes, as discussed in Section IV(d). (c) Partnerships. Minnesota's partnership laws allow for the creation of either a general partnership, in which all partners are liable for the debts of the business, or a limited partnership, in which only the general partners are liable for debts, while the liability of limited partners is limited to the amount they have invested, in general. State law also allows for the creation of a limited liability partnership, in which no partner has personal liability and for a limited liability limited partnership (LLLP), which is a limited partnership that also elects limited liability partnership status. Partnerships, as entities, are not subject to state income tax in Minnesota. Instead, the income or losses of the partnership, as allocated among the partners, must be reported on the personal income tax returns of the individual partners (or on the corporate tax returns of any corporate partners). However, like corporations and LLC's, partnerships may be subject to an annual "minimum fee" ranging from $100 to $5,000, as discussed at Section IV(a). Partnerships are also required to file an annual tax information return with the state. For details on the Minnesota partnership tax return filing requirements, see Section IV(c). A partnership agreement, for any type of partnership, should spell out in considerable detail such matters as the following:
As a rule, general partnerships in Minnesota can be formed with no formalities, although it is highly advisable to have a written partnership agreement. However, as noted in Section IV(b), it will generally be necessary to obtain one or more local business licenses from cities or counties in which you operate and, in some cases, state licenses, for any type of partnership, including general or limited partnerships, or limited liability partnerships. There are no specific filing requirements that apply to general partnerships under Minnesota state law. However, a partnership may file a Statement of Partnership Authority with the secretary of state, designating which partners in the partnership have (or do not have) the authority to enter into specified types of transactions, such as real estate transactions. There is a $135 fee to file a Statement of Partnership Authority. In addition, if a partnership operates under an assumed or fictitious business name, it will be required to register the name with the secretary of state and then publish a notice in a legal newspaper in the county where it has offices, as discussed in Section IV(g). A limited partnership, in which there is at least one general partner (who is liable for partnership debts) and at least one limited partner (who is not liable for partnership debts), may also be formed under Minnesota law. Unlike a general partnership, a limited partnership must generally have a written partnership agreement, and must file a certificate of limited partnership with the secretary of state, together with a filing fee of $100. Foreign limited partnerships must also register before being allowed to do business in Minnesota, and must pay a registration fee of $85. As several other states have done, Minnesota allows a limited partnership to also become a limited liability partnership -- a limited liability limited partnership, or LLLP. An LLLP is a regular limited partnership that has elected LLP status, so that the general partners in the LLLP are given the same liability protection as partners in an LLP. Limited partnerships formed or doing business in Minnesota must file an annual renewal statement with the secretary of state each year by December 31. No fee is charged, unless there are changes in address, registered agent, or the name of the partnership, in which case a $50 fee applies for each such change. For information on limited partnership filing requirements, see the contact information for the offices of the Minnesota Secretary of State, listed in Section VI(a). LIMITED LIABILITY PARTNERSHIPS Limited liability partnerships (LLP's) are a relatively new form of partnership permitted under the laws of Minnesota. Like an LLC, an LLP provides limited liability for its owners, while retaining the tax advantages of a partnership for federal and Minnesota state income tax purposes. However, unlike an LLC, an LLP typically operates like a regular partnership, and is not required to file articles of organization. A general partnership or partners in a limited partnership can obtain limited liability by simply registering the partnership with the state as an LLP. To form an LLP in Minnesota, you must register and pay a filing fee of $135 to the secretary of state. Foreign LLP's, those created under the laws of another state, must register with the secretary of state and also pay a fee of $135. Every LLP doing business in Minnesota, including both domestic and foreign LLP's, must renew its initial registration annually, and pay the registration fee of $135. Note that one potential drawback of LLP's, if you will do business in other states besides Minnesota, is that you may not enjoy limited liability with regard to creditors of the LLP if you do business in some such states. Some states, like California and New York, only recognize certain types of professional partnerships as LLP's. Such other states may simply treat your LLP like an ordinary general partnership, with no limitation of liability. Minnesota will not deny limited liability to a foreign LLP that is required to register in Minnesota but fails to do so, but such a foreign LLP cannot start or maintain an action in the Minnesota courts until it has registered. For more information on LLP registration and reporting requirements, see the contact information for the offices of the Minnesota Secretary of State, listed in Section VI(a). (d) Corporations. To form a corporation in Minnesota, you must file articles of incorporation with the Minnesota Secretary of State and pay fees of $135, according to the Minnesota Statutes. However, the Secretary of State now collects an incorporation fee of $160. A foreign corporation (one formed under the laws of another state or a foreign country), must obtain a certificate of authority before it may legally conduct any business in Minnesota, by filing an application for a certificate of authority and paying filing fees of $200, according to the Minnesota Statutes. However, the Secretary of State now lists these fees as, in total, $225 for a foreign corporation. For more information on filing articles of incorporation or applying for a certificate of authority to do business in Minnesota, see the contact information for the offices of the secretary of state, listed in Section VI(a). Once your corporation is formed, it will be required to file annual reports by December 31 each year. No fee is due for a domestic corporation, generally, except that a $35 fee will be charged if the articles of incorporation are amended to change the name of the corporation or the registered agent information. A foreign corporation that does business in Minnesota must also file an annual report, by December 31 for each calendar year, and pay a fee of $115 with the annual registration. However, the Secretary of State now charges a fee of $135 for each annual renewal, rather that $115 specified by the Minnesota Statutes. Failure to file the corporate annual report on a timely basis could result in suspension or revocation of your corporation's charter or, in the case of a foreign corporation, revocation of its authority to do business in Minnesota. In addition to paying federal income taxes on its income, a corporation that does business in Minnesota must also file corporate income tax (franchise tax) returns with the state. See Section IV(c) for a discussion of state corporate income tax rates and tax return filing requirements. For tax forms and more information on corporate franchise (income) taxes in Minnesota, see the contact information for the offices of the Department of Revenue, listed in Section VI(a). (e) S Corporations. An S corporation is simply a regular corporation that has elected, for federal or state income tax purposes, or for both, to be taxed somewhat like a partnership, with its income, losses and tax credits flowing through to its owners, who report such income, losses, or credits on their individual tax returns. S corporations are subject to the same Minnesota incorporation and annual renewal fees as other for-profit corporations. Minnesota recognizes S corporations for income tax purposes, and treats them in a manner similar to the federal tax treatment. No separate state election of S corporation status is required. However, S corporations may be required to pay the annual minimum fee described in Section IV(a). (f) Limited Liability Companies. Minnesota, like every other state in the U.S., has adopted a limited liability company (LLC) law. Thus, in addition to the traditional choices of a sole proprietorship, partnership, or corporation, a business that operates in Minnesota may also choose to operate in the form of an LLC. In most states, including Minnesota, LLC's are very attractive entities for many small businesses, in that they offer the same protection as a corporation from creditors for debts of the business, while offering much of the flexibility plus the flow-through tax treatment of a partnership for federal tax purposes. However, LLC's are subject to the annual fee described in Section IV(a). See Section IV(c) for a discussion of the income tax treatment of LLC's under Minnesota tax laws. To form an LLC under the laws of Minnesota, one or more persons must file articles of organization with the Minnesota Secretary of State, which must be accompanied by filing fees of $135, according to the Minnesota Statutes, or $160 which is actually collected by the Secretary of State. Minnesota state law allows the formation of single-member LLC's, which now qualify for treatment as sole proprietorships for federal tax purposes. Foreign LLC's, those formed under the laws of another state, must obtain a certificate of authority to do business in Minnesota, by filing an application for a certificate of authority with the secretary of state and paying a filing fee of $185. In addition to initial filing fees, all LLC's operating in Minnesota must subsequently file annual reports every year (every two years, before 2001). The secretary of state will send out a preprinted form to the LLC before it becomes due. No fee is required, generally, except where there is a name change or change in the address of the registered agent. For more information on filing articles of organization for an LLC, see the contact information for the offices of the Minnesota Secretary of State, listed in Section VI(a). (a) In General. When acquiring an existing business, there are a number of state legal and tax issues you or, preferably, your business attorney, should attend to before closing the purchase. These include matters such as doing a title search for any real property that is being acquired, checking for any recorded security interests on personal property items, and thoroughly researching county, state, and federal records for any judgment liens, tax liens, or other liens, before property is acquired. You will also benefit from consulting a tax advisor before the agreement of sale is negotiated, in order to seek a structuring of the agreement so that the purchase price is allocated among the assets in a way that favors you. You may be able to obtain considerable tax savings if the purchase price is allocated in a way that gives you the best possible tax results under federal and state income tax laws, and other state tax laws, such as sales/use tax or property tax laws. Depending upon the state (or states) in which the seller's assets are located, you may also have to comply with state bulk sale or bulk transfer laws. You should also obtain tax releases from various state taxing agencies, as discussed below. (b) Bulk Sale Laws. Typical bulk sale laws require either publication of legal notices to all creditors in advance of the sale and recording of such notices in some cases, or maintenance of detailed lists of the property to be transferred, for inspection by the public. Minnesota is one of the states that has repealed its bulk sale laws, so you no longer have to be concerned with this requirement when buying a business in Minnesota. However, see the tax bulk sales requirements that apply for Minnesota tax purposes, discussed in Section III(c). (c) Tax Releases. When you acquire an existing business, you will want to make sure that you do not unwittingly become liable for any unpaid taxes owed by the seller. Typically, to protect yourself, you will need to receive a tax release or releases from various state taxing agencies, for such taxes as sales and use tax, income tax withholding, and state unemployment taxes, in each state in which the seller does business. If you fail to obtain such a release or written statement from the tax agency that the seller is not delinquent on any tax payments, you will be held responsible for such tax if it is not withheld from the purchase price proceeds and paid to the state at the time the sale of the business occurs. In Minnesota, you need to be aware of the Business Successor Liability law, which deals with unpaid sales and use tax or withholding tax owed by the seller, and you must check for tax liens against the business you are buying. After deciding to acquire a business, check for possible tax liens filed against it by the Minnesota Department of Revenue. First check the county recorder's office in which the business is located, unless it is a sole proprietorship. In that case, check the county in which the owner resides. If the seller's business is a corporation or partnership, also check with the Secretary of State's office. If you find such a lien, you must send a Notice of Business Transfer, Form C50 (Rev. 3/07) to the Department of Revenue, specifying the liens you found and other information about the pending transaction and parties, at least 20 days before the proposed sale. The Commissioner of Revenue will either notify you within 20 days as to how much tax the seller owes (and which must be withheld) or, if you do not hear from the Department of Revenue, you can proceed with the transaction and are not responsible for any more taxes than the amount shown on the tax lien. In addition, if you are acquiring part or all of the assets of a business that has employees for whom it was required to pay state unemployment tax, you should request, from the Department of Employment and Economic Development (DEED), a statement of the amount of such tax that may be due from the seller, prior to the date of acquisition. A release from the seller will be needed to obtain this information. If the DEED advises you that the seller owes a certain amount of unemployment tax, you must withhold that much from the sales price or else you will become liable for such tax if it is not paid by the seller. You can be held liable for tax in amount not to exceed the reasonable value of the acquired business or assets. Also, as the acquiring business, you are required to notify the DEED of the acquisition of the seller's business within 30 days after the transaction. (d) Unemployment Tax Rating of Seller. In addition to obtaining tax releases, you may find it advantageous to succeed to the seller's unemployment tax experience rating, if the seller has a tax rate lower than you would otherwise obtain as a new business. Perhaps even more importantly, if you are treated as a successor employer, you can count any wages paid during the year already to the acquired employees by the selling company against the annual amount of wages per employee that are subject to tax. For instance, if an employee had already been paid at least the amount of the taxable "wage base" at the time you acquire the business, any wages you subsequently pay to that employee for the rest of the year would not be subject to any further unemployment taxes. PLANNING POINT: EXAMPLE: To determine if you can or must obtain the seller's experience rating and be treated as a successor employer, contact the Department of Employment and Economic Development and, if advantageous to do so, request that you be treated as a successor employer with regard to the acquired employees. Note that if the seller and the acquiring business are under common control or common ownership of 25% or more, then the transfer of the seller's experience rating is mandatory, generally. IV. MINNESOTA TAXES AND OTHER GENERAL REQUIREMENTS. (a) In General.
Minnesota imposes relatively high tax rates on individuals
and particularly on businesses, with its high corporate income
tax rate. It also imposes an annual minimum fee, in addition,
upon any corporation, S corporation, partnership, or LLC that
does business in the state, as follows:
Intangible property is not counted as "property" for purposes
of the above minimum fee calculation. Certain LLC's, partnerships,
or S corporations that derive over 80% of their income from
farming are exempted from the minimum fee.
This tax or fee does not apply to a sole proprietorship owned
by an individual, or, as the above table indicates, to any other
form of business if the sum of its Minnesota tangible property,
payroll, and gross receipts is less than $500,000.
For state tax forms and tax information, see the contact
information for the Minnesota Department of Revenue
in Section VI(a).
(b) State and Local Licensing.
Nearly any business, operated anywhere in the United States, will
have to have at least one government license of some kind. In
most cases, this will be a local license, issued by your city or
county. Before you open your business, contact your local city
or county hall and find out if your particular business needs
one or more local licenses. Most kinds of local business
licenses are granted upon payment of a fee, with no further
requirements, except possibly for annual or other periodic
renewal fees.
However, if you are engaging in any kind of food business,
you will usually need to also obtain a health department
permit and show that you are in compliance with health
department food-handling requirements. In addition, be
sure to check with an attorney or local government zoning
or planning department officials to determine if your
business will be in compliance with all local zoning
and planning restrictions. If you own or rent any type
of facility, you will generally need fire department
permits, showing that you meet fire safety codes and any
construction or improvements to an existing structure
will usually require a building permit. If you intend
to simply operate your business from your home, you may
be in violation of local zoning requirements, but this
is less likely to be a concern if you don't have clients,
customers, suppliers, or employees coming to your house
on business, on a regular basis.
State governments have traditionally required special
licenses for many kinds of professionals, such as physicians,
dentists, lawyers, and accountants. To further protect
consumers, Minnesota has expanded the list of occupations
that must be licensed by the state to include many other
occupations. Most state licenses not only require payment
of fees, but are only issued for a given profession or
occupation upon showing that you have completed certain
educational or experience requirements, or passed certain
tests, or some combination of the foregoing. A partial
list of occupations, professions, and activities requiring
state licenses includes the following:
Unlike some states, there is no "generic state license"
required of all businesses in Minnesota. However, most
businesses will need to register with the state Department
of Revenue for various state taxes that may apply. You can
register your business with the state for Minnesota corporation
franchise, sales and use tax, and employer withholding of state
income tax on a single state application form, Form ABR,
Application for Business Registration. Also use this
form to register for MinnesotaCare tax, if you are a health
care provider. In addition, businesses that have employees
should register for state unemployment tax with the Department
of Employment and Economic Development, as discussed in
Section V(b).
For help with state licensing and business registration
requirements in Minnesota, see the contact information for
the offices of the Department of Employment and Economic
Development, Small Business Assistance Office, listed in
Section VI(a). This office has two
divisions, the Bureau of Business Licenses and the Bureau
of Small Business.
(c) Income and Franchise Taxes.
Minnesota has both an individual income tax and a corporate
franchise (income) tax. The taxation of each of the major
types of business legal entities is discussed in the
remainder of this Section IV(c). All business entities other
than individual sole proprietorships, except for very small
businesses, are also subject to the annual Minnesota fee,
ranging from $100 to $5,000 per year, as discussed in
Section IV(a).
Note that Minnesota has not conformed to federal enactments
for 50% bonus depreciation for 2008 and 2009 or for increased
Section 179 expensing in 2008. 80% of such additional depreciation
or expensing must be added back to Minnesota taxable income, but
then can deducted in five equal portions over the next five years.
TAXATION OF SOLE PROPRIETORS AND PARTNERSHIPS
The Minnesota individual income tax is imposed at a maximum
tax rate of 7.85% in 2008 and subsequent years.
The lowest tax bracket for individuals is a 5.35% rate. Minnesota
is one of a few states that also has an alternative minimum tax
on individuals, which is imposed at a rate of 6.4% of alternative
taxable income, if the tax so computed is greater than the
regular tax.
A special tax rate calculation applies to lump-sum distributions
from retirement plans.
Individual taxpayers generally pay state income tax on their
business earnings from a sole proprietorship, or on their share
of the earnings of a pass-through entity, such as a partnership,
S corporation, or LLC. The Minnesota personal income tax return
is Form M-1, which must be filed with the
Minnesota Department of Revenue by April 15th of the following
year.
Partnerships, or entities taxable as partnerships, such as
LLC's, are not subject to state income taxation in Minnesota,
but must file an information return with the Department of
Revenue each year, showing each partner's share of taxable
income, losses, and credits, on Form M3. The
partnership information return is due by April 15th of the
following year, in the case of a calendar year partnership.
While partnerships (or LLC's treated as partnerships), as
entities, are not subject to state income tax, they must
withhold state income tax on Minnesota-source income allocable
to nonresident partners, if the amount of such adjusted gross
income allocable to the partner is $1,000 or more for the
taxable year. However, withholding is not required if the
partner elects to participate in a composite tax return filed
by the partnership on behalf of its nonresident partners and
if the tax is paid with such return.
Note, however, that like LLC's, regular corporations or
S corporations, partnerships may be subject to the "minimum
fee" tax described in Section IV(a).
Partnerships that owe $1,000 or more of the minimum fee or
$500 of nonresident withholding tax for any individual
partner (or $500 of estimated composite income tax for
nonresident partners) must make quarterly estimated tax
payments on the 15th day of the 4th, 6th, and 9th months
of the taxable year, and the 15th day of the first month of
the following year.
Individual taxpayers doing business as sole proprietors
(or who are partners in partnerships, members of LLC's, or
shareholders in S corporations), who have taxable income from
the business, will generally be required to make advance
payments of estimated Minnesota individual income taxes,
on Form M14, if their net tax liability
(not covered by withholding) exceeds $500. Estimated tax
payments are due in four installments, on the 15th day of
the 4th, 6th, and 9th months of the taxable year, and the
15th day of the first month of the following year.
To avoid penalties for underpayment of estimated tax, you
must either pay in 90% of the current year's tax, or 100%
of the previous year's tax (110% of the previous year's tax,
if the previous year's adjusted gross income was over $150,000).
The Minnesota corporate income (franchise) tax rate, on
corporations other than S corporations, is 9.8%.
The state corporation income tax return is Form M4,
which must be filed with the Department of Revenue by the 15th day
of the third month following the end of the taxable year, or by
March 15th in the case of a corporation whose taxable year is
the calendar year. Corporations may also be subject to a corporate
alternative minimum tax on tax preference items, at a tax rate
of 5.8% of alternative minimum taxable income.
Corporations are required to make estimated tax payments
of their state corporate income tax in advance, if their tax
liability for the year equals or exceeds $500.
A corporation is not required to pay estimated tax the first
year it is subject to tax in Minnesota.
If estimated tax payments for the year total at least $20,000,
a corporation must begin making tax payments by electronic
funds transfer (EFT) the next year. Also, if a corporation
is required to pay ANY state tax electronically, such as sales
tax or withholding taxes, it must also pay the income (franchise)
tax by EFT.
Estimated tax payments are due in advance, in four equal
installments, on the 15th day of the 3rd, 6th, 9th, and
12th months of the taxable year. The total estimated tax
that must be paid in is usually equal to 100% of the actual
tax liability for the year. However, if the preceding year
was a full year of 12 months, the current year payments need
only be equal to 100% of the prior year's tax liability,
if less. The latter exception is not allowed for certain
"large corporations," however, which had at least $1 million
of taxable income in one of the three preceding tax periods.
Such large corporations must pay in 100% of the current year's
tax as estimated tax to avoid penalty, and may only base the
first quarter estimate on the prior year tax liability.
Penalties will be imposed for failure to make the required
estimated tax payments on a timely basis.
S corporations that have elected S corporation status for
federal tax purposes are also treated as S corporations under
Minnesota tax laws and are not subject to the corporate franchise
(income) tax. However, they may be subject to the annual minimum
fee or tax, as discussed in Section IV(a).
In addition, S corporations must file an annual information
return, Form M-8, showing each shareholder's
share of the corporation's Minnesota taxable income or loss.
As in the case of partnerships and LLC's taxed as partnerships,
an S corporation that has any nonresident shareholders must
generally withhold state income tax on their behalf on their share
of the S corporation's Minnesota income, unless the shareholder
elects to participate in a composite tax return filed on behalf
of the nonresident shareholders of the S corporation.
An S corporation must file quarterly estimated tax payments if
it owes $1,000 or more of the annual minimum fee or $500 or
more of nonresident withholding tax for a nonresident shareholder
or for a composite return for nonresident shareholders.
TAXATION OF LIMITED LIABILITY COMPANIES
In Minnesota, a limited liability company (LLC) is taxed
in the same manner as a partnership (or sole proprietorship,
if it has only a single member), if it is so treated for
federal tax purposes, thus avoiding the possible double
taxation of income that can occur with a corporation.
Under IRS regulations, effective since 1997, an LLC
may elect to be treated as a partnership if it has more
than one owner, or as a sole proprietorship if it does
not, for federal tax purposes. Minnesota law recognizes
the validity of a one-owner LLC. However, an LLC that
is owned by a corporate parent may not be disregarded
for Minnesota tax purposes, as state law does not
permit the net income or apportionment factors of
separate legal entities to be combined when apportioning
the Minnesota taxable income of entities doing business
in the state.
Note that it is not always entirely clear whether an LLC is
a "single-member LLC" or not, where the "single owner" is a
married couple who hold the entire ownership of the LLC in some
form of co-tenancy, such as joint tenants with right of survivorship,
tenants by the entirety, or as tenants in common. The federal Internal
Revenue Service (IRS) has taken a very lenient position in Rev.
Proc. 2002-69, where a couple hold the LLC interest as community
property, ruling that the IRS will accept whatever choice the couple
make, either to disregard the LLC as an entity (treating it as a
"single-member LLC") or to treat it as a partnership between the
husband and wife.
However, Minnesota is not a community property state, so where
the LLC is owned by a husband and wife in some form of co-tenancy,
it is unclear whether the IRS treatment would be as lenient as
for community property owners, since the IRS has not issued any
published rulings on whether an LLC can be a disregarded entity
if held in one of the various forms of co-tenancy by a married
couple, rather than being held as community property. Thus, it
is also unclear, where an LLC is owned by a husband and wife as
co-tenants, whether Minnesota would treat the LLC as a single-member
LLC or as a partnership.
While Minnesota does not directly tax the income of LLC's,
unless they have elected for federal purposes to be treated
as corporations, all LLC's doing business in the state,
regardless of whether they are taxed as corporations or not,
are subject to the annual minimum fee or tax, as described
in Section IV(a). In addition, an LLC
that is treated as a partnership, if it has any nonresident
members, must withhold Minnesota income tax on their behalf,
generally, as noted in the discussion of the Minnesota tax
treatment of partnerships.
An LLC that is treated as a partnership and that owes $500
or more of the minimum fee plus nonresident withholding tax
will be required to make quarterly estimated tax payments on
the 15th day of the 4th, 6th, and 9th months of the taxable
year, and the 15th day of the first month of the following year.
(d) Sales and Use Tax.
Minnesota imposes a general sales tax on retail sales of tangible
personal property and certain types of services at the statewide
rate of 6.5% In addition, several local governments have adopted
local sales taxes, generally at rates of 0.5% or 1.0%. Sellers
are required to obtain a seller's permit and to collect and pay
over the state and local sales and use taxes to the Minnesota
Department of Revenue.
Beginning January 1, 2009, any business that paid sales and use
taxes of $10,000 or more in the fiscal year from July 1, 2007 to
June 30, 2008 must begin making all such payments by electronic
funds transfer (EFT).
A new 0.15% sales tax was imposed in Hennepin County (including
Minneapolis), effective January 1, 2007. The new tax is to be
used to finance the new Minnesota Twins Stadium, and increases
the total tax rate in the county to 6.65% (7.15% in Minneapolis).
Beginning July 1, 2008, a new 0.25% local sales and use tax and
a vehicle excise tax are imposed in Anoka County, Dakota County,
Hennepin County, Ramsey County, and Washington County, all to be
administered by the state Department of Revenue. Motor vehicles
registered for road use will be subject to a $20 excise tax
instead of the new sales tax. In the 2008 election, Minnesota
voters will approved an amendment to the state constitution to
increase the state sales tax by 0.375%, with the new tax proceeds
to be dedicated for natural resource and cultural heritage purposes.
While the sales tax applies primarily to sales of tangible
personal property, some services are also taxable. For example,
massage therapy services are subject to sales tax, unless
prescribed for treatment of illness, injury, or disease -- in
which case the MinnesotaCare tax, an occupational license tax,
applies.
There are numerous exemptions from the sales tax, the most
important of which is the resale exemption. If you are a
wholesaler or retailer who purchases goods that you will
resell, your purchase of such goods may qualify as an exempt
sale for resale. Similarly, if you sell goods to wholesalers
or retailers for resale by them, your sale may also qualify
as an exempt sale for resale. In any such transaction, the
exemption is ordinarily available only if the purchaser gives
the seller a valid resale certificate, certifying that the
items are being purchased for resale, and not for use or
consumption by the buyer.
A shadow tax, the use tax, is also imposed at the same rate
as the sales tax. It is primarily intended to tax property
that is acquired from sources outside of the state, in
transactions not subject to sales tax, when such property
is used or consumed within Minnesota. Use tax may also apply
to items purchased on an exempt basis, such as for resale,
if such items end up being used or consumed, instead of
being resold.
Before making any taxable sales, you will need to register
with the Department of Revenue on Form ABR, Application
for Business Registration (May, 2007 Revision).
For more information on Minnesota sales and use tax
registration and compliance, see contact information for
the offices of the Department of Revenue in
Section VI(a).
(e) Real and Personal Property Taxes.
In Minnesota, as in every other state, any business real estate
you own will be subject to real property taxes. In general,
there is little that you must do, unless you wish to challenge
your assessed valuation, since the assessor will bill you for
each year's property taxes as they come due. A cap has been
placed on property taxes in cities of more than 2,500 population,
for taxes paid in 2009 through 2011, of 3.9%.
Minnesota, unlike most other states, does not generally
impose any property taxes on personal property of any kind,
either tangible or intangible, either at the state or local
government level. ("Personal property" is any kind of property
that is not real estate.) However, there are a few exceptions,
such as for lessors who lease personal property, billboards and
advertising devices, mobile homes, certain motor vehicles and
watercraft, and other items such as equipment of utility companies.
(f) Other Business Taxes.
Minnesota imposes a number of excise and other taxes on businesses,
some of which may affect you. These include:
(g) Trade Names. A trade name, also known as a fictitious or assumed name, is any name used in the course of business that does not include the actual legal names of all the owners of the business. Thus, if your business goes by any name other than your own real name, it is operating under a trade name. The same is true of a corporation, if it operates under a name other than its legal name. A trade name might also be one that suggests the existence of additional owners, by using such words as "company," "associates," or "group." In most states where you do business, it will be necessary to register a trade, fictitious, or assumed name, so that people who do business with you can find out who the actual owners of your business are. You may also want to register any such trade name, as a means of protecting against other companies usurping that particular trade name. Any person or business organization conducting a commercial business in Minnesota under a name other than their full name is required to file a Certificate of Assumed Name with the secretary of state. After filing with the secretary of state, a notice must be published in a qualified newspaper in the county in which the person has a principal or registered office for two successive issues. Forms for this certificate are available by calling the offices of the Minnesota Secretary of State. The filing fee for original assumed names and amendments is $25. The original filing is good for ten years, after which it may be renewed. Original filings and amendments that show changes in the original information must then be published in a legal newspaper qualified for the county of the business' location for two successive issues. V. EMPLOYER REQUIREMENTS IF YOU HAVE EMPLOYEES (a) Employer Registration and Withholding. If you have any employees, you will already be withholding federal income tax and FICA taxes from their wages. Since Minnesota imposes a state income tax on the income of individuals, you will need to also withhold Minnesota income tax from the wages of your employees. Before you begin to pay wages, you must register as an employer with the Department of Revenue on Form ABR, Application for Business Registration (May, 2007 Revision), which you can also use to register your business for sales and use taxes, corporation franchise tax, and other state taxes, if applicable. Under 2008 Omnibus Tax Legislation enacted in Minnesota, employers with 100 or more employees must submit their Minnesota W-2's electronically. The 100-employee threshold is decreased to 50 employees in 2009 and 25 in 2010 and following tax years. In addition, the new law requires construction contractors to withhold tax at the rate of 2% on payments to individual sole proprietors who perform contract work for them, beginning January 1, 2009. The payments are subject to withholding only if the work was performed in the state of Minnesota and the total payments during the year exceed $600. Under a new Minnesota law effective January 1, 2008, most employers are required to provide health insurance coverage for employees' dependent children under the age of 25, regardless of whether the dependent children are enrolled in an educational institution. Dependent children aged 19 through 24 who are not enrolled as full-time students in educational institutions are generally not considered dependents for purposes of the individual income tax. Thus the value of employer-provided insurance for such dependents is taxable compensation to the employee and is subject to the withholding tax. The amount of taxable compensation subject to the withholding tax is based on the "fair market value" of the insurance coverage provided for the dependent. UPDATE NOTE: For more information on Minnesota income tax withholding and registration requirements for employers, see the contact information for the offices of the Department of Revenue, listed in Section VI(a) (b) Unemployment and Other State Payroll Taxes. If your business has one or more employees in Minnesota to whom you have paid wages in the prior or current calendar year, you, as an employer, will be required to pay state unemployment tax based on the amount of such wages paid. Employers subject to the Minnesota unemployment tax are required to register with the Department of Employment and Economic Development and to obtain a state tax identification number. Registration can be completed online or, if you do not have Internet access, by phone. New employers are required to pay tax at a rates that vary (higher rates apply for construction and certain other high-rate businesses) in 2009 on the first $26,000 of wages paid to each employee. The general new employer tax rate is 1.94% (8.40% for high-rate firms) and is increased by a 14% Additional Assessment, plus a 0.1% (of covered wages) Workforce Development fee is also levied. Thus, the total new employer rate in 2009 for most employers is 2.116% and is 9.676% for high-rate employers. Once your business has been subject to unemployment tax since about 2 years, you will be assigned an unemployment tax experience rating (and tax rate). This rating is based on the number of employees you terminate who then claim unemployment benefits and the amount of such benefits paid to those former employees, under complex formulas. The state will inform you when they have assigned you an individual tax rate based on your firm's experience rating. That rate may be higher or, if you have had relatively few benefit claims charged to your account, lower than the standard new employer tax rate you initially were paying. Large employers, with 50 or more employees, are required to make all payments of Minnesota unemployment taxes by electronic funds transfer. Note that, effective since January 1, 2005, wages or salary paid to a corporate officer who owns 25% or more of the stock of the corporation are exempt from Minnesota unemployment tax, unless the officer voluntarily chooses to have his or her wages be subject to the tax. A similar exemption applies to an LLC member who owns 25% or more of the LLC. PLANNING POINT: All state unemployment taxes are imposed upon you as the employer, and, under Minnesota law, cannot be charged to your employees or withheld from their wages. For more information on your Minnesota unemployment tax obligations as an employer, see the contact information for the offices of the Department of Employment and Economic Development, listed in Section VI(a). (c) Workers' Compensation. Workers' compensation insurance is a state-mandated insurance requirement for most employers, in almost every state. In Minnesota, virtually all businesses with one or more employees are required by law to have workers' compensation insurance, except those able to self-insure. Note, however, that a sole proprietor or a partner in a partnership, is generally not considered an employee. Similarly, officers of certain closely-held (10 or fewer shareholders) small corporations, or managing members of certain small LLC's with 10 or fewer members, if the officer or member owns at least 25% of the firm, are not required to be covered for workers' compensation purposes, but may elect such coverage. The exemption of corporate officers or LLC members (which also may extend to family members) is only applicable if the corporation or LLC had less than 22,880 hours of payroll in the preceding calendar year. Workers' compensation provides wage loss and medical benefits to employees injured on the job and it protects you, as an employer, from legal action for damages for injuries or job related illnesses suffered by your employees. In effect, it is a "no-fault" insurance system for work-related injuries or illnesses. Thus, if you fail to obtain required workers' compensation insurance, and an employee is injured on the job, you will have opened yourself to unlimited liability and severe legal consequences, so it is very important to obtain workers' compensation insurance for your employees. Be aware that neither general liability nor health and accident insurance can properly substitute for workers' compensation insurance. As an employer, you must notify injured employees of their benefits and post a notice in the workplace informing your employees of their workers' compensation coverage and rights as employees. You can request copies of preprinted notices from the Minnesota Department of Labor and Industry, Division of Workers' Compensation. For more detailed information regarding your obligations as an employer under the Minnesota workers' compensation laws, contact your insurance carrier or see the contact information for the offices of Department of Labor and Industry, listed in Section VI(a). (d) State Wage and Hour Laws. Some employees of certain small firms not engaged in interstate commerce are not covered by the federal minimum wage and overtime laws. However, even if few or none of your employees are covered by the federal wage-hour laws, if, for example, because your firm does less than $500,000 a year in gross sales and the employees in question are not deemed to "...engage in (interstate) commerce...," they will still generally be subject to the Minnesota wage-hour laws, which provide for a state minimum hourly wage that is currently $5.25 an hour for small employers with gross annual sales of less than $625,000 or $6.15 an hour for larger employers. Under Minnesota law, new employees under the age of 20 can be paid a "training wage" of $4.90 an hour for the first 90 days they are employed. Minnesota law requires overtime premium be paid, at the rate of one-and-one-half times the regular rate of pay, for overtime hours worked in excess of 48 hours per week. However, employers that are subject to the federal overtime law will have to pay overtime premium after 40 hours of work in a week. Note that, as under federal wage-hour laws, certain classes of executive, administrative, and professional employees are exempted from the Minnesota wage-hour rules, as are outside salespersons. However, the Minnesota rules for exempting such persons are different in many details from the similar federal wage-hour laws and regulations. Besides the federal wage-hour posters that you must display in the workplace, you must also display a state wage-hour poster, which you can obtain from the Department of Labor and Industry, Division of Labor Standards. In addition to wage-hour laws, most businesses are subject to federal child labor laws, which put numerous restrictions on the working hours and kinds of work in which minors under the age of 18 may engage. Your business must also be cognizant of similar state child labor laws, in Minnesota, which differ significantly from the federal child labor laws. Minnesota law generally forbids the employment of children under the age of 14, except for a few types of work, such as models or performers, or children who are 11 or older who deliver newspapers. Minors aged 14 or 15 may not work during school hours unless they have first obtained a youth employment certificate from the Board of Education. Children under the age of 16, but at least 14, can work in a wider number of jobs or occupations, but must obtain an employment certificate from their school superintendent or other person designated by their Board of Education, if they will work during school hours on school days. Children under the age of 16 may not work before 7 a.m. or after 9 p.m., or more than 40 hours in a week or more than 8 hours in any 24-hour period. High school students who are 16 or 17 years old may not work before 5 a.m. on school days or after 11 p.m. on a night before a school day, except that a parent or guardian may give written permission for such a minor to work as early as 4:30 a.m. or as late as 11:30 p.m., instead. State law prohibits employment of minors under the age of 18 in a number of specified hazardous occupations as defined by the Department of Labor and Industry. Employers must obtain a proof of age before hiring a minor, such as an age certificate, birth certificate, or copy of the child's driver's license. (e) State Occupational Safety and Health Laws. Nearly half of the states have their own OSHA-like agency, charged with administering the state's own occupational safety and health laws. The remaining states have no such enforcement agency, and thus rely instead on the federal Occupational Safety and Health Administration (OSHA) to administer the federal job safety rules within such states. Minnesota is one of the states that has its own OSHA-type agency, MNOSHA. To determine if your workplace is in compliance with federal and Minnesota job safety requirements, you may wish to contact the OSHA Consultation Division of the Minnesota Department of Labor and Industry and request a free on-site safety consultation. You will not be cited for any violations detected, provided that you promptly correct the unsafe conditions. This differs from the rules for consultations by federal OSHA inspectors, who are required to cite you for any violations they find. Employers in certain specified types of industries are required to establish a written A Workplace Accident and Injury Reduction (AWAIR) program. The program must describe:
An employer must conduct and document a review of the work place accident and injury reduction program at least annually and document how procedures set forth in the program are met. Contact MNOSHA to determine if your type of business is one that is required to adopt an AWAIR program. For information on your job safety and health obligations as an employer, required posters, and possible on-site safety consultations, see the contact information for the offices of the OSHA Consultation Division, listed in Section VI(a). (f) Other Miscellaneous State Labor Laws. Other Minnesota labor laws you need to be aware of, as an employer, include the following: (1) Wage payments to employees. Employers of workers engaged in work of a transitory nature, such as construction or repair work, must pay wages at least every 15 days. Otherwise, wages must generally be paid not less frequently than every 31 days, on a designated payday. Workers who quit their jobs must generally be paid no later than the next regular payday, with some exceptions. Workers who are discharged by the employer must generally be paid final wages within 24 hours of discharge, however, unless the employee requests payment by mail. An employer who fails to pay wages on time after an employee quits or is discharged may have to continue to pay wages to the former employee for a period of up to 15 days that the employer is in default, at the employee's final rate of pay or contracted rate. (2) Right-to-work laws. About half the states have enacted "right-to-work" laws, which guarantee that no person may be denied employment for refusing to join a union or for not paying union dues, thus banning either "union shop" or "agency shop" agreements, or both. In a union shop, an employee not belonging to a union may be hired but then must join the union, usually within 30 days. In an agency shop, an employee need not join the union but, to remain employed, must pay union dues. Minnesota does not have such a right-to-work law and allows union shop or agency shop contracts between an employer and a union. (3) State anti-discrimination laws. In addition to complying with federal anti-discrimination laws, employers must also be aware of and comply with state civil rights laws in Minnesota, and display a poster informing employees of their rights. You can obtain this poster from the St. Paul office of the Department of Human Rights, at the address listed in Section VI(a). Minnesota has some of the broadest and most far-reaching employment discrimination laws in the nation. Under state law, except when based on a bona fide occupational qualification, it is an unfair employment practice for an employer to discriminate in employment because of:
In addition, under the Minnesota Human Rights Act, organizations that have more than 40 full-time employees in Minnesota on a single working day during the previous 12 months, must have a Certificate of Compliance issued by the Commissioner of the Department of Human Rights before a state contract or agreement for goods or services in excess of $100,000 can be executed. The Certificate of Compliance is obtained only when the employer demonstrates that it has a qualifying affirmative action plan in effect. (4) Reporting new hires. Under federal welfare reform laws, employers in all are now required to report all newly-hired (or rehired) employees to a designated state agency (the Department of Human Services for Minnesota employers) within 20 days after the date of hire. Employers are not required to report the hiring of any person who will be employed for less than two months' duration and will have gross earnings less than $250 per month, according to MINN. STAT. Sec. 256.998. (However, the New Hire Reporting Center website states that ALL new hires must be reported, even if the employee works only one day and is terminated.) Employers who submit reports magnetically or electronically must submit the reports in two monthly transmissions not more than sixteen days apart. See the contact information for the New Hire Reporting Center in Section VI(a) and, for more information or to file reports online, see the link to the New Hire Reporting Center website in Section VI(c). (5) Family Leave Laws. Minnesota has adopted its own family leave provisions, somewhat similar to the parental leave provisions of the federal Family and Medical Leave Act. However, the parental leave and sick or injured child leave provisions of the Minnesota law apply to any employer with 21 or more employees at one work site. Only employees with at least 12 months of service and who work full-time, or at least half of full-time, are counted. An educational poster summarizing this law must be posted in the workplace. Covered employers are required to grant 6 weeks of unpaid parental leave to a covered employee in connection with the birth or adoption of a child. In addition, a worker may use personal sick leave benefits to care for a sick or injured child, as well as for his or her own illness, to the extent the employer provides sick leave benefits. During a leave-taking period, the employer must continue to provide any group insurance or health care coverage to the employee, although the employer is not required to pay for such coverage during the leave of absence. In addition, any employer of one or more employees in the state of Minnesota must grant up to 16 hours a year of unpaid leave for parents to attend school conferences and school activities of their children. (6) Lie Detector Tests Prohibited. Under Minnesota law, an employer may not require or demand, as a condition of employment, prospective employment, or continued employment, that an individual submit to or take a lie detector or similar test. Unlike the federal law, which exempts certain kinds of firms from the prohibition against polygraph testing, the Minnesota law makes no exceptions for any private businesses. The law prohibits tests that cause any kind of physiological changes, but the state courts have held that the law does not prohibit written honesty tests. An employee or prospective employee may voluntarily request a lie detector test, but in that case, the employer must advise the person that taking the test is voluntary. If an employee does undergo such a test, the employer must keep the results of such test confidential and also must keep confidential the fact that any employee or applicant has taken such a test, except to release such information to persons authorized by the employee to receive the test results. VI. STATE SOURCES OF HELP AND INFORMATION (a) Key State Agencies Contact Information. Minnesota, as many states have done in recent years, has set up a "one-stop" center to help your new or existing businesses to obtain all necessary state licenses and permits from a single office. You can register your business with the state for Minnesota corporation franchise, sales and use tax, and employer withholding of state income tax on a single state application form, Form ABR, Application for Business Registration. If your business may require a state license of some kind, see the License Minnesota website that the state has established, to aid you in obtaining any necessary licenses. See the links to this and other helpful state government websites, in Section VI(c). To obtain business registration forms or helpful publications such as the free booklet, A Guide to Starting a Business in Minnesota (2009), or other information on starting or relocating your business in Minnesota, contact: Small Business Assistance Office The Small Business Assistance Office has two bureaus: the Bureau of Business Licenses and the Bureau of Small Business, both of which can be helpful to a new business. Addresses and other contact information for other key state and federal government agencies in Minnesota, mentioned in preceding sections of this book, are listed below for your convenience. SECRETARY OF STATE. Contact the office of the secretary of state for information on:
Minnesota Secretary of State TAXES. Obtain state income, sales and use tax, and other miscellaneous business tax forms, instructions and information from the Minnesota Department of Revenue, which is the main tax collection agency in Minnesota. Also register with this agency as an employer, for state income tax withholding purposes. Mail any tax questions to or call: Minnesota Department of Revenue STATE LABOR LAWS. Contact the following agency about your obligations as an employer under various state labor laws, including:
Department of Labor and Industry STATE SALES TAX. Obtain your sales and use tax license or permit and information on the Minnesota sales and use tax law, from the Department of Revenue, at the address listed above for that agency. STATE UNEMPLOYMENT TAX. Contact the following state agency to determine whether you are an employer subject to payment of state unemployment taxes, and for registration as an employer if you are subject. Registration must now be done online or by telephone. Department of Employment and Economic Development NEW HIRE REPORTING. Employers must report all newly hired employees within 20 days, or file reports twice a month if filing electronically or on magnetic media. Send reports to the Minnesota New Hire Reporting Center at the following address: New Hire Reporting Center WORKERS' COMPENSATION INSURANCE. If you employ workers for whom you must supply workers' compensation coverage, contact the following agency for further information: Department of Labor and Industry STATE OSHA PROGRAM. For information on both federal and state occupational safety and health laws that affect you as an employer in Minnesota, or to arrange for an OSHA consultation for your workplace, contact: OSHA Consultation Division STATE ANTI-DISCRIMINATION LAWS. Contact the following state agency for more detailed information on Minnesota civil rights laws that may apply to your business, and to obtain anti-discrimination notices you are required to post in the workplace: Minnesota Department of Human Rights (b) Small Business Development Centers. A number of Small Business Development Centers (SBDCs) are located throughout Minnesota to assist you. These centers, usually located on college campuses, provide a wealth of start-up information and sponsor frequent business-oriented seminars. Contact the lead office below for information, or for the location of other SBDCs nearer to you. Minnesota Small Business Development Center (c) Internet Sites. For anyone with access to the Internet, there is a wealth of state and even local business information provided by state and local governments. All states now have a state government Web page, and most major Minnesota state agencies also have sites on the Internet where you can obtain useful small business information on matters such as state taxes, financing sources, or the addresses and phone numbers (or e-mail addresses) of various state and federal agencies' offices in Minnesota. Since new sites are appearing constantly, you might also want to search for other Minnesota government Web sites by using one of the popular Internet search engines, such as Excite! or Yahoo. To start your Internet search for Minnesota government information, you may want to begin with the following Internet sites: State of Minnesota home page list of government agency links: Minnesota Small Business Assistance Office (publications, assistance to new and small businesses): Minnesota Secretary of State web site (corporate, LLC, and partnership filings, assumed name filings): Minnesota Department of Revenue (downloadable tax forms): Department of Employment and Economic Development (Business assistance and financing, state unemployment tax): Department of Labor and Industry (Workers' compensation, wage-hour laws, child labor restrictions, labor standards): License Minnesota (Online one-stop licensing center) Minnesota New Hire Reporting Center: (d) Financing Sources. For information and help on locating financing for your small business, contact the nearest U.S. Small Business Administration office in Minnesota, or contact the Minnesota Department of Employment and Economic Development regarding the Capital Access program and other state sources of financial assistance, at the address listed in Section VI(a) for that agency. The address of the main SBA Office in Minnesota is: U.S. Small Business Administration |
Copyright © 2009 Michael D. Jenkins
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