Start an S Corporation in Massachusetts

The IRS can be a problem for your business entity, whether you’re starting a small business or want to upgrade your company. You want to find a way to make taxes more manageable and possibly receive some advantages. That’s where the S corporation status comes in. 

This article will tell you what an S corporation in Massachusetts is and how to start one.

S Corporations in Massachusetts: Key Points

• An S corporation is a tax classification offered by the IRS.

• With S corp status, organizations can pass their income, losses, credits, and deductions directly to their shareholders.

• You must form an LLC or C corporation before submitting Form 2553 to elect S corp status.

What Is an S Corporation?

Unlike a C corporation or limited liability company (LLC), an S corporation isn’t a business structure. Instead, it’s a tax classification. The IRS permits these organizations to pass their income, losses, credits, and deductions directly to their shareholders. That’s why they’re also known as pass-through entities.

Tax Considerations for an S Corporation in Massachusetts

Let’s delve deeper into the tax differences between an S corp and a traditional business entity.

Massachusetts Tax Treatment of S Corporations

Tax treatment is the most significant difference between S corporations, C corporations, and LLCs. In most cases, you’re only subject to some tax on passive income and capital gains as an S corp owner. The state looks at S corps the same as partnerships, so you don’t pay taxes at a corporate level.

This might be the most attractive feature of S corporations. You don’t operate under double taxation. Regular corporations are taxed at a corporate and individual level.

Furthermore, S corp owners earn money from reasonable salaries and distributions. That’s why you’ll need to pay certain taxes if you form an S corporation in Massachusetts:

• Self-Employment Tax: Your self-employment tax covers Medicare and Social Security. As of today, the rate stands at 15.3%. Any money earned as a salary is subject to this case, but your distributions are exempt from this rule.

• State Income Tax: The state income tax in Massachusetts is 5%. It means you must pay 5% in taxes, irrespective of your income bracket. Some states don’t have this tax, whereas others raise it to 10%, putting Massachusetts in the middle.

Massachusetts Franchise Tax for S Corporations

The state of Massachusetts imposes a corporate excise tax. This general corporation tax comprises franchise tax and your net income.

The most crucial detail you need to consider here is your tax base:

• S corporation with tangible properties: If you have tangible properties, the state taxes you based on the value of your tangible assets.

• S corporation with intangible properties: If you run an intangible property S corporation, you’re subject to tax on intangible assets.

The franchise tax rate is $2.60 per $1,000 of allocated and specified tangible personal property or allocated and specified net worth. The structure depends on the tax base you belong to.

Pass-Through Taxation

If you set up your organization as an S corporation, federal corporate income tax doesn’t apply to your business income. Suppose you’re running an S corp with just one shareholder. Your corporation status is practically disregarded, and your income is viewed as the shareholder's income. This makes S corporations similar to sole proprietorships.

If your S corporation has multiple shareholders, you operate under pass-through taxation. Your income passes through to your shareholders, who pay income tax on their portion of your company’s income at individual tax rates.

Although you’re not subject to federal corporate income tax, you must still file your annual tax return on Form 1120S. The form is mandatory, but the IRS only uses it to get an overview of your earnings and expenses. In other words, the IRS needs the form for informational purposes.

Requirements for Forming an S Corporation in Massachusetts

Whether you’re launching a company from scratch or transitioning a well-established organization to the S corp status, understanding the requirements of this tax classification is essential. It helps ensure you remain compliant with Massachusetts state laws.

Here are the conditions you must meet to qualify for an S corporation in Massachusetts:

• Have only one class of stock in your company[1]

• Be a domestic limited liability company or corporation with up to 100 members or shareholders

• Not be a bank or any other financial institution

• Have eligible shareholders or members, including estates, certain trusts, and individuals

Note that you can’t have non-resident taxpayers who don’t have a green card or haven’t completed their substantial presence testing. Partnerships or corporations as shareholders or members aren’t allowed either.[2]

Making sure your enterprise adheres to these rules can be overwhelming. You can easily forget some of them in your rush to transition your company, but Swyft Filings is here to prevent this. Our online filing service is a comprehensive yet user-friendly platform that lets you stay on top of the requirements.

How to File as an S Corp in Massachusetts in 6 Steps

After familiarizing yourself with the nature of the S corp status, you can now begin the filing process. Take the following steps to form your S corporation in Massachusetts.

Step 1: Choose a Business Name

First, you need to name your company. Here are a few limitations you should bear in mind when selecting your business name:

• Must include “limited company,” “limited liability company,” or an abbreviation (L.C., LC, L.L.C., or LLC)

• May not include words that may make the state or others confuse your company with government agencies, such as State Department and Treasury

• May require additional paperwork or licensed individuals as your shareholders if you include University, Bank, or similar words in the name

• May not be similar to existing names in your state

A great way to ensure you’re not overlapping with other businesses is to perform a name search. Our free business name search reveals whether you can safely use the desired name within seconds. We can also help you complete your name reservation.

Furthermore, don’t forget to trademark your business name. It guarantees your name remains unique while protecting your brand from intellectual property misuse or theft as the company grows.

Step 2: Appoint Directors and a Registered Agent

In addition to selecting an eligible name, you must appoint your S corp directors. This is a crucial role, as your directors make decisions on your behalf, appoint other officers, and ensure your company complies with state laws.

Appointing a registered agent is also critical. A Massachusetts registered agent is a person or business that accepts service of process, tax notices, and other legal documents on your behalf. You provide the information about your registered agent when filing your articles of organization.

Many S corp owners register themselves as their registered agent, but this is risky. Here’s what happens when you’re a self-appointed agent:

• Receive lawsuit notices and other sensitive documents in front of other S corporation shareholders or clients, damaging your reputation

• Maintain a registered office and be present at this location during standard business hours, which can be overwhelming if you’re not used to working a nine-to-five job

• Miss a paperwork delivery if your schedule is busy

There’s no need to make your life as a business owner harder because you can hire a registered agent company. Swyft Filings is your go-to option. Here’s what our registered agent service brings to the table:

• Delivering same-day paperwork

• Handing you service of process when it’s most convenient to avoid sharing sensitive data in front of others

• Maintaining standard business hours on your behalf

• Receiving key documents, like tax and annual report reminders

When setting up your Massachusetts registered agent, they must agree to the appointment. The easiest way to do so is to sign your articles of organization. Alternatively, they can sign a separate document attached to your articles of organization.

If you prefer online filing to hard copy submissions, your agent must provide an electronic signature. It verifies to the state that they’ve consented to their appointment.

Step 3: File Articles of Organization

Since an S corp is a status, not a business structure, you must file for an LLC or corporation before transitioning to this tax classification. Submitting your articles of organization is essential here. 

Massachusetts requires this paperwork to obtain key information about your company, including the address for sending the annual report and franchise tax reminders. More importantly, the document officially registers your business.

There are two methods of filing your articles of organization (Certificate of Formation):

1. Submitting your articles online to the Massachusetts Secretary of the Commonwealth.

2. Submitting in person, by fax, or by mail with this form.

If you prefer the second method, you’ll need to use this filing address:

William Francis Galvin

Secretary of the Commonwealth

One Ashburton Place, Room 1717

Boston, MA 02108

Fax: (617) 624-3891

Any fax filings need to include your fax voucher cover sheet. The filing fee for registering your LLC is $500.

Step 4: Create an S Corp Operating Agreement

All S corp business owners should have an operating agreement. It sets the rules for your company and outlines your ownership structure.

Your operating agreement should cover the following elements:

• Organization: When was your company formed? How are the members, and what’s the ownership structure?

• Management and Voting: Will you manage the company through the members or appointed managers? How do you perform your voting? Do some individual shareholders have higher voting power than others?

• Capital: How much money has each member contributed to the business? Should you raise any extra funds?

• Distributions: How will you distribute profits and losses among your members? Do you divide them evenly? If not, how will you go about the distributions?

• Membership Changes: How will you transfer company roles if someone leaves your business?

• Dissolution: How will you carry out the dissolution if you no longer want to do business or all the members abandon it?

When creating your operating agreement, don’t forget about the bylaws. They help establish your S corporation and facilitate decision-making. This way, you can avoid future conflicts and enhance your company’s growth potential.

Step 5: Apply for an Employer Identification Number

Once your operating agreement is in place, it’s time to obtain your Employer Identification Number (EIN) from the IRS. You need this number to open a business bank account, hire employees, and report income and employment taxes. 

We can obtain an EIN for you, or you can visit the IRS online platform.

Step 6: File Form 2553 for S Corporation Election

The final step is to file Form 2553. This might also be the most critical stage since this form registers your business entity as an S corporation.[3]

Here are the deadlines for getting your S corp status through this form:

• No later than two months and 15 days after the start of the tax year when your S corporation election will take place

• At any point during the year preceding the fiscal year when your S corporation election takes place

Submitting the form shouldn’t be too difficult. You need only access IRS Form 2553 and provide the requested information. Once you fill it out, submit it online or hand in the form at this address:

Department of the Treasury

Internal Revenue Service

Kansas City, MO 64999

Form 2553 Fax Number: 855-887-7734

If you have an LLC you want to classify as an S corporation, and your LLC is past the deadline, you’ll need to submit an additional form — Form 8832. Hand it in with Form 2553 to ensure your company is taxed as an S corporation.[4]

Massachusetts S Corp vs. Massachusetts LLC

Registering your limited liability company as an S corporation is a great decision. Nevertheless, you might also be considering leaving your Massachusetts LLC as is. Either way, you should understand the advantages and disadvantages of both routes.

Advantages of Starting an LLC in Massachusetts

• No personal liability

• Flow-through taxation (no double taxation)

• Local and state tax breaks

• Flexible profit distribution (no need to distribute profits 50-50)

Disadvantages of Starting an LLC in Massachusetts

• Cost of running an LLC is higher than maintaining some other business structures

• Subject to federal income tax

• Transferring ownership of an LLC is more difficult than doing so with corporations

Advantages of Forming an S Corporation in Massachusetts

• S corporation election means the owner isn’t personally liable for debt

• No federal corporate taxes

• Favorable tax treatment and tax status, as your shareholders can receive dividends and other tax-free distributions

• Seamless transfer of ownership since there are no complex accounting rules you need to follow for tax purposes

• Cash accounting method, which is usually simpler

• Higher credibility of an organization as partners and customers see the owner is formally committed to the business

Disadvantages of Forming an S Corporation in Massachusetts

• Generally need to use a calendar year as your tax year, which can be restrictive

• Only one class of stock is permitted

• Fringe benefits are taxable

Ready to File for an S Corp Status in Massachusetts?

The process of filing for your S corp status and the S corp limitations may seem daunting. If so, turn to Swyft Filings. Our S corp filing service handles all the paperwork on your behalf, so you can quickly launch your S corporation in Massachusetts.

Our experts can clear any confusion you might have about this tax classification. We’ve helped numerous small business owners make a seamless transition. We can do the same for you – reach out to us today!

Frequently Asked Questions

What is an S corporation in Massachusetts?

A Massachusetts S corporation is a corporation that passes income, deductions, credits, and losses through to shareholders.

Does Massachusetts recognize S corporations?

Yes. The state of Massachusetts recognizes S corporations in its tax system.

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

It normally takes the IRS up to two months to process your S corp request.

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

The main difference is that an S corp can only have up to 100 shareholders, whereas the number is unlimited for LLCs.

What are the requirements for an S corporation in Massachusetts?

The shareholders must be Massachusetts residents, there can’t be multiple classes of stock, and you can’t have more than 100 shareholders.

Are taxes for LLCs and S corps the same?

No. S corps usually pay lower taxes than LLCs.

What is the S corp tax rate?

There isn’t a fixed S corp tax rate. It depends on your personal income.

How do I dissolve an S corporation in Massachusetts?

You need to file Articles of Dissolution with the Secretary of the Commonwealth.

Bibliography

1. Internal Revenue Service. “S corporations.” Accessed March 7, 2023.

2. The Commonwealth of Massachusetts. “S corporations.” Accessed March 7, 2023.

3. Internal Revenue Service. “About Form 2553, Election by a Small Business corporation.” Accessed March 7, 2023.

4. Internal Revenue Service. “About Form 8832, Entity Classification Election.” Accessed March 7, 2023.