Subchapter S corporation (S Corp) is an appealing option for many business entities because it offers limited liability while maintaining the formal structure of a corporation. At the same time, it also allows pass-through taxation for the company profits.
Understanding S Corps
S Corps is not a legal business entity structure. It is, in fact, a tax code. Companies that elect for this status will not be taxed at a corporate level. So, the business entity itself will not pay income taxes. Instead, the business owners report the salaries, bonuses, and dividends on their individual tax returns. S corporation owners are called shareholders.
The asset protection and pass-through taxation features of this tax code make it similar to a limited liability company (LLC). However, S Corp owners can have lower tax liabilities because they can choose to receive salaries or dividend payments. Dividends, unlike salaries, will not be subjected to self-employment tax. Additionally, S corporations can also deduct the cost of wages paid when calculating the income that flows through to the owners. However, the Internal Revenue Service (IRS) determines whether the division between dividends and salaries is reasonable.
Converting an S corporation to be taxed as a C corporation is also easy. It only needs to file the election with the IRS.
Aside from the benefits, a company should also consider the requirements before electing S Corp in Maine. These include the following:
- All shareholders should be U.S. citizens or residents.
- An S Corp cannot have more than 100 shareholders.
- The profits and losses of S corporations can only be allocated in proportion to the shareholder’s interest in the company.
- Shareholders are not allowed to deduct corporate losses exceeding their basis in corporate stock, which is equivalent to the amount of their investment in the company plus or minus some adjustments.
- S corps cannot deduct the cost of fringe benefits provided to employee-shareholders owning more than 2% of the company.
Reasons to Do Business in Maine
The state where the company operates also plays a big role in determining its obligations. Maine is a good place to start. It is home to thousands of businesses.
Doing business in Maine offers several benefits for business entities. For instance, the state offers various business programs. These include the Pine Tree Development Zone, which offers benefits for companies in certain development zones and those in eligible sectors like Advanced Technologies for Forestry and Agriculture, Aquaculture and Marine Technology, Biotechnology, Composite Materials Technology, Environmental Technology, Financial Services, and Manufacturing and Precision Manufacturing. Companies that qualify for this program are entitled to corporate tax credits. They can also get sales and use tax exemptions of real and personal properties.
The Finance Authority of the state also provides various financing options to new Maine companies, such as the Rural Development Authority and New Markets Capital Investment Credit.
There are also other business incentive programs like the Business Equipment Tax Exemption, Business Equipment Tax Reimbursement, Community Development Block Grant Program, Employment Tax Increment Financing, Manufacturing Extension Partnership, and Technology Tax Credits. Contact state government agencies to find out more about the requirements and qualifications.
Create an S Corp in Maine
Since the S corporation is a tax code status, it is necessary to form an eligible entity in Maine first. From that, the company will elect S Corp. In most cases, startups would register as a C corporation.
Step 1: Choose an appropriate business name.
Company names should abide by state naming regulations. That includes the use of a proper designator. For corporations, it means the use of the term Corporation, Incorporated, Company, or any abbreviation of the said words.
Business entities registering in the state of Maine should also make sure that their company names are unique. So, if another company in the state is already using a name, then a startup can not use it. A company can verify the availability of a name by conducting a business entity search on the database of the Secretary of State.
Maine also gives business entities the option to reserve an available name. Filing an Application for Reservation of Name with the Secretary of State and pay $20. Doing this will reserve the business name for 120 days.
Step 2: Nominate a registered agent.
A C Corp needs to have a registered agent who will serve as its point of contact with the state. The agent should agree to accept and send all legal and government correspondence on behalf of the company.
Individual Registered Agent:
- Over 18 years old
- Has a physical street address in Maine
- Available in the listed address during regular business hours
Commercial Registered Agent:
- Authorized to do business in Maine
- Has a physical address in Maine
- Is open during regular business hours
Step 3: Register with the state.
To register a business entity in Maine, the company has to file formal paperwork and pay corresponding fees. To form a corporation, it has to submit a completed Articles of Incorporation and pay the $145 filing fee. Submit the appropriate paperwork with the Bureau of Corporations, Elections, and Commissions of the Secretary of State.
There may also be additional steps to accomplish. These include the holding of a first organization meeting, preparation of bylaws, appointment of directors, election of officers, and issue stock to company shareholders. Read the article Maine Corporation to learn more about the incorporation process.
Make sure the company complies with the requirements to elect S Corp to ensure that it qualifies.
Step 4: Obtain necessary licenses and permits
Depending on the industry the company is in, its business activities, and the location of its primary place of business, it may have to obtain certain business licenses and permits. These include the following:
- Tax Registration – Maine S Corporations that sell goods will have to register with the Revenue Services. Those that hire employees have to register with both the Revenue Services and the Department of Labor.
- Employer Identification Number (EIN) – Business entities may also need to get an EIN from the IRS. It will be necessary for tax filing purposes, hiring employees, and opening a bank account for the company.
- Other Regulatory Licenses and Business Permits – There may also be other business licenses and permits necessary, such as those related to health and safety, environment, and construction. Check with town and city government agencies.
Step 5: Elect S Corp.
To operate as an S Corp in Maine, a business entity has to make an election to be treated as such for tax purposes. That requires the submission of a completed Form 2553 with the IRS.
In most cases, states treat the S Corp the same way that they are treated by the federal government. However, some states do not recognize the tax code for state taxes. In such cases, the company will continue to report and pay taxes based on the original business entity structure it registered. To prevent any issues, it is best to check this with state agencies.
Getting Started
While the S Corp tax code status is not for all types of business, those that qualify can enjoy various benefits. It will help protect the company and its owners as long as the business entity ensures compliance with all requirements and obligations.
For instance, in Maine, electing S Corp requires the completion of a multi-step process. That includes the formation of a legal business entity, payment of fees, and complying with ongoing obligations both at the state and federal levels.
In some cases, companies may find it hard to set aside time to handle the whole process. A great option is to hire a third-party organization like DoMyLLC. Our team of experts can handle the preparation and filing of formal paperwork and help in ensuring business compliance.