Start an S Corporation in Maine

Choosing your business entity is one of your first tasks as a prospective small business owner. Your selected entity affects how you run your company and how the Internal Revenue Service (IRS) treats it. 

Here we explain how to form an S corporation in Maine and why you might want to do so.

S Corporation in Maine: Key Points

• An S corporation is a tax classification available to eligible LLCs and corporations.

• S corp tax status offers pass-through taxation, lower self-employment tax, and easy management.

• You must meet the IRS requirements before electing S corp status.

What Is an S Corporation?

A Subchapter S corporation (S corp) is a tax classification rather than a business entity. Under this classification, a small business pays no corporate taxes. Instead, the S corp's shareholders pay taxes on income, losses, and distributions based on their individual tax rates.

This differs substantially from a C corporation (C corp) setup, in which the business pays taxes, followed by the individual paying additional income taxes. As such, the S corp setup means you hand over less of your company's profits to the IRS.

The S corp classification is similar to a limited liability company (LLC) because both are pass-through tax entities. However, the two types have differences, particularly in business structure and liability protection.

Ultimately, the S corp classification can result in your company paying less taxes. However, there are stringent requirements your business must meet before you can benefit from this tax structure.

Tax Considerations for an S Corporation in Maine

Tax treatment is one of the main differences between an S corp and a typical Maine corporation. Let's look at how tax applies to an S corp.

Maine Tax Treatment of S Corporations

Maine's corporate income tax rate operates on a graduated system. For any tax year on or after January 1, 2018, that system works as follows:[1]

• Earnings between $0 and $350,000 - 3.5% of adjusted federal taxable income

• Earnings between $350,000 and $1.05 million - $12,250 plus 7.93% on any income above $350,000

• Earnings between $1.05 million and $3.5 million - $67,760 plus 8.33% on any income above $1.05 million

• Earnings over $3.5 million - $271,845 plus 8.93% on any income above $3.5 million

As you can see, Maine's corporate taxes are quite high. Thankfully, an S corp doesn't have to pay the above taxes. All taxes pass through to the S corp shareholders, who pay income tax at their individual rates.[2]

Maine Franchise Tax for S Corporations

Maine has a franchise tax, though it only applies to banks and similar financial institutions, including those with pass-through tax classification.[3]

You can pay Maine's franchise tax in one of two ways:

• Pay 1% on all Maine-generated income plus 0.008% on all Maine-based assets

• Pay a 0.039% tax on Maine-based assets, with no income tax

As there are restrictions on financial institutions becoming S corps, it's unlikely that your S corp will need to pay this franchise tax.

Pass-Through Taxation

A pass-through entity is a business that doesn’t pay taxes at the business level. Instead, all business profits, losses, deductions, and credits get passed onto the company’s members or shareholders. These members or shareholders then pay taxes on this money via their tax returns at their individual income tax rates.

As a result, the pass-through structure allows S corp owners and shareholders to avoid double taxation on company profits. Each shareholder still needs to meet their tax burden, with some also having to pay self-employment tax.

Requirements for Forming an S Corporation in Maine

Maine follows the IRS’s requirements for forming an S corporation. As such, you need to meet the following criteria to obtain S corp status:[4]

• Be a domestic company based in the United States

• Have no more than 100 S corp shareholders who are individuals, certain types of trusts, or estates

• Offer only one class of stock to your shareholders

• Not be an ineligible corporation, which includes insurance companies, Domestic International Sales corporations (DISCs), and some financial institutions

An S corp must also be careful who it accepts as a shareholder. Non-resident aliens, corporations, and partnerships can't hold shares in an S corp.

In the state of Maine, you can form an S corp if you already have a limited liability company or C corporation, assuming you meet the above requirements. You can also file for S corp status when creating your business.

Filing as an S Corp in Maine

With the requirements for obtaining S corp status defined, you likely are wondering how to create an S corporation in Maine. Our six-step process involves choosing a business name, setting up your company, and successfully obtaining S corp status.

Step 1: Choose a Business Name

You have to be careful when choosing a business or corporate name in Maine. The name must be distinguishable in the Maine Secretary of State’s records, meaning you can’t use a business name that another company already uses.

Thankfully, our free business name search tool makes it easy to confirm that your desired name is available.

Assuming it is available, you can reserve the name for up to 120 days.[5] Note that this reservation isn’t renewable. You must file your Articles of Organization or Incorporation within 120 days. After that, you can still use the name if it’s available but you can't keep it reserved.

Maine also allows businesses to file "Doing Business As" (DBA) names. These are alternative names for a company, which many business owners use if their official business name isn't marketable.

A big disclaimer to the Maine business name process is that you don't receive a trademark on your name after filing your formation documents. Instead, you must file for trademarks on all names and identifying marks separately. Doing so is recommended because you receive a legal document you can use to contest illegitimate uses of your business name easily.[6]

Step 2: Appoint Directors and a Registered Agent

Since you’re creating a domestic corporation when you file for S corp status, your business needs a board of directors. Your S corp directors are typically shareholders in the company.

These S corporation shareholders attend regular meetings to discuss policy and business direction. Your board is also responsible for developing your company bylaws and ensuring the S corp operates as it should.

With your board in place, you can switch focus to assigning a registered agent. This agent is an individual or entity that commits to receiving legal documents and communication from the Maine Secretary of State on your behalf. To be a registered agent, your elected individual must meet the following criteria:

• Be a resident of Maine with a physical street address that they're willing to register with the Secretary of State

• Commit to operating during normal business hours

• Accept all relevant documents, such as service of process, on your behalf

• Ensure documents reach you in an appropriate timeframe

You can act as your own registered agent in Maine, though that isn't advised. A registered agent's duties require a lot of admin work. The role also creates privacy issues, and you may receive sensitive documents at inopportune moments when acting as your own agent.

To avoid these issues, many Maine businesses use a registered agent service. At Swyft Filings, we offer Maine registered agents to companies that want access to expertise and ensure a constant presence in the state.

Step 3: File Articles of Organization

As mentioned earlier, S corp status isn't a business entity. It's a tax classification. That means you must form your business, whether a corporation or limited liability company, before applying to become an S corporation.

LLCs must file a Certificate of Formation with the Secretary of State. The filing fee for this certificate is $175.[7] Corporations file the Articles of Incorporation form, along with a $145 filing fee.[8]

Regardless of the form you complete, you will include general details about your business. These details include your location and business purpose. 

After completing the form, you must submit it via mail to the following address:

Secretary of State Division of Corporations, UCC and Commissions

101 State House Station

Augusta, ME 04333-0101

It takes five to 10 business days to receive a response to your filing.

Once your application is accepted, you're in good standing and can transact business in the state of Maine. To stay in good standing, your company must submit an annual report by June 1 of each year.

Step 4: Create an S Corp Operating Agreement

If you file to create an LLC, Maine requires you to have an operating agreement on file. Maine Legislature outlines what this agreement may contain, though the basic explanation is that an operating agreement allows business owners to set their company's bylaws.[9]

A good operating agreement contains the following:

• Confirmation of each LLC members ownership percentage in the company

• Information about the roles and responsibilities each member assumes

• Processes for the transfer of ownership, termination of members, and dissolution of the company

• Solidification of the liability protection offered to each member via the LLC business structure

You don’t need to create an operating agreement if you form a corporation, though it’s always recommended.

Step 5: Apply for an Employer Identification Number

An Employer Identification Number (EIN) is a nine-digit code that serves as a social security number for your business. The IRS requires any company with employees to have an EIN to keep track of employment taxes and other income tax-related issues.

As such, sole proprietorships without employees don't have to apply for an EIN. However, it’s a good idea to do so for the following reasons:

• Allows you to open business banking accounts with most banks

• Ensures you can scale up by hiring employees whenever you want

• Enhances your business credibility among customers and clients

You can apply for an EIN online using the IRS website. Alternatively, we’ll obtain your EIN for you so you can skip the hassle.

Step 6: File Form 2553 for S Corporation Election

With the previous five steps completed, you’ve formed your business and can start transacting in Maine. But you still haven’t achieved S corp status. You must complete and file Form 2553, Election by a Small Business Corporation, with the IRS.

The form asks for details about your business entity and proposed S corporation election. For example, you must provide details for your shareholders, including who they are and their ownership stakes.

You must submit Form 2553 in the tax year before the one in which you want S corp status or within two months and 15 days of the current tax year. If you have a C corp, missing these deadlines means waiting until the next tax year to achieve S corp status.[10]

If you have an LLC, you can file Form 8832, Entity Classification Election, after the Form 2553 deadline. Form 8832 allows you to reclassify your LLC as a corporation, with the submission of Form 2553 alongside it confirming you want S corp status.[11]

Maine S Corp vs. Maine LLC

Given the paperwork involved in an S corporation election, you may wonder why you should do it as a Maine LLC owner. Weighing up the pros and cons of each structure should reveal which works best for your business.

Advantages of Starting an LLC in Maine

• Have more control over their leadership structures than S corps.

• Gain limited liability protection that safeguards most of your personal assets from business-related lawsuits

• Deal with fewer restrictions 

Disadvantages of Starting an LLC in Maine

• Liability protection isn't total and can be revoked by a judge

• Self-employment taxes are higher as LLC owners can't class themselves as employees of their own businesses

• Business structure is not a tax classification you can use to obtain more favorable tax treatment

Advantages of Forming an S Corporation in Maine

• Offer better liability protection than LLCs due to their corporate structuring

• Allow you to avoid double taxation on business income as a pass-through tax entity

• Combine the benefits of an S corp and LLC by applying for S corp status as an eligible LLC

Disadvantages of Forming an S Corporation in Maine

• Can only have 100 shareholders, whereas an LLC can theoretically have unlimited members

• Must complete extra paperwork to file for S corp status

• May have higher accounting fees due to the more complex nature of S corp taxation

Ready to File for S Corp Status in Maine?

Now that you know the steps for forming an S corporation in Maine, it’s time to work on obtaining S corp status. Doing so offers many tax benefits for small business owners, particularly regarding double taxation.

If you're a new entrepreneur, you may need to form an LLC before applying for S corp status. As a company that's served over 250,000 businesses since 2015, we ensure that your formation documents are accurate and filed correctly so you get your Certificate of Formation in no time.

From there, you need to overcome the S corp limitations to get S corp status. We'll assist you in figuring out if your business is eligible and handle the filing on your behalf, allowing you to focus on running your business. With Swyft Filings, you get quality and timely service without any headaches.

Frequently Asked Questions

What is an S corporation in Maine?

An S corporation in Maine is a pass-through tax classification that ensures you don't have to pay corporate taxes on business income.

Does Maine recognize S corporations?

Yes, Maine recognizes S corps under the rules put in place by the IRS.

What is the turnaround time for filing for S corp status with the IRS?

The IRS may take up to 60 working days to respond to your S corporation filing, though it's often much less than that.

What is the difference between an S corp and an LLC?

The main differences lie in tax treatment and how the businesses operate at the leadership level.

What are the requirements for an S corporation in Maine?

You must meet the IRS's requirements for forming an S corp:

• Be a domestic company based in the United States

• Have no more than 100 S corp shareholders who are individuals, certain types of trusts, or estates

• Offer only one class of stock to your shareholders

• Not be an ineligible corporation, which includes insurance companies, Domestic International Sales corporations (DISCs), and some financial institutions

Are taxes for LLCs and S corps the same?

No, because S corp owners often pay less self-employment tax and have more options for managing income via their personal tax returns.

What is the S corp tax rate?

S corps don't pay any business taxes in Maine. As such, each shareholder pays taxes at their individual income tax rates.

How do I dissolve an S corporation in Maine?

You must file a Statement of Intent to Dissolve with the Maine Secretary of State. A Maine company can't dissolve without the written consent of all members or directors.[12]

Bibliography

1. Department of Administrative and Financial Services – Maine Revenue Services. “Corporate Income Tax FAQ.” Accessed March 14, 2023.

2. Maine.gov. “Frequently Asked Questions.” Accessed March 14, 2023.

3. Department of Administrative and Financial Services – Maine Revenue Services. “Franchise Tax (1120B-ME).” Accessed March 14, 2023.

4. Internal Revenue Service. “S Corporations.” Accessed March 14, 2023.

5. Maine.gov. “Application for Reservation of Name.” Accessed March 14, 2023.

6. Maine Department of the Secretary of State. “Marks & Trade Names.” Accessed March 14, 2023.

7. Maine.gov. “Certificate of Formation.” Accessed March 14, 2023.

8. Maine.gov. “Articles of Incorporation.” Accessed March 14, 2023.

9. Maine Legislature. “Limited Liability Company Agreement; Scope; Function and Limitations.” Accessed March 14, 2023.

10. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed March 14, 2023.

11. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 14, 2023.

12. Maine.gov. “Statement of Intent to Dissolve.” Accessed March 14, 2023.