How to Start an S-Corporation in Massachusetts (2024 Guide)

Start an S-Corporation in Massachusetts

If you want to start an LLC in Massachusetts, there are things that you should consider. Massachusetts is the home to a thriving business community, making it an attractive location for entrepreneurs. One popular business structure is the S-Corporation, which offers several tax and operational advantages. This comprehensive guide will explore the process of starting an S-Corporation in Massachusetts, including the costs, steps, advantages, and disadvantages associated with this business structure.

Webinarcare Editorial Team will help you gain knowledge through thorough research and market study. Before starting your S-corp, all the steps in this article must guide you.

What is an S-Corporation?

An S-Corporation is a type of corporation that elects to be taxed under Subchapter S of the Internal Revenue Code. This tax treatment allows S-Corporations to enjoy pass-through taxation, meaning the corporation’s income, deductions, and credits flow through to the shareholders, who report this information on their individual tax returns. This structure helps to avoid the double taxation experienced by C-Corporations.

An S corporation (S corp) is not a type of corporate entity, unlike a limited liability company (LLC) or other companies. It’s a tax classification that might result in significant financial savings for corporations and LLCs but in different ways. S-corp is similar to LLC, except that the IRS treats it as a corporation for tax purposes.

Limitations and Requirements of S-Corp

As you have decided to have an S-Corp structure for your business, you must know the limitations and requirements to qualify for S-Corp status. We have listed some important points to consider following for your reference-

  • Be a domestic corporation.
  • Not be an ineligible corporation, such as specific financial institutions, insurance providers, or domestic corporations engaged in overseas sales.
  • Have just one type of stock.
  • Have a maximum of 100 shareholders or members.
  • Have only permitted individuals, certain trusts, and estates as stockholders or members.

You can apply for an S-Corp in Massachusetts if qualified for the limitations and requirements.

Recommended: We recommend a professional service that can launch an S-Corp whether you have plans to crowdfund or go public. We recommend using –

LegalZoom Starts at $149 + filing fees

How to Form an S-Corporation in Massachusetts?

To create S-Corp in Massachusetts, you must follow the below guidelines that include forming a business name, hiring a Resident Agent, filing your Certificate of Organization, creating an operating agreement, requesting an EIN, and filing a form 2553.

Step 1: Register a Business Name in Massachusetts

After you have decided on the idea to start an S-Corp in Massachusetts, deciding the name for your corporation is significant. Legal procedures should be taken into account when choosing your partnership name. Choose a business name that will enable you to develop a strong brand identity.

If you want to set up an S-Corp, there is a complete guide on Massachusetts Business Name Search for a proper business name. Here are some guidelines you must follow while naming your S-corp.

  • Avoid profanities
  • The name should be available, and no other entity should have the same name in Massachusetts.
  • Limit of restricted words that need a license in Massachusetts
  • Do not use a business name that sounds like a government agency or entity (like “police,” “county,” and “state”)

Step 2: Hire a Resident Agent

The next step in starting an S-corp in Massachusetts is hiring a Resident Agent, a person that accepts legal paperwork on behalf of your business. This person or business will receive important tax forms, legal documents (such as subpoenas), all notices of lawsuits, and other official government correspondence. Forming an LLC with an S-corp will be easier if you have Resident Agent in Massachusetts.

However, if you would like to have an easier process in filing the necessary documents, you can get Massachusetts Resident Agent Services.

We reviewed some of the Best Registered Agent Services and provided features as an add-on with their packages for you to check out.

LLC Service

Rating & Pricing

Top Features

Learn More

#1 Recommendation

$299 Per Year

  • Free LLC Formation

  • RA service in all states

  • Legal consultation

$125 Per Year

  • Flat price for RA service

  • LLC formation package

  • Fast service

Step 3: File For Certificate of Organization

The Certificate of Organization is an important document to start your limited liability company (LLC). Massachusetts Certificate of Organization is a simple document that contains the business name and address as well as the name and address of the person who received lawsuits on behalf of the organization. For the Certificate of Organization to be filed in MI Dept. of LARA, you need to pay a filing fee of $500. In Massachusetts, the filing fee of forming an LLC is $500.

Recommended: Filing formation papers is easy and hassle-free if you hire a professional service. We recommend using –

LegalZoom ($0 + State Fee)

Step 4: Creating an Operating Agreement

After you have filed your Certificate of Organization, the next step is to create an operating agreement in Massachusetts. The operating agreement is essential and necessary since it will cover your corporation’s important documentation and rules. The operating agreements usually include the following:

  • Article I: Organization
  • Article II: Management and Voting
  • Article III: Capital Contributions
  • Article IV: Distributions
  • Article V: Membership Changes
  • Article VI: Dissolution

After creating the LLC operating agreement, you can benefit in several ways since it will discuss how decisions for the business will be made, including management and member voting structure.

Step 5: Request for an EIN

After documenting the operating agreement, you should get or request an Employer Identification Number (EIN). An EIN will serve as the tax ID for your general partnership. EIN can be obtained from the Internal Revenue Service (IRS). It is a 9-digit number similar to Social Security Number. EIN, however, is distinct from SSN. It is only used for business-related activities, particularly for submitting general taxes. The form must be completed and uploaded to the IRS website.

The application of an EIN in Massachusetts can be through the following:

  • Apply Online- The online EIN application is the preferred method for customers to apply for and obtain an EIN.
  • Apply by Fax- Taxpayers can fax the completed Form SS-4 application to the appropriate fax number), after ensuring that the Form SS-4 contains all of the required information.
  • Apply by Mail- The EIN application Form SS-4 can be filed via mail. The processing time frame to receive the mail is four weeks.
  • Apply by Telephone-International Applicants – International applicants may call 267-941-1099 (not a toll-free number) from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain their EIN.

If you would like to be assisted in getting an EIN in the Internal Revenue Service, LegalZoom can get your EIN for you. Their EIN service is quick and hassle-free. For more details about EIN for your business, check on how to apply for an EIN in Massachusetts.

Recommended: With LegalZoom’s EIN service, obtaining your business’s crucial tax ID becomes a breeze, saving you time and effort by handling the complexities so you can quickly set sail on your entrepreneurial voyage. We recommend –

LegalZoom$79 (Standard Fee)

Step 6: File Form 2553 for your S-Corp Business

Once you have obtained your EIN and Certificate of Organization to form an S-Corp, you must file Form 2553, Election by a Small Business Corporation, to apply for S-corp status. Filing a form 2553 should be done 75 days after the formation of your S-Corp, or at most 75 days after the beginning of the tax year in which the election is to take effect.

If your LLS-Corp has passed the deadline of 75 days, you must also file Form 8832, Entity Classification Election, to opt to be taxed as a corporation. Then you would send Form 2553 and Form 8832 jointly by certified mail from the USPS.

In Massachusetts, you can file your form 2553 in the Department of the Treasury Internal Revenue Service Center – Kansas City, MO 64999 Fax: 855-887-7734.

Costs of Forming an S-Corporation

There are several costs associated with forming an S-Corporation in Massachusetts, including:

  1. Filing Fees: When forming a corporation in Massachusetts, you must file Articles of Incorporation with the Massachusetts Secretary of State and pay a filing fee of $275 for filing online, in-person, or by mail.
  2. Statement of Information: After forming the corporation, you must file a Statement of Information (Form SI-550) within 90 days and pay a filing fee (currently $25). This statement must be filed annually after that.
  3. Franchise Tax: S-Corporations in Massachusetts are subject to the annual franchise tax, which is the greater of a minimum tax (currently $800) or a calculated tax based on the corporation’s net income.
  4. Other Costs: Depending on the nature of your business, additional costs may include obtaining licenses and permits, registered agent services, and professional fees for legal and accounting services.

Advantages of Forming an S-Corporation

There are numerous advantages to incorporating an S-Corp, but you should be aware of certain problems. Consider the following benefits of an S corporation:

Pass-through Taxation

S-Corporations enjoy pass-through taxation, which helps to avoid the double taxation faced by C-Corporations. This can result in potential tax savings for shareholders. Pass-through taxation is a tax system where the income, deductions, and credits generated by a business entity, such as Massachusetts General Partnership, limited liability company (LLC), or S-Corporation, are passed through to individual owners or shareholders instead of being taxed at the corporate level.

In this system, business profits and losses are reported on the owners’ or shareholders’ individual tax returns, and taxes are paid at their individual income tax rates. This avoids the issue of double taxation, which occurs in C-Corporations where income is taxed at both the corporate level and again when distributed to shareholders as dividends. Pass-through taxation is generally advantageous for small businesses and their owners, as it simplifies tax filings and often results in lower overall taxes.

Limited Liability Protection

Shareholders of an S-Corporation have limited liability protection, meaning their personal assets are protected from the corporation’s debts and obligations. Limited liability protection in an S-Corporation refers to the legal separation between the personal assets of the shareholders (owners) and the business assets, which protects shareholders from being personally responsible for the company’s debts and legal obligations.

In an S-Corporation, shareholders’ personal assets, such as their homes, cars, and personal savings, are not at risk if the business faces financial difficulties or lawsuits. The shareholders’ liability is limited to the amount they have invested in the company. This limited liability is a significant advantage of incorporating a business as an S-Corporation, as it provides a safeguard for the personal financial well-being of the business owners.

It is important to note that limited liability protection can only be supported if the shareholders maintain proper corporate formalities, such as keeping separate business and personal finances, holding regular shareholder meetings, and maintaining accurate business records. In such cases, courts may “pierce the corporate veil” and hold shareholders personally liable for the company’s debts and obligations.

Transferability of Shares

Shares in an S-Corporation are more easily transferable than those in an LLC, allowing for greater flexibility in ownership changes. Transferability of shares in an S-Corporation refers to the ability of shareholders to sell, gift, or otherwise transfer their ownership interest in the company to another person or entity. This is an important aspect of an S-Corporation’s structure, as it allows for flexibility in ownership and the potential for raising capital through the sale of shares.

However, there are certain restrictions on the transferability of shares in an S-Corporation, which are imposed by the Internal Revenue Service (IRS) to maintain the company’s eligibility for S-Corp status:

  • Shareholders: The number of shareholders in an S-Corporation is limited to a maximum of 100. Only individuals, certain trusts, and estates can be shareholders; other corporations and partnerships are generally not allowed.
  • Eligible Shareholders: Only U.S. citizens and resident aliens can be shareholders in an S-Corporation. Non-resident aliens are not allowed to hold shares.
  • One Class of Stock: S-Corporations can only have one class of stock. All shares must have the same rights and privileges, such as voting rights and distribution preferences. However, differences in voting rights are allowed if they are not tied to economic rights (e.g., distribution preferences).
  • Perpetual Existence: Perpetual existence refers to the concept that a business entity, such as an S-Corporation, can continue to exist indefinitely, regardless of changes in ownership or management. This means the corporation can outlive its original founders and shareholders and continue to operate even if individual shareholders pass away or decide to sell their shares.

This characteristic of an S-Corporation provides stability and continuity for the business, as it ensures that the corporation’s operations, contracts, and legal obligations remain unaffected by changes in ownership. It also makes it easier for the company to attract investors and raise capital. Potential investors can be confident that the business will continue to exist even if the original owners are no longer involved.

Disadvantages of Forming an S-Corporation

Despite these advantages, moving to an S corporation only sometimes makes sense – or at the very least, necessitates a thorough review of certain situations. The following issues may arise in particular:

Restrictions on Shareholders

S-Corporations are subject to specific restrictions, such as a maximum of 100 shareholders and limitations on the types of eligible shareholders (e.g., only individuals, certain trusts, and estates).

Single Class of Stock

S-Corporations are limited to issuing only one class of stock, which can limit flexibility in raising capital or creating different ownership structures. A single class of stock in an S-Corporation refers to the requirement that the corporation only issues one type of stock with equal rights and characteristics for all shareholders. This means that all shares of stock must have the same economic rights, such as dividend distribution preferences and liquidation rights, as well as voting rights. The single class of stock requirement is one of the key criteria the Internal Revenue Service (IRS) sets for a corporation to qualify for S-Corp status.

Increased Complexity

Forming and maintaining an S-Corporation requires more paperwork, record-keeping, and compliance with state and federal regulations than simpler structures like LLCs.

Franchise Tax

S-Corporations in Massachusetts are subject to the annual franchise tax, which can financially burden some businesses.

In an Massachusetts S-Corporation context, the franchise tax is usually based on the company’s income, net worth, or a combination of both. Since S-Corporations are pass-through entities for federal income tax purposes, meaning that their income is not taxed at the corporate level but rather passed through to individual shareholders, they may be exempt from or subject to lower franchise tax rates in some states than traditional C-Corporations.

However, S-Corporations must still comply with Massachusetts franchise tax requirements, which may include annual filings and tax payments. It is crucial for S-Corporation owners to understand the specific rules and regulations in their state of operation and to consult with a tax professional to ensure compliance and minimize their tax.

FAQs

What is an S-corporation?
It is a type of corporation that offers income tax benefits to its owners.
Do I need to form a corporation before I apply for S-corporation status?
Yes, you need to first register a corporation with the state of Massachusetts.
Can I have a one-person S-corporation?
Yes, you can have a one-person S-corporation in Massachusetts.
How long does it take to become an S-corporation in Massachusetts?
It usually takes 4-6 weeks to become an S-corporation in Massachusetts.
How much does it cost to form an S-corporation in Massachusetts?
The cost of forming an S-corporation in Massachusetts varies depending on several factors, such as the company’s structure, the number of shareholders, and filing fees.
How many shareholders can an S-corporation have in Massachusetts?
An S-corporation can have up to 100 shareholders in Massachusetts.
Can an S-corporation be owned by another corporation?
Yes, another corporation can own an S-corporation in Massachusetts.
Can an S-corporation have more than one class of stock in Massachusetts?
No, an S-corporation cannot have more than one class of stock in Massachusetts.
Do I need to file both federal and state taxes for my S-corporation in Massachusetts?
Yes, you need to file both federal and state taxes for your S-corporation in Massachusetts.
What is the minimum share capital required to form an S-corporation in Massachusetts?
There is no minimum share capital required to form an S-corporation in Massachusetts.
Can a foreign corporation become an S-corporation in Massachusetts?
No, only US citizens or residents can own an S-corporation in Massachusetts.
Can Massachusetts residents form an S-corporation in another state?
Yes, Massachusetts residents can form an S-corporation in another state, but they will still need to pay taxes in Massachusetts.
Can an S-corporation be taxed as a C-corporation in Massachusetts?
No, an S-corporation cannot be taxed as a C-corporation in Massachusetts.
What are the annual requirements for S-corporations in Massachusetts?
S-corporations in Massachusetts need to file annual reports and pay the required fees.
Do S-corporations in Massachusetts need to hold annual meetings?
S-corporations in Massachusetts are not required to hold annual meetings.
Can S-corporations in Massachusetts issue stock options?
Yes, S-corporations in Massachusetts can issue stock options.
Can an S-corporation in Massachusetts be sued?
Yes, an S-corporation in Massachusetts can be sued.
Can S-corporations in Massachusetts be dissolved?
Yes, S-corporations in Massachusetts can be dissolved.
How do I get an EIN for my S-corporation in Massachusetts?
You can get an EIN (Employee Identification Number) for your S-corporation in Massachusetts by applying online on the IRS website or by mailing Form SS-4.
What is the advantage of having an S-corporation in Massachusetts compared to a sole proprietorship?
The advantage of having an S-corporation over a sole proprietorship in Massachusetts is that an S-corporation can offer the owner(s) personal liability protection.
What should I consider before forming an S-corporation in Massachusetts?
You should consider factors such as the business type, the number of shareholders, and the potential for growth.
Are S-corporations in Massachusetts required to have a board of directors?
No, S-corporations in Massachusetts are not required to have a board of directors.
Is there a residency requirement for S-corporation shareholders in Massachusetts?
No, there is no residency requirement for S-corporation shareholders in Massachusetts.
What is the tax rate for S-corporations in Massachusetts?
The tax rate for S-corporations in Massachusetts is the same as the regular corporate tax rate.
Can S-corporations in Massachusetts issue bonds?
No, S-corporations in Massachusetts cannot issue bonds.
How do S-corporations in Massachusetts distribute profits to shareholders?
S-corporations in Massachusetts distribute profits to shareholders in the form of dividends.
What are the limitations of an S-corporation in Massachusetts?
The limitations of S-corporations in Massachusetts include a restriction on the number of shareholders and the type of stock that can be issued.
Can an S-corporation in Massachusetts change its structure?
Yes, an S-corporation in Massachusetts can change its structure if it meets the requirements of the IRS and the state of Massachusetts.
What types of businesses are best suited for S-corporation status?
Businesses that are best suited for S-corporation status in Massachusetts include small businesses and professional service firms.
What is an S-corporation in Massachusetts?
An S-corporation in Massachusetts is a special type of corporation that allows for pass-through taxation and limited liability protection.
How do I start an S-corporation in Massachusetts?
To start an S-corporation in Massachusetts, you must file the necessary paperwork with the Secretary of the Commonwealth and follow state regulations.
What are the benefits of starting an S-corporation in Massachusetts?
The main benefit of starting an S-corporation in Massachusetts is the ability to avoid double taxation and limited liability protection.
What are the V-TEC workshops offered in Massachusetts to help S-corporation Business?
V-TEC workshops are offered in Massachusetts to provide training and assistance to individuals starting or running S-corporations in the state.
How much does it cost to start an S-corporation in Massachusetts?
The cost to start an S-corporation in Massachusetts varies depending on various factors such as State filing fees, attorney fees and more.
What is the Massachusetts Secretary of State Corporation Division?
The Massachusetts Secretary of State Corporation Division regulates and oversees the formation and operation of corporations, including S-corporations in the state.
Do I need a lawyer to start an S-corporation in Massachusetts?
While you do not need a lawyer to start an S-corporation in Massachusetts, it is highly recommended that you seek legal advice if you are unfamiliar with the process.
Can an S-corporation in Massachusetts have only one shareholder?
Yes, an S-corporation in Massachusetts can have only one shareholder.
What is the filing fee to start an S-corporation in Massachusetts?
The filing fee to start an S-corporation in Massachusetts is $275.
How long does it take to start an S-corporation in Massachusetts?
It takes approximately two weeks to start an S-corporation in Massachusetts.
What is the minimum number of shareholders required for an S-corporation in Massachusetts?
The minimum number of shareholders required for an S-corporation in Massachusetts is one.
What is the maximum number of shareholders allowed for an S-corporation in Massachusetts?
The maximum number of shareholders allowed for an S-corporation in Massachusetts is 100.
Does an S-corporation in Massachusetts have to file an annual report?
Yes, an S-corporation in Massachusetts is required to file an annual report with the Secretary of the Commonwealth.
Can an S-corporation in Massachusetts be a professional corporation?
Yes, an S-corporation in Massachusetts can be a professional corporation, which is a corporation formed for the practice of a specified professional service such as medical or legal services.
Are there any residency requirements to start an S-corporation in Massachusetts?
There are no residency requirements to start an S-corporation in Massachusetts.
How many director positions are required in an S-corporation in Massachusetts?
An S-corporation in Massachusetts is not required to have a board of directors.
What are the requirements to be an S-corporation shareholder in Massachusetts?
To be an S-corporation shareholder in Massachusetts, you must be a U.S. citizen or resident alien.
Can an S-corporation in Massachusetts elect to be taxed as a C-corporation?
Yes, an S-corporation in Massachusetts can elect to be taxed as a C-corporation.
Does Massachusetts require the owners of an S-corporation to be publicly disclosed?
Massachusetts does not require the owners of an S-corporation to be publicly disclosed.
What is the difference between a C-corporation and an S-corporation in Massachusetts?
The main difference between a C-corporation and an S-corporation in Massachusetts is that C-corps pay taxes at the corporate level and then at the individual shareholder level, while S-corps only pay taxes at the individual shareholder level.
What are the requirements for an S-corporation to remain in compliance in Massachusetts?
The requirements for an S-corporation to remain in compliance in Massachusetts are filing annual reports and conducting annual meetings of directors and shareholders.
Can an S-corporation in Massachusetts have more than one class of stock?
No, an S-corporation in Massachusetts cannot have more than one class of stock.
What is the difference between a shareholder and a director in an S-corporation in Massachusetts?
A shareholder in an S-corporation in Massachusetts owns a part of the company, while a director has a managerial role in the company.
In Massachusetts, can an S-corporation be owned by a foreign corporation?
Yes, an S-corporation in Massachusetts can be owned by a foreign corporation.
How often must annual meetings be held for an S-corporation in Massachusetts?
Annual meetings must be held at least once per year for an S-corporation in Massachusetts.
Is it possible for an S-corporation in Massachusetts to revert to a C-corporation?
Yes, an S-corporation in Massachusetts can elect to revoke its S-Corp status and convert to a traditional C-corporation.
What is the advantage of a Massachusetts S-corporation over a Massachusetts LLC?
The advantage of an S-corporation over an LLC in Massachusetts generally has to do with better tax savings for owners/shareholders of the entity.
Can an S-corporation in Massachusetts have unlimited shareholders?
No, an S-corporation in Massachusetts cannot have unlimited shareholders.

Also Read

Why You Should Start Massachusetts S Corp

A Massachusetts S Corporation, or S Corp for short, is a type of business structure that offers many benefits to business owners. One of the main advantages of forming an S Corp is the potential tax benefits. S Corporations allow income to pass through to shareholders without being taxed at the corporate level, avoiding the double taxation that is common with C Corporations. This can result in significant tax savings for business owners.

Another advantage of forming an S Corporation in Massachusetts is the limited liability protection it offers to shareholders. Like a C Corporation, an S Corporation is a separate legal entity from its owners. This means that in the event of a lawsuit or debt, the personal assets of shareholders are protected from being used to satisfy business liabilities. This can provide peace of mind to business owners, especially in industries with higher liability risks.

Furthermore, forming an S Corporation can lend credibility to your business. S Corporations are seen as more established and reputable than sole proprietorships or partnerships. This can be beneficial when attracting investors, customers, and suppliers to your business. In addition, many banks and financial institutions prefer to lend to S Corporations due to their perceived stability and structure.

Additionally, S Corporations offer flexibility in terms of ownership and management. While C Corporations have strict ownership and management requirements, such as a board of directors and annual meetings, S Corporations have fewer formalities. This can make it easier for business owners to run their company the way they see fit without cumbersome bureaucratic procedures.

Finally, forming an S Corporation can provide estate planning benefits for business owners. Shares of an S Corporation can be easily transferred to family members or heirs without triggering significant tax consequences. This can facilitate the smooth transition of ownership in the event of retirement, death, or other circumstances.

In conclusion, starting a Massachusetts S Corporation can offer numerous benefits to business owners, including potential tax savings, limited liability protection, credibility, flexibility, and estate planning advantages. If you are a small business owner looking to protect your assets, minimize taxes, and enhance the credibility of your business, forming an S Corporation may be the right choice for you. Consider speaking with a legal or financial advisor to determine if this business structure is the best fit for your specific circumstances.

Conclusion

Forming an S-Corporation in Massachusetts can be a beneficial decision for small business owners seeking liability protection, pass-through taxation, and easier transfer of ownership. By meeting the requirements set by the IRS and following the necessary steps, business owners can take advantage of an S-Corp’s unique structure and benefits. However, it is essential to consider the potential drawbacks, such as increased paperwork and limitations on ownership, before making a final decision. Consulting with a legal or financial professional can help business owners determine if an S-Corporation is right for their needs and goals.

Leave a Comment