Start a Maine S Corp

Requirements and limitations of S Corporations

Importantly, not all entities are eligible for classification as an S-Corp. To qualify for an S Corporation election, an entity must:

• Be a domestic corporation
• Have only allowable shareholders, such as individuals, certain trusts, and estates
• Have no more than 100 shareholders
• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations
• Have only one class of stock

So long as your business entity meets these minimum filing requirements, you are eligible to choose an S Corp election. 

File Form 2553 with the IRS

After you formally create your legal business entity, you can then file paperwork with the IRS to make your Maine S Corporation election.

Regardless of whether you’ve decided to form a corporation or an LLC, your next step is to file your Form 2553 with the IRS. Again, by default, your entity will be classified as a C Corp at formation. However, Form 2553 allows you to request a status change to a Maine S Corporation. 

It’s also important to know when to make your S Corp election. Specifically, the IRS requires that you complete and file your Form 2553: 

• No more than 2 months and 15 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect

For more information on when and how to file your Form 2553, visit the IRS website

Weighing the pros and cons of creating an S Corporation

So, how do you know whether to proceed as a C Corp or make an S Corp election instead? 

Ultimately, the decision will come down to what works best for the needs of your entity. Assessing the pros and cons can help you make the best choice for your business. Common advantages of an S Corp election include: 

• Asset protection
• Pass-through taxation
• Tax-favorable characterization of income
• Ability to utilize cash method of accounting

As with most things, however, there are also certain disadvantages to take into consideration. Some disadvantages of forming an S Corporation include: 

• Higher formation and maintenance expenses
• Tighter tax qualification obligations
• Stock ownership restrictions
• Closer IRS scrutiny
• Less flexibility in allocating income and losses

S Corp election may not be right for all businesses. Thus, be sure to carefully consider the competing pros and cons before making your decision. 

What to know before creating an S Corporation in Maine

Before you decide to formally make your S Corp election, there are a few important things you need to know. For example, by default, your entity will be classified as a C Corp at formation.

Here’s some more important information you should know before creating an S Corporation in Maine: 

What is an S Corporation?

An S Corp is a type of corporation status that an entity can select for itself. Specifically, a business entity that has made an S Corp election has chosen to pass its corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. 

This is often referred to as “pass-through taxation” because it allows the business entity to avoid double taxation on its corporate income. It does so by “passing” the obligation to pay income taxes on to the entity’s shareholders.  

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

As you consider whether to make an S Corp election or keep the default C Corp classification, it’s important to understand the primary differences between the two. 

The primary difference is that S Corps benefit from pass-through taxation, while C Corps do not. Instead, C Corporations must file and pay income taxes at both the corporate level and at the shareholder level on the income taxes of the entity’s individual owners. 

What are the requirements to create an S Corporation? 

To create an S Corporation, you have to form a business that falls within the limitations identified above, and you have to file Form 2553 with the IRS within one of the timeframes listed above. If you are an LLC, you will need to file 

Can LLCs choose an S Corporation election? 

Yes, LLCs can, and often do, choose an S Corporation election. Many LLCs decide to do so due to the variety of beneficial tax advantages that come along with this type of classification.

Thus, your entity doesn’t have to be a corporation to qualify for an S Corp election.  

We can help

When you’re ready to take the next steps toward forming your Maine S Corporation, we’ll be here to support you at every step along the way. From business formation to compliance and maintenance and everything in between, we have the tools and resources to help you navigate the business lifecycle from start to finish.