If you’re looking to start your own business, you’re likely considering which entity structure is best for you. One name you may hear thrown around from time to time is an S Corporation in Massachusetts, also known as an S Corp. But an S Corp isn’t a business entity, it’s an IRS-approved tax election that offers tax benefits to many entrepreneurs. These benefits can include a business’s income, losses, deductions, and credits passing through to a business’s shareholders at their personal income tax rate.

But is an S Corporation election the right choice for your business? That depends on many different factors, but you can learn more about this kind of business structure in the following article and on our S Corporation Information page. In general, S Corporations tend to start as standard corporations or LLCs, and then business owners must file additional paperwork and follow additional rules to give their businesses S Corp status.

If this sounds like it might be a good path for your Massachusetts business, we can help you from the very beginning of this process. We can help you establish an LLC or corporation with our Massachusetts LLC Formation Service or Massachusetts Corporation Formation Service, and then guide you through the S Corp election process.

And if you need beyond formation, we provide help for businesses from start to finish with our many business development and legal compliance tools and services. 

1. Choose a Name

You have a lot of freedom when choosing a name for your business, but there are a few basic rules you normally need to follow. Your corporation or LLC name must: 

• Include approved words that identify what kind of state business entity you started
• Not suggest an impermissible business purpose (for a corporation)
• Not be the same or deceptively similar to other names on record with the commonwealth

Sometimes you can use a business name that is similar to another on record with the commonwealth, but the process requires extra paperwork. 

2. Get a Registered Agent

Your business’s Registered Agent plays a large part in keeping your business legally compliant. Registered Agents receive your business’s legal and official correspondence. For help with locating a qualified registered agent for your business, you can use our Registered Agent Service to find one today.

3. Choose a Board of Directors or Managers

Businesses need good management for success. To start a corporation, you need to have a Board of Directors to manage business affairs. When you start a Massachusetts LLC, your members manage business affairs unless your Operating Agreement chooses to have separate managers do the job.

4. Select Corporate Officers

At a minimum, your Massachusetts corporation needs to have a president, a treasurer, and a secretary. One person can hold more than one corporate officer position. If you formed an LLC, your members can serve in these roles.

5. Submit Articles of Incorporation or a Certificate of Organization to the Secretary of the Commonwealth

Your business becomes official under state law when you file Articles of Incorporation for your corporation or a Certificate of Organization for your LLC. You file these documents with the Secretary of the Commonwealth, and you normally have to pay a filing fee. 

6. File Form 2553 to turn your business into an S Corporation

One of the main Massachusetts S Corporation filing requirements is filing Form 2553 with the IRS. If you start your business as an LLC, you first need to file Form 8832 to give your business corporation status, then you can file Form 2553 for S Corporation status. 

S Corporation requirements and limitations

Creating an S Corporation involves certain limitations and business requirements. You can’t elect to run your business as an S Corporation unless: 

• Your business is a domestic entity
• The business has no more than 100 corporation shareholders
• The only corporation shareholders are from allowable groups that include estates, individuals, and certain trusts, but not corporations, non-resident immigrants, or partnerships
• The business has only one class of stock
• The business is not one of the ineligible entities, such as insurance companies, domestic international sales corporations, and certain financial institutions

Staying within these limitations might be easier for some businesses compared to others. It’s likely in your best interest to speak to financial and legal experts about whether these limitations are appropriate for the kind of enterprise you want to run. 

Pros and cons of creating an S Corporation

It’s best to speak to legal and financial experts about what tax designation your business should have, but the following list of pros and cons can help you assess how appropriate the S Corporation designation is for your business. 

Pros

As the owner of an S Corporation, you might be able to take advantage of multiple benefits, including: 

• Asset protection
• The use of cash method accounting
• Pass-through taxation
• Favorable characterization of taxable income

In many ways, running an S Corporation can ease potential financial burdens on your business, but there can be downsides to this election as well. 

Cons

Common disadvantages of running an S Corporation include:

• Limited options for issuing corporation stock
• Additional obligations, limitations, and paperwork
• Increased IRS oversight
• Less flexibility when allocating income and loss

Determining whether these disadvantages are significant enough to forgo the S Corporation election depends on factors unique to your business. 

What to know before creating an S Corporation in Massachusetts

If you create a standard Massachusetts corporation, it’s by default a C Corporation with the IRS until you follow certain rules and successfully file the proper paperwork to make it an S Corporation. We’ve gone over some of the basic steps for how to set up an S Corporation in Massachusetts, but let’s talk about the general characteristics of this kind of business. 

What is an S Corporation?

The label “S Corporation” is a tax designation for federal purposes and commonwealth purposes. If an eligible business elects to be a Massachusetts S Corp, it can enjoy multiple tax benefits. 

What’s the difference between an S Corporation and a C Corporation?

The differences between S Corporations and C Corporations can be stark. As you have seen with the eligibility requirements we listed above, S Corporations have significant limitations on issuing stocks that C Corporations generally don’t have.

But some of the starkest differences between S Corporations and C Corporations are their tax obligations. Normally, C Corporations are subject to double taxation. This means that the C Corporation normally has to pay income taxes at the entity level, and then its shareholders have to pay taxes on their share of the corporate income.

S Corporations are attractive to many because they enjoy pass-through taxation. This means that the business entity doesn’t pay income taxes, only the shareholders pay taxes on their share of the corporate income. S Corporation income tax liabilities also pass through to the shareholders when paying Massachusetts corporation tax on corporate income. 

What are the requirements to create an S Corporation? 

In general, your business must operate within the limitations listed above and file Form 2553 with the IRS to become an S Corporation. To properly file this form, you need an Employer Identification Number (EIN) from the IRS. We can help you get an EIN right away with our Employer ID Number Service. 

Can LLCs choose an S Corporation election?

Yes, LLCs can choose S Corporation status. Many LLCs choose this route for certain tax benefits, such as more favorable self-employment taxes. You can learn more about the tax liabilities of LLCs on our Tax Information for LLCs page. 

How We Can Help

Often, the success of your business hangs on the amount of support you have. Our services can provide you with easy-to-access support for every stage of running your business. Our S Corporation Service can help you speedily and properly turn your LLC into an S Corporation. Once you have your S Corporation up and running, we have numerous products and services to help with your business maintenance and compliance needs. We’re here to make your workload lighter as you build a new venture!

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.