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Starting an S Corporation (or S Corp) is an excellent way to minimize your tax liability and increase the level of protection for your assets. However, not everyone knows about S Corporations. What are they? And how do you go about forming an S Corporation?
The first thing you should know is that an S Corp is not a separate type of business entity like a corporation or limited liability company (LLC). Instead, it is a tax election that you make with the Internal Revenue Service (IRS). The IRS then uses a different tax subchapter for your business that allows certain tax benefits. Specifically, the main benefit of S Corporations is that they do not have to pay corporate taxes on their income or credits. Instead, they “pass-through” their revenue, losses, and credits to their shareholders, who then pay personal income taxes. Check out our Maryland S Corporations guide to learn more.
In this article, we’ll talk about how to form an S Corporation. Because it is not a separate business structure, you can form an S Corp only if you already have an existing LLC or corporation. If you do not have a business yet, we can help you form a Maryland LLC or a Maryland Corporation. After that, we’re ready to give you a hand if you decide that forming a Maryland S Corp is the best path forward for your company. With our products, we can help streamline the process for creating an S Corp so that you can glide right through it. We can also help with all kinds of other services, like comparing business structures, meeting your filing and compliance requirements, and other business needs.
The first step in forming an S Corporation in Maryland is either forming a corporation or an LLC. Although we have guides on how to form a corporation or an LLC in Maryland, they share many filing requirements. To form an S corporation, you simply have to meet these administrative and filing requirements for standard corporations or LLCs.
First things first. Get a pen, paper, or computer and think of several great business names. Once you have those, use Maryland’s Business Entity Search website to see whether any of your business names are available. The name must abide by state law and not be in use by another business.
Both LLCs and corporations require a Maryland registered agent. Registered agents receive critical legal and financial documents for your business so that you have official notice of all ongoing issues.
Every business needs some kind of management structure. For corporations, management consists of a board of directors. LLCs, on the other hand, can be managed by their members or by a group of managers.
All Maryland C Corporations have to file Articles of Incorporation with the Maryland State Department of Assessments and Taxation. It’s a fairly straightforward document that shows the business’s mailing address, registered agent, and corporate purpose. On the other hand, LLCs must submit Articles of Organization. Like Articles of Corporation, these simply reflect the LLC’s name, purpose, mailing address, and resident agent.
Just as workers use their social security number to pay taxes, businesses use an EIN to pay their federal taxes. Unlike social security numbers, however, businesses have to apply for an EIN with the IRS. It is possible to apply for an EIN on your own, but our Employer ID Number Service can make the application process much easier.
Once you’ve completed the above, you will have an official Maryland business. All that’s left in the long list of Maryland S Corporation filing requirements is to submit a copy of Form 2553. LLCs will file Form 8832 first.
When you file Form 2553, make sure you follow the IRS’s timing requirements. If you want your S Corp election to take place in the current tax year, you have to submit the form no more than 2 months and 15 days after the start of your business’s tax year. If you want the election to take place next tax year, you can file the form at any point in the preceding tax year.
All newly formed corporations are C corporations by default, so you have to file extra paperwork to change to a qualified subchapter S corporation. Before your business can qualify for S corporation status, it must:
It doesn’t matter whether your business’s shareholders are individuals or estates. However, none of your shareholders can be partnerships, corporations, or non-resident foreigners.
Like most business decisions, there are both pros and cons to creating a Maryland S corp.
The benefits of an S Corp include:
Cons of an S Corp include:
Based on the personal circumstances of your business, becoming an S corporation may be the perfect choice to take your business to the next level.
It is vital that business owners understand the pros and cons of a Maryland S Corp before they decide to make a change. That way, you can make the right call for your business based on its current situation.
Simply put, S Corporations are usually smaller corporations that trade taxation benefits for a limited number of shareholders.
Again, an S Corporation is not a separate business entity from a C corporation. It is actually just a corporation or LLC that is treated differently by the Internal Revenue Services for tax purposes.
Most C corporations have to pay taxes twice. The first taxation event occurs when the business pays taxes on its revenues. The second taxation event occurs when the business’s shareholders pay personal income taxes on the profits they receive from the business. However, when the IRS uses Subchapter S of the Internal Revenue Code for a corporation, there is no “double taxation.” Instead, S corporations get to “pass-through” their revenues to their shareholders without paying business taxes. Taxes are paid only when the corporation’s shareholders pay their personal income taxes.
Besides that change, S corporations have all the benefits of C corporations. S corps can still issue stock, have the same ownership structure, and can provide their shareholders with personal liability protection.
To create an S Corporation, all you have to do is file a copy of Form 2553 with the IRS after you form a standard corporation or LLC.
As you might have guessed from the above section, LLCs can elect to file taxes as an S corporation. LLCs are considered pass-through taxation entities by default, so it is less common for them to file for S corporation status. However, they can still benefit from filing taxes as an S corporation, especially when it comes to self-employment taxes. Check out our guide on LLC tax information to learn more.
We’re passionate about supporting business owners at every step of their business journey. We know you have to make all kinds of critical corporate-level decisions. Whether you need help with formation, compliance requirements, or expanding your business, we’re there for you. If you need to start a corporation or LLC, we can get you underway in just a few minutes. Let us get your business started today.
Disclaimer: The content on this page is for information purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
There are several benefits of creating a Maryland S Corp. These benefits include “pass-through” taxation and favorable tax treatment for income from self-employment.
A Maryland S Corp is not a unique type of business. It just has a different kind of tax treatment. This means that you don’t need to worry about finding a new name.
Your best approach is to consult a capable attorney or accountant to assess whether your business should opt to be treated as an S corporation taxation. It’s also helpful to know the differences between an LLC and an S Corp. As for public-facing identifiers, use the name found on your formation documents, there’s no need to alter any signage.
Consult with your business’s accountant or tax professional to calculate your business’s taxes as an S corporation. You can also check out our page on calculating your S Corp’s taxes.