Edmond Hui is a software engineer and serial entrepreneur based in New York who has founded multiple online businesses across e-commerce, media, and information publishing. Before transitioning into tech, he spent years as a commercial real estate professional closing deals totaling over 100,000 square feet, giving him firsthand experience with business formation and entity structuring. He built MyStateLLC to provide the free, state-specific LLC guidance he wished existed when forming his own companies.
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An owner's draw is when you transfer money from your LLC's business bank account to your personal account. You're essentially taking a portion of the profits you've already earned. The draw isn't considered a business expense and doesn't reduce your LLC's taxable income.
Tax treatment: Owner's draws are not subject to payroll taxes, but the entire profit of your LLC (regardless of how much you draw) is subject to self-employment tax of 15.3%. In Minnesota, you'll also pay state income tax on your LLC profits at rates ranging from 5.35% to 9.85% depending on your income level.
How to do it
Open a separate business bank account for your Minnesota LLC to maintain clear separation of business and personal funds
Transfer money from your LLC business account to your personal account, documenting each draw with the date, amount, and purpose
Set aside approximately 30-35% of your draws for federal self-employment tax, federal income tax, and Minnesota state income tax
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Guaranteed Payment
A guaranteed payment is a predetermined amount paid to an LLC member for services rendered to the business, regardless of whether the LLC is profitable. These payments are treated as business expenses and reduce the LLC's taxable income. They're similar to a salary but don't require payroll tax withholding.
Tax treatment: Guaranteed payments are subject to self-employment tax of 15.3% for the recipient and are deductible as business expenses for the LLC. In Minnesota, the recipient pays state income tax on guaranteed payments at rates from 5.35% to 9.85%, and the payments reduce the LLC's overall taxable income.
How to do it
Document the guaranteed payment arrangement in your LLC operating agreement, specifying the amount and payment schedule
Make regular payments to the member and issue a Schedule K-1 at year-end showing the guaranteed payment amount
The receiving member should make quarterly estimated tax payments to cover self-employment tax and Minnesota state income tax on the guaranteed payments
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Salary via S-Corp Election
Your LLC elects to be taxed as an S-Corporation by filing Form 2553 with the IRS. As an S-Corp, you become an employee and must pay yourself a reasonable salary subject to payroll taxes. Any additional profits can be distributed as dividends, which aren't subject to self-employment tax.
Tax treatment: Your salary is subject to payroll taxes (15.3% total for Social Security and Medicare), but dividend distributions are not subject to self-employment tax. In Minnesota, both salary and dividends are subject to state income tax at rates from 5.35% to 9.85%. The payroll tax savings on dividends can be significant for higher earners.
How to do it
File Form 2553 with the IRS to elect S-Corp tax status for your Minnesota LLC (must be filed by March 15th for current year election)
Set up payroll to pay yourself a reasonable salary, withholding federal and state income taxes plus payroll taxes
Take additional profits as dividend distributions throughout the year, which avoid self-employment tax but are still subject to Minnesota income tax
Minnesota Tax Notes for LLC Owners
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Income Tax
Minnesota has a progressive income tax system with rates ranging from 5.35% to 9.85% for 2026. LLC owners pay Minnesota state income tax on their share of LLC profits, regardless of the payment method used.
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Self-Employment Tax
Minnesota LLC owners are subject to federal self-employment tax of 15.3% on their share of LLC profits when using owner's draws or guaranteed payments. This tax applies to the entire profit amount, not just what you withdraw.
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Estimated Taxes
Minnesota LLC owners must make quarterly estimated tax payments if they expect to owe $500 or more in state income tax for the year. Federal quarterly payments are required if you expect to owe $1,000 or more. Payments are due April 15, June 15, September 15, and January 15.
Common Mistakes to Avoid
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Mixing personal and business expenses by using the same bank account, which creates tax complications and reduces legal protection
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Failing to make quarterly estimated tax payments and facing penalties from both the IRS and Minnesota Department of Revenue
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Not properly documenting owner's draws or guaranteed payments, making it difficult to track compensation for tax purposes
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Either paying yourself too much (risking cash flow problems) or too little (failing to account for the value of your work and time)
Frequently Asked Questions
You can take owner's draws from your Minnesota LLC as frequently as you want—daily, weekly, monthly, or irregularly—with no legal restrictions from the Minnesota Secretary of State. However, the Minnesota Department of Revenue requires that you only withdraw funds when your LLC maintains positive cash flow and sufficient reserves for business expenses, payroll taxes, and operating costs. Taking excessive draws when your LLC lacks adequate funds can create personal liability issues and trigger IRS scrutiny during audits. Most Minnesota LLC owners establish a consistent monthly or quarterly draw schedule aligned with their business cycle, which simplifies accounting and helps you meet estimated quarterly tax payments to the IRS and Minnesota Department of Revenue. Document every draw in your LLC's accounting records and operating agreement. Your next step: review your current cash flow projections, then establish a sustainable draw schedule that you can maintain consistently throughout 2026.
No, owner's draws from your Minnesota LLC are not subject to payroll taxes like Social Security and Medicare. However, you must pay self-employment tax at 15.3% on your entire share of LLC profits—not just what you withdraw—when you file Form 1040 Schedule SE with the IRS. Additionally, Minnesota requires you to pay state income tax on all LLC profits at rates ranging from 5.35% to 9.85%, depending on your bracket, through the Minnesota Department of Revenue.
This distinction matters significantly: you could take a small draw while owing substantial self-employment and state taxes on retained profits. File Schedule SE with your 2025 federal return (due April 15, 2026) and make quarterly estimated tax payments to both the IRS and Minnesota using Form 1040-ES to avoid penalties.
Your Minnesota LLC salary should balance personal needs with business sustainability—typically after setting aside 30-35% of profits for federal and state income taxes, plus 3-6 months of operating expenses. Minnesota's Department of Revenue requires you to report all LLC distributions on your individual tax return using Schedule C (Form 1040), making your draw amount directly tied to your tax liability. If you're a multi-member LLC, the Minnesota Secretary of State's office expects you to document distributions in your operating agreement to avoid partnership disputes. A practical approach: calculate your annual business profit, subtract taxes owed to Minnesota and the IRS, reserve three to six months of payroll and overhead costs, then distribute the remainder as your draw. Before setting your payment schedule, file Form ST4 with Minnesota Department of Revenue if applicable to your business structure, ensuring compliance with state withholding requirements and avoiding penalties.
Document every owner's draw with the date, amount, reason, and bank account details in your LLC's accounting records. Keep all bank statements showing transfers from your business to personal accounts, as Minnesota's Secretary of State requires LLCs to maintain accurate financial records for seven years. Maintain completely separate business and personal bank accounts—commingling funds weakens your LLC's liability protection and triggers IRS scrutiny. Track all business income and expenses using either the cash or accrual method consistently. These records are critical because Minnesota requires LLCs filing Form ST-4, Sales Tax Return, to substantiate all deductions claimed on federal Form 1065 or Schedule C. During an IRS audit, the agency will request three years of bank statements and draw documentation to verify that distributions align with your LLC's net income. Next, open a dedicated business checking account with your Minnesota bank if you haven't already, then begin using a spreadsheet or accounting software like QuickBooks to log each draw immediately.
An S-Corp election typically makes financial sense for your Minnesota LLC once annual profits exceed $60,000–$80,000, because you can split income between W-2 wages and dividend distributions, reducing self-employment taxes on the dividend portion. File Form 2553 with the IRS and notify Minnesota Department of Revenue within 60 days of election to avoid penalties. The payroll processing costs—roughly $1,500–$3,000 annually through a Minnesota payroll service—become worthwhile when your tax savings exceed these expenses. For example, at $100,000 profit, taking a reasonable $50,000 salary and $50,000 dividend saves approximately 15.3% self-employment tax on that dividend portion. However, if your LLC generates under $60,000 profit, the administrative burden of quarterly payroll filings and year-end reconciliation typically outweighs tax benefits. Schedule a consultation with a Minnesota CPA or tax attorney to model your break-even point and confirm S-Corp election aligns with your business structure and income projections before filing.
Yes, you can legally pay yourself from your Minnesota LLC before it becomes profitable, but this practice carries significant risks. The Minnesota Secretary of State imposes no restrictions on owner distributions, but withdrawing funds during losses depletes your operating capital needed for expenses, payroll, and debt obligations. If your LLC has negative cash flow, taking draws can create a liquidity crisis that forces you to halt operations or default on loans. Lenders and investors reviewing your Minnesota LLC's tax returns (Form 1065) will see these distributions as red flags, potentially disqualifying you from business credit lines or venture funding. Additionally, the IRS scrutinizes disproportionate draws relative to losses during audits. Your practical solution: establish a minimum cash reserve covering three months of operating expenses, then only draw profits after that threshold is met. Contact the Minnesota Department of Revenue to discuss your specific situation before implementing a draw schedule.
