Considering Tax Rates When Choosing a Business Type in MN

The rate of tax paid on income from the business activity depends on whether the business is organized as a sole proprietorship, a partnership, an S corporation, a C corporation, or a limited liability company. Income from a sole proprietorship, partnership, S corporation, or limited liability company is taxed to the owner at individual tax rates. A C corporation’s income is taxed to the corporation at corporate tax rates. Dividend income paid by the C corporation is taxed to shareholders at individual tax rates.

Federal Individual Income Tax Rates

For federal income tax year 2010, the tax rates are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 depending on income.

Minnesota Individual Income Tax Rates

Minnesota individual income tax rates are 5.35 percent, 7.05 percent, and 7.85 percent depending on income and filing status. Partnerships and S corporations that have nonresident individual partners or shareholders are allowed to pay a composite income tax, on behalf of such nonresident partners or shareholders, on the partnership’s or S corporation’s return. In that event, the nonresident partners or shareholders do not have to file separate Minnesota income tax returns. The tax rate for the Minnesota Composite Income Tax is 7.85 percent of the individual’s “Minnesota source” income. In addition, a partnership or S corporation that does not pay a composite income tax on behalf of nonresident individual partners or shareholders must withhold tax at a rate of 7.85 percent from such an individual’s “Minnesota source” income, and submit it with the partnership’s or S corporation’s return. A bill that would have increased the maximum rate to 9 percent was vetoed by the governor in May, 2009.

Federal Corporate Income Tax Rates

Taxable income over Not over Tax rate
$0 $50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 . . . . . . . . . 35%

Personal Service Corporations are taxed at a rate of 35%.

These rates are set to expire for tax years beginning after December 31, 2010.

Minnesota Corporate (Franchise) Income Tax Rates

The Minnesota corporate income tax rate is 9.8 percent. Corporations are subject to an alternative minimum tax based on Minnesota alternative minimum taxable income at the rate of 5.8 percent. The amount due is the excess of the alternative minimum tax liability over the firm’s regular franchise tax liability.

Minnesota Minimum Fee Rates

Agraduated minimum fee is imposed by Minnesota on corporations, S corporations, partnerships, and limited liability companies. The fee is based on a single factor apportionment phase-in for the years 2007-2014. The new formula for conversion from the three factor (sales, property and payroll) apportionment to the single (sales) apportionment is:

Year Sales % Factor Property % Factor Payroll % Factor
$2,007 $78 1100% 11
2,008 81 950% 9.5
2,009 84 800% 8
2,010 87 650% 6.5
2,011 90 500% 5
2,012 93 350% 3.5
2,013 96 200% 2
2014 and later 100 0 0

Note that for partnerships, the minimum fee is the joint and several liability of the partners. The minimum fee schedule is as follows:

Minnesota Payroll, Property and Sales Fee
Less than $500,000 $0
$500,000 to $999,999 $100
$1 million to $4,999,999 $300
$5 million to $9,999,999 $1,000
$10 million to $19,999,999 $2,000
$20 million or more $5,000

This is part of a series of articles on How to Pick the Right Business Entity Type. These articles help you select the right business type for your circumstances.

CREDITS: This is an excerpt from A Guide to Starting a Business in Minnesota, provided by the Minnesota Department of Employment and Economic Development, Small Business Assistance Office, Twenty-eighth Edition, January 2010, written by Charles A. Schaffer, Madeline Harris, and Mark Simmer. Copies are available without charge from the Minnesota Department of Employment and Economic Development, Small Business Assistance Office.