LLC vs. S Corp in Massachusetts

Many entrepreneurs start limited liability companies (LLCs) in Massachusetts because of its business-friendly regulations. However, you may have heard that forming an S Corporation can help you save money on your taxes. We can help you understand how you might benefit from forming an LLC vs. S Corp in Massachusetts.

LLC vs. S Corp: Which is better in Massachusetts?

S Corp refers to a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code (I.R.C.). When you compare the pros and cons of making the S Corp election, consider the tax code, your business income, and the rules for the business entities in your state. As a business owner, you could see tax savings on your personal tax return when forming an S Corporation vs. LLC in Massachusetts.

The LLC and S Corp are both pass-through entities, meaning you’ll pay the individual tax rate on your gross personal income. Individual income is usually taxed at a lower rate than corporate taxes. However, you will have to maintain the accounting responsibilities of a corporation. 

When deciding between the S Corp vs. LLC in Massachusetts, take some time to consider whether the S Corp election can save you money on taxes. Everyone’s situation is different, so remember to compare the tax requirements to your business goals. At this stage in your business, it’s essential to consult a professional tax advisor for individual advice.

What are the tax differences between LLCs and S Corps in Massachusetts?

To understand the tax benefits of the S Corporation, consider how the different legal entities pay corporate taxes for an LLC vs. S Corp vs. C Corp in Massachusetts. 

By default, a multi-member LLC pays taxes as a partnership, with each member paying self-employment tax on their share of business income. Alternatively, an LLC can choose to elect either C Corp or S Corp tax status with the IRS. 

Federal Taxes

The C Corp election means double taxation. First, the company will pay the corporate income tax. Then, each business owner pays personal income taxes on any income from the company. Electing S Corporation status can help business owners avoid double taxation on business income.

Like the LLC, the S Corporation uses pass-through taxation. When the S Corporation owners report their business income, they will classify their income as either a reasonable wage or a share distribution. Wages mean income received in exchange for work for the company and are taxed at the individual self-employment tax rate. On the other hand, S Corporation share distributions are taxed at a different rate, which is typically lower.

When comparing the S Corporation vs. LLC taxation for the LLC in Massachusetts, business owners need to understand the current income tax rates and the IRS’s rules for income classification. Only a licensed professional can provide individualized advice for your circumstances. It’s a good idea to consult an accountant or attorney to ensure your business choices align with your goals.

Massachusetts Taxes

The Massachusetts Department of Revenue has its own rules to determine the annual corporate tax for an LLC vs. S Corp in Massachusetts. As the owner of a Massachusetts LLC, you will pay taxes to the state on your share of business income. The business won’t pay income taxes at the entity level. For tax year 2021, the Department requires individuals to pay a 5.0% tax on both earned (salaries, wages, tips, commissions) and unearned (interest, dividends, and capital gains) income in Massachusetts. Certain capital gains are taxed at 12%.

After you file the S Corp election, the Department of Revenue will require the business to file Form 355S and pay the corporate excise tax. The rate is 8% on corporate income, although there are lower rates for S Corporations making more than $6 million in total receipts.

Further, as a pass-through entity, S Corporation owners are responsible for paying income taxes on the business profits as above. 

How do Massachusetts LLC and S Corp ownership requirements compare?

Massachusetts LLCs and S Corps have specific ownership requirements. When you form an LLC, the Operating Agreement will limit ownership. Most of the time, the LLC members need to agree before a new owner can share in business profits. 

To qualify as an S Corp, the business must meet certain requirements. Only domestic corporations can make the S Corp election. Further, Subchapter S of the I.R.C. limits S Corps to companies owned by:

• Fewer than 100 shareholders
• Individuals who are U.S. citizens or resident aliens (and some trusts and estates)
• One class of stockholders

Further, you can’t elect S Corp status if one of the owners is a partnership or corporation. (However, an S corp can own other businesses.) In addition, the business can’t be a specific financial institution, insurance company, or domestic international sales corporation. You’ll want to ensure your business meets the requirements before applying for S Corp status.

How do Massachusetts LLCs and S Corps handle liability protection?

One of the main benefits of registering a business is personal liability protection. When you register your business, the law protects the owners’ personal assets from being used to pay for business debts. In Massachusetts, LLC members receive liability protection when filing with the  Secretary of the Commonwealth of Massachusetts. Because the S Corporation isn’t a separate business structure, electing S Corp tax status doesn’t change the LLC’s liability protection. 

Which is easier to file in Massachusetts: LLCs or S Corps?

Before you can become an S Corporation, you must first form an LLC or corporation. Thus, filing for an S Corp is an extra step and takes longer.

First, you can form an LLC in Massachusetts. File a Certificate of Organization (a.k.a. Articles of Organization) with the Secretary of the Commonwealth of Massachusetts, Corporations Division. If you accept being taxed as a partnership, you don’t have to do anything further.

To use S Corp taxation, you’ll need to file an S Corp election. First, filing Form 8832 lets the IRS know that you want to be taxed as a corporation. Then, you will elect S Corp taxation by filing Form 2553 Election by a Small Business Corporation with the IRS. The Massachusetts Department of Revenue recognizes when you make the federal S Corp election, unless your business deals in securities. 

After you register your LLC or S Corp in Massachusetts, you’ll be required to file annual reports to keep your business in good legal standing. The S Corp is supposed to benefit the small business owner, but we know all the steps can be overwhelming. That’s why we created our Worry-Free Compliance Service. Our business experts will remind you of important deadlines and keep your business documents organized on your dashboard.

Can I convert my Massachusetts LLC to an S Corp? 

Yes. Forming an LLC is the first step in starting an S Corp. If you’ve already registered your LLC in Massachusetts, the next step is to make the S Corp election with the IRS.

How do I convert my Massachusetts LLC to an S Corp? 

To convert your Massachusetts LLC to an S Corp, you’ll file Form 8832 and Form 2253 with the IRS.

Do I need to change my designator if I do?

No, the LLC in your business name reflects the owners’ limited liability. The LLC retains its liability protection because the S Corporation is a tax election, not a separate business entity. 

What is the best time for an LLC to elect S corporation status?

The best time is when you’re planning for next year’s taxes. Many entrepreneurs file for S Corp status immediately after forming their LLC. However, the business owners can elect S Corporation taxation whenever it works best for them. The IRS requires a company to make the S Corp election within two months and 15 days into the tax year. The S Corporation continues until you revoke the election.

LLC vs. S Corp Massachusetts Chart