1. What is S Corporation Massachusetts?
2. Advantages of S Corporation Massachusetts
3. Frequently Asked Questions About S Corporation Massachusetts
4. Steps to Becoming an S Corporation Massachusetts

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.

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.

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.

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