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

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.

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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.

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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.

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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.

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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

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Why You Should Start Massachusetts S Corp

One of the key benefits of operating as an S Corporation is the pass-through tax treatment. This means that the company itself does not pay federal income taxes. Instead, profits and losses are passed through to the shareholders, who report them on their individual tax returns. This can result in potential tax savings for shareholders, as they avoid double taxation that can occur with a traditional C Corporation structure.

Another advantage of an S Corporation is the limited liability protection it provides to shareholders. By forming this type of entity, shareholders are typically not personally responsible for the company’s debts and liabilities. This protection helps safeguard personal assets from potential business risks and lawsuits, offering peace of mind when operating a small business.

Furthermore, an S Corporation structure can help attract investors and potential partners. Many investors prefer to work with S Corporations due to the potential tax benefits and liability protection. By choosing this business entity, you may have an easier time securing funding or partnerships to help grow your business.

Additionally, an S Corporation can offer more flexibility in terms of ownership and distribution of profits. Unlike a traditional C Corporation, S Corporations have a limit on the number of shareholders and are required to be owned by individuals rather than other business entities. This can make it easier to maintain control over the company and distribute profits among fewer shareholders.

In Massachusetts, forming an S Corporation is a relatively straightforward process. You will need to file articles of organization with the Secretary of the Commonwealth, create corporate bylaws, and elect S Corporation tax status with the Internal Revenue Service. While there are some specific requirements and regulations to follow, the benefits of operating as an S Corporation in Massachusetts can make the effort worthwhile.

Ultimately, starting a Massachusetts S Corporation could be a beneficial decision for small business owners looking to maximize tax savings, protect personal assets, and attract potential investors. With its pass-through tax treatment, limited liability protection, and flexibility in ownership structure, an S Corporation can provide the foundation for a successful business venture. If you are considering forming a business in Massachusetts, consider the advantages of operating as an S Corporation and consult with legal and financial professionals to determine if this business entity is the right fit for your objectives and ambitions.

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.