Start a Maryland S Corp

S Corporation requirements and limitations

All newly formed corporations are C corporations by default, so you have to file extra paperwork to change to a qualified subchapter S corporation. Before your business can qualify for S corporation status, it must:

• Be a corporation based in the United States;
• Have shareholders (but no more than 100);
• Offer only one class of stock; and
• Not be what the IRS defines as “ineligible” corporations (like insurance companies and financial institutions.

It doesn’t matter whether your business’s shareholders are individuals or estates. However, none of your shareholders can be partnerships, corporations, or non-resident foreigners. 

Weighing the Pros and Cons of a Maryland S Corporation

Like most business decisions, there are both pros and cons to creating a Maryland S corp. 

Pros

The benefits of an S Corp include:

• Pass-through taxation at your personal income tax bracket
• Being able to use the cash method for accounting
• Limited liability for shareholders
• Favorable tax treatment of income

Cons

The cons of an S Corp include:

• Additional expenses/paperwork for formation and maintenance
• Restrictions on stock ownership and issuance
• More tax scrutiny from the IRS
• Reduced flexibility in how you can allocate revenues and losses

Based on the personal circumstances of your business, becoming an S corporation may be the perfect choice to take your business to the next level.

What to know before creating an S Corp in Maryland

It is vital that business owners understand the pros and cons of a Maryland S Corp before they decide to make a change. That way, you can make the right call for your business based on its current situation. 

What is an S Corporation?

Simply put, S Corporations are usually smaller corporations that trade taxation benefits for a limited number of shareholders. 

What’s the difference between an S Corporation and a C Corporation?

Again, an S Corporation is not a separate business entity from a C corporation. It is actually just a corporation or LLC that is treated differently by the Internal Revenue Services for tax purposes.

Most C corporations have to pay taxes twice. The first taxation event occurs when the business pays taxes on its revenues. The second taxation event occurs when the business’s shareholders pay personal income taxes on the profits they receive from the business. However, when the IRS uses Subchapter S of the Internal Revenue Code for a corporation, there is no “double taxation.” Instead, S corporations get to “pass-through” their revenues to their shareholders without paying business taxes. Taxes are paid only when the corporation’s shareholders pay their personal income taxes.

Besides that change, S corporations have all the benefits of C corporations. S corps can still issue stock, have the same ownership structure, and can provide their shareholders with personal liability protection. 

What are the requirements to create an S Corporation?

To create an S Corporation, all you have to do is file a copy of Form 2553 with the IRS after you form a standard corporation or LLC.

Can LLCs choose an S Corporation election?

As you might have guessed from the above section, LLCs can elect to file taxes as an S corporation. LLCs are considered pass-through taxation entities by default, so it is less common for them to file for S corporation status. However, they can still benefit from filing taxes as an S corporation, especially when it comes to self-employment taxes. Check out our guide on LLC tax information to learn more.  

We can help 

We’re passionate about supporting business owners at every step of their business journey. We know you have to make all kinds of critical corporate-level decisions. Whether you need help with formation, compliance requirements, or expanding your business, we’re there for you. If you need to start a corporation or LLC, we can get you underway in just a few minutes. Let us get your business started today.