An S Corporation in Massachusetts can provide strong benefits to business owners and operators. The primary benefit of an S Corporation is that it avoids the dilemma of double taxation. In other words, taxes will to have to be paid for the activities of the corporation AND for the profits that will be distributed to the shareholders by way of dividends and share appreciation. A C Corporation is taxed at the entity level and personal level of taxation. The double taxation issue is solved by “passing through” all corporate profits and losses to the shareholders, who will claim those items on their individual income tax return.
Another substantial benefit of an S Corporation is that it provides its shareholders and officers limited liability. The liabilities of the corporation will be treated separately from the individual shareholders and officers. Except in narrow circumstances, or in the case of a disregarded entity, the shareholders and officers of a corporation will not have to answer for the debts, civil claims, taxes, and other liabilities of the corporation.
An S Corporation may also avoid the Self-Employment tax. The current rate is 15.3% of the first $118,500.00 in earnings. Partnership income that is distributed to members of an LLC will be subject to the Self-Employment tax because the members of the LLC are not subject to tax withholding. In comparison, an S Corporation and the wages paid to the owners are subject to withholding, and the individual pays 6.2% for FICA payroll taxes. The employer (corporation) will pay the other “half” of the FICA payroll taxes.
If you are planning on expanding your corporation to a larger number and different types of shareholders, which is common for an enterprise that raises funds among numerous private investors, an S Corporation may create some disadvantages. S Corporations are limited to a maximum of 100 shareholders, and those shareholders must be United States citizens and permanent residents. An LLC cannot retain ownership of S corporation stock. The S Corporation may also have only one class of stock and each shareholder has equal voting rights; there can no be preferential rights to dividends or special voting rights (no preferred stock).
Selection of an S Corporation or C Corporation, or a Limited Liability Company, or other entity, depends on your desired organizational structure, objectives and plans for future growth. Please contact Attorney Stefan Cencarik for a consultation so that I may advise you on the best entity for your business. I serve all businesses, entrepreneurs, and individuals in the greater Boston area.