Key Takeaways

  • An S corp in Massachusetts is a standard corporation or LLC that has elected to be taxed under Subchapter S of the Internal Revenue Code, allowing profits and losses to pass through to shareholders.
  • S corps avoid double taxation, offer liability protection, and can provide significant payroll tax savings, but they come with eligibility restrictions and administrative requirements.
  • To form an S corp in Massachusetts, you must incorporate or form an LLC with the state, obtain an EIN, file IRS Form 2553, and comply with state-level corporate tax and reporting obligations.
  • Massachusetts imposes unique tax rules for S corporations, including corporate excise taxes and minimum annual fees based on income and revenue.
  • Maintaining S corp status requires strict adherence to shareholder limits, stock structure rules, annual reports, and recordkeeping obligations.

What is S Corporation Massachusetts?

An S corporation Massachusetts is a C corporation in Massachusetts that has elected to be taxed only once under the IRS code provision subchapter S. It is recognized as an individual entity separate from the people who own it. Many small companies benefit from electing to be taxed as an S corporation since it eliminates the "double-taxation" problem that many corporations experience. By eliminating double-taxation, small companies are able to be more profitable and financially stable, which promotes continued growth and advancement.

Understanding S Corp Taxation and Requirements in Massachusetts

Unlike a traditional C corporation, which pays federal and state income tax on its profits and again when dividends are distributed to shareholders, an S corp in Massachusetts is treated as a pass-through entity for federal tax purposes. This means that income, deductions, and credits flow directly to shareholders, who report them on their personal tax returns. However, Massachusetts imposes its own corporate excise tax on S corporations, which differs based on income levels:

  • S corporations with gross receipts under $6 million pay a flat minimum excise tax of $456.
  • S corporations with gross receipts between $6 million and $9 million pay a 2% excise tax on income plus the minimum tax.
  • S corporations with gross receipts over $9 million pay a 3% excise tax on income plus the minimum tax.

Additionally, S corporations must meet the IRS eligibility rules, including:

  • No more than 100 shareholders
  • All shareholders must be U.S. citizens or residents
  • Only one class of stock may be issued
  • Must be a domestic corporation or LLC

These requirements must be maintained continuously to avoid termination of S corp status.

Advantages of S Corporation Massachusetts

  • S corporations in Massachusetts provide limited liability for shareholders for financial and legal obligations for the business.
  • Shareholders in an S corporation typically cannot lose more money than what they invested.
  • Shareholders' assets are separated and protected from actions against the corporation as long as the shareholders and the company are not involved in illegal or illicit actions.
  • S corporations can build capital quickly because they have more financial instruments and the ability to create and sell stock quickly.
  • S corporations are not double taxed since they do not pay income tax.
  • Business owners that work in the company receive the same employee benefits as everyone else in the company.
  • S corporations often have better luck recruiting when they can offer stock options and bonuses.
  • S corporations have an indefinite life span, which means that they continue even after the owner has passed on.

Massachusetts-Specific Tax Advantages and Considerations

While the general benefits of forming an S corporation apply nationwide, there are several Massachusetts-specific considerations that can make this business structure particularly appealing:

  • Avoidance of Double Taxation: Federal pass-through taxation allows profits to bypass corporate tax, with shareholders only paying tax at the individual level.
  • Payroll Tax Savings: Shareholder-employees can receive a “reasonable salary” subject to payroll tax and take the remainder as distributions, which are not subject to self-employment tax.
  • Potential for State Tax Savings: Massachusetts’ corporate excise tax rate for smaller S corps is generally lower than the combined corporate and dividend tax faced by C corporations.
  • Access to Business Incentives: S corporations registered in Massachusetts may qualify for certain state tax credits, grants, or small business assistance programs that sole proprietorships and partnerships cannot access.
  • Enhanced Credibility: Incorporating as an S corp may improve credibility with banks, investors, and potential partners, which is especially valuable for growing Massachusetts startups.

However, owners should be aware of the administrative overhead, such as annual report filings with the Massachusetts Secretary of the Commonwealth, maintaining corporate records, and adhering strictly to S corp eligibility requirements.

Frequently Asked Questions About S Corporation Massachusetts

What are the limitations or stock requirements for S corporations?

S corporations face several limits regarding their stock, such as who can own it and how it is established. Essentially, S corporations can only be owned by shareholders that meet specific requirements. Shareholders can change the ownership structure of a company by buying or selling stock in the company. The company must also only have one type of stock available.

Do S corporations provide any benefits for foreign investors?

Yes, S corporations are good choices for foreign investors. Because S corporations do not pay income tax, foreign investors that own stock in those companies do not pay tax in the United States.

How is the tax structure affected when an S corporation is sold to another entity?

The sale of the business is where S corporations experience a common problem. Since there will be a transfer of assets, the S corporation will be double-taxed through the built-in gains tax and the shareholder-employee tax. This means it would be more beneficial for the company if it had remained as an LLC rather than an S Corporation.

How does forming an S corporation affect the taxes of self-employed workers?

Although the worker will be employed by the S corporation, he or she is still considered to be self-employed since the S corporation functions as a pass-through entity. Self-employed workers pay self-employment tax, which is a roughly 12 percent income tax on top of the other taxes. This tax goes toward paying for Medicare and Social Security. In actuality, all employees pay this tax, but W-2 employees really only pay half of it since their employer pays the other half. Self-employed workers that have their own S corps get the improved liability protection but have to pay the full 12 percent self-employment tax.

A worker could help to offset this cost through the corporation's dividends. Dividends are not included in self-employment tax. However, they are taxed as a part of the shareholder's taxes.

How are distributions and other disbursements accounted for?

That depends on the accountant and the situation. For the most part, an accountant will allocate distributions at 40 percent of the owner's compensation. The other 60 percent will be counted as the owner's salary, which is taxed accordingly.

Steps to Becoming an S Corporation Massachusetts

1. If you want to become a S corporation in Massachusetts, the shareholders of your company need to elect for a special tax status through the IRS using Form 2553.

If you haven't become a business entity in the State of Massachusetts, you will first have to incorporate your business or set up an LLC before filing the paperwork with the IRS.

2. Each year, the S corporation will file an informational tax return without paying income tax.

3. Shareholders of the S corporation report their share, based on ownership percentage, of income and losses on their personal tax returns.

The losses of the business can help offset an individual shareholder's income from other sources.

Detailed Steps to Form an S Corp in Massachusetts

The process of forming an S corp Massachusetts involves both state-level incorporation and federal tax election. Here’s a detailed breakdown of the steps:

  1. Choose a Name: Make sure your business name is unique and complies with Massachusetts naming requirements.
  2. Appoint a Registered Agent: Designate a registered agent with a physical address in Massachusetts to receive legal and tax documents.
  3. File Articles of Organization: Submit formation documents (for a corporation or LLC) to the Secretary of the Commonwealth.
  4. Obtain an EIN: Apply for an Employer Identification Number from the IRS, which is required for tax filings and opening a business bank account.
  5. File IRS Form 2553: Within 75 days of formation (or the start of the next tax year), file Form 2553 to elect S corporation status.
  6. Register for State Taxes: Depending on your business activities, you may need to register with the Massachusetts Department of Revenue.
  7. File Annual Reports: Submit annual reports and pay any applicable fees to maintain good standing.

Following these steps ensures your S corporation is legally recognized and compliant with both federal and Massachusetts requirements.

Frequently Asked Questions

  1. Do S corporations in Massachusetts pay state income tax?
    S corporations do not pay traditional state income tax but are subject to Massachusetts’ corporate excise tax, which varies based on gross receipts and income.
  2. How long does it take to form an S corp in Massachusetts?
    Formation can take 1 to 2 weeks once you file with the Secretary of the Commonwealth. IRS approval of S corp status typically takes 60 to 75 days.
  3. Can a single-member LLC elect S corp status in Massachusetts?
    Yes. A single-member LLC can elect to be treated as an S corporation by filing IRS Form 2553, provided it meets all eligibility requirements.
  4. Are there annual reporting requirements for Massachusetts S corporations?
    Yes. S corporations must file an annual report with the Secretary of the Commonwealth and pay a filing fee, usually around $125.
  5. What happens if my S corporation fails to meet eligibility requirements?
    Failure to comply — for example, by issuing a second class of stock or admitting an ineligible shareholder — can result in the loss of S corp status, causing the company to revert to C corporation taxation.

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