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Editorial 9 MIN READ

Minnesota in May 2018: a $135 LLC in a 9.85% state

A free annual renewal that dissolves you if you miss it, a brand-new LLC Act finally mandatory for everyone, and a tax code still pinned to the federal Code as it stood in 2016

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 6 sections
  1. The mechanics
  2. Maintenance, where the free renewal is a trap
  3. What Minnesota actually taxes
  4. Sales tax, payroll, and the other edges
  5. Who Minnesota actually makes sense for
  6. Sources

Minnesota LLC costs $135 online to form, or $155 on paper, and nothing to renew. The renewal is free, and missing it will get the entity administratively dissolved by the Secretary of State. The top individual income tax rate is 9.85% and the corporate rate is 9.8%.

This is a guide for someone forming a Minnesota LLC in May 2018, four months after the state's revised LLC Act became mandatory for every entity on the rolls and four months into a legislative session where conformity to the December 2017 federal tax bill is the open question. It is written for a founder who already knows they want to be in Minnesota and is trying to do the filing once, correctly.

The mechanics

You file Articles of Organization with the Minnesota Secretary of State. The statutory authority is Minn. Stat. § 322C.0201, which lists the four things the Articles must contain: the name of the LLC (with one of the statutory designators, most commonly "LLC" or "Limited Liability Company"), the street address of the LLC's registered office in Minnesota, the name of the registered agent if one is appointed at that address, and the name and signature of at least one organizer. The Secretary of State's office publishes a one-page PDF form that walks through the fields.

The fee is $155 if you mail a paper filing and $135 if you file online through the Business Filings Online portal. Online filings are treated as expedited under Minn. Stat. § 5.12 subd. 1; paper filings routed by mail are not. In-person and online turnaround is typically same-business-day to a few business days during ordinary load. Paper through the mail takes longer, generally a week or two, and during the March renewal crush longer than that.

Minnesota runs its LLCs under the Minnesota Revised Uniform Limited Liability Company Act, codified at Minn. Stat. Chapter 322C. The legislature enacted 322C in 2014, it took effect August 1, 2015 for new formations, and the statute became mandatory for all Minnesota LLCs on January 1, 2018. The prior statute, the Minnesota Limited Liability Company Act at Chapter 322B, is now closed to new formations and, as of the start of this year, no longer governs any live entity in the state. That detail matters for a founder who is looking at forms or template operating agreements dated before 2015. A 322B operating agreement is not automatically enforceable under 322C; the default rules shifted in places that matter, particularly around fiduciary duties, member dissociation, and the distinction between manager-managed and member-managed governance. If the template you found predates August 2015, it should be rewritten against 322C before anyone signs it.

After the Articles clear, the rest of the stack is the usual one. You get an EIN from the IRS through Form SS-4 online, which arrives in the time it takes to fill in. You write an operating agreement, which Minnesota does not require you to file but which 322C repeatedly assumes exists. And you pick a federal tax classification: disregarded entity for a single member, partnership for multiple members, or an S-corp or C-corp election if the numbers support the change. Most founders let the federal default ride for the first year and revisit once the entity has revenue and a real payroll question.

Maintenance, where the free renewal is a trap

Minnesota does not charge a fee for the annual renewal, and it is this fact that the state's administrative dissolution rate leans on. Every LLC on the rolls must file an Annual Renewal with the Secretary of State by December 31 of each calendar year, under Minn. Stat. § 322C.0209. The filing is free online through Business Filings Online. There is no fee, there is no tax, there is no late penalty. What there is, instead, is the consequence spelled out in Minn. Stat. § 5.26 and mirrored in § 322C.0706: an LLC that fails to file the Annual Renewal is statutorily dissolved, by operation of law, and the Secretary of State removes its active status.

The mechanics of the dissolution are that the Secretary runs a program every year and flips the status of every non-renewed entity to "statutorily dissolved" on an administrative sweep. A dissolved LLC loses the right to conduct business in Minnesota, loses the protection of its name against later filers, and becomes exposed to reinstatement fees ($25 to reinstate an LLC that has been dissolved for a renewal lapse) plus the risk that in the interim someone else took the name. The renewal notice is sent to the registered agent on record, which is why the commercial registered-agent services earn their money in Minnesota more than in some other states; they catch the December notice and push the filing through. A solo founder serving as her own registered agent, using a home address, is the person most likely to miss the mailing.

The registered-agent requirement is at Minn. Stat. § 5.36. A Minnesota LLC must maintain a registered office at a Minnesota street address and, if it designates one, a registered agent at that office. The agent can be an individual resident of Minnesota or a business entity authorized to do business in the state. A PO box alone is not sufficient. Commercial registered agents in the state typically charge between $50 and $150 a year, which is a meaningful spread given that the service is load-bearing against a statutory dissolution that costs nothing to trigger.

What Minnesota actually taxes

Minnesota's individual income tax is graduated, and in 2018 the top bracket is 9.85% on Minnesota taxable income above roughly $160,020 for single filers and $266,700 for married-filing-jointly, set by Minn. Stat. § 290.06 subd. 2c. The brackets are inflation-adjusted annually by the Department of Revenue. The 9.85% rate applies in full to flow-through income from an LLC taxed as a partnership, a disregarded entity, or an S-corp, when the income lands on a resident member's Minnesota return.

The corporate franchise tax, governed by Minn. Stat. § 290.06 subd. 1, runs at 9.80% on Minnesota-apportioned corporate taxable income. An LLC that elects C-corp treatment pays at this rate, subject to the minimum fee at § 290.0922, which is a tiered amount keyed to Minnesota property, payroll, and sales and runs from $0 for the smallest entities up to $10,380 at the top tier. The minimum fee applies to S-corps, partnerships, and LLCs as well as C-corps, not just to corporate filers, which is a design choice unusual among the states. The fee is not a franchise tax in the Delaware sense; it is an entity-level charge that catches any flow-through with enough Minnesota presence to clear the first tier.

Minnesota income tax is computed off federal taxable income as a starting point, with modifications. The relevant mechanic here is Minnesota's fixed-date conformity rule, at Minn. Stat. § 290.01 subd. 31, which pins the state's reference to the Internal Revenue Code to a specific date chosen by the legislature. As of May 2018, the date in § 290.01 subd. 31 is December 16, 2016. That means Minnesota has not yet updated its conformity reference to incorporate any of the Internal Revenue Code amendments made by the December 22, 2017 Tax Cuts and Jobs Act. Every TCJA change, including the new IRC § 199A pass-through deduction, the expanded bonus depreciation under § 168(k), the amended interest-expense limit at § 163(j), and the new limits on state and local tax deductions at § 164(b)(6), is federal only for the moment. Minnesota's 2018 tax forms will ask filers to add back or subtract the TCJA effects to arrive at Minnesota taxable income.

The legislature is in session. Both chambers have passed conformity bills with different approaches to TCJA, and the Governor's office has signaled concerns about the revenue effect. Whether a conformity update passes this session and what date it lands on are the open questions. For a founder forming this spring, the planning answer is that the federal § 199A deduction will not reduce the Minnesota liability on pass-through income until the legislature acts. The federal 21% corporate rate does not affect Minnesota's 9.80% rate at all, and Minnesota's minimum fee is unchanged. The mechanics of the state's lag are worked through in our earlier piece on state conformity to federal tax changes, which was written a year before TCJA passed but describes exactly the machinery now at work.

Sales tax, payroll, and the other edges

Minnesota imposes a 6.875% state sales tax under Minn. Stat. § 297A.62, and most municipalities layer local option taxes on top; Minneapolis and Saint Paul each sit at roughly 7.875% combined. Any LLC selling taxable goods or services in Minnesota registers for a Minnesota Tax ID with the Department of Revenue and files returns monthly, quarterly, or annually depending on volume. This is a separate filing from the Secretary of State's entity record and is the compliance obligation most often missed by out-of-state founders who think the entity registration is the whole set.

Payroll adds the state withholding account and the unemployment insurance account with DEED (the Department of Employment and Economic Development). The 2018 Minnesota unemployment taxable wage base is $32,000, and the new-employer rate is set annually by DEED in the first quarter. Workers' compensation coverage is mandatory for any LLC with employees under Minn. Stat. § 176.181, with a narrow exception for sole proprietors, partners, and LLC members who own more than a de minimis share and elect out in writing.

Who Minnesota actually makes sense for

A Minnesota operating company with Minnesota employees or customers belongs in Minnesota. The $135 online fee is modest, the free annual renewal is real savings over a Delaware $300, and the statute is newly modernized to a Uniform Act baseline that most experienced counsel now recognize. For a Twin Cities software firm, a medical-adjacent services company in Rochester, a design studio in Duluth, the straightforward answer is the in-state LLC.

A Minnesota holding company that owns out-of-state operations is a harder call and usually the wrong one. The 9.85% top individual rate and 9.80% corporate rate are the fourth-highest in the country, and the minimum fee at § 290.0922 catches flow-throughs as well as C-corps. A founder who is going to end up raising venture capital will convert to a Delaware C-corp before the Series A, and the interim state of the holding entity does not matter enough to pay Minnesota's rate for the privilege of being there first.

An out-of-state founder forming a Minnesota LLC to operate a business that is genuinely elsewhere is almost always better off forming in the operating state. A Minnesota formation requires a Minnesota registered agent, brings the entity under Minnesota's minimum fee, and opens the door to a Minnesota apportionment question if any revenue touches the state. Minnesota residency, employees, or customers are what justify the choice; the 9.85% rate alone does not travel.

If you are in Minnesota this quarter and the business is operational and local, file the Articles online, pay the $135, and put December 31 on a calendar as the annual renewal date. The renewal is free and the dissolution is automatic, which is the kind of pairing that rewards a founder who sets up the reminder and punishes the founder who does not.

Sources

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