Start an S Corporation in Maryland

Starting a small business involves making crucial decisions, including selecting an appropriate business entity. 

This article examines the process of establishing an S corporation in Maryland. We’ll outline the advantages of this tax classification for small businesses, particularly in terms of IRS treatment. 

S Corporation in Maryland: Key Points

• An S corporation is not a type of business structure but a tax classification. 

• S corp tax status permits small businesses to bypass paying federal income taxes at the corporate level with pass-through taxation.

• Before applying for S corp status, you must form a C corporation or LLC and meet the IRS criteria.

What Is an S Corporation?

In the U.S., an S corporation is a tax classification under the federal tax code that permits small businesses to bypass paying federal income taxes at the corporate level. Instead, the S corp’s profits, losses, deductions, and credits pass through to shareholders who report them on their personal tax returns.

An S corporation isn’t to be confused with a C corporation (C corp). By default, the Internal Revenue Service (IRS) sees all businesses as C corporations, but those that elect S corp status can enjoy certain tax benefits. Choosing between these two categories can impact the future of your enterprise, its growth, and its investor base. 

Furthermore, while the limited liability company (LLC) and S corporation share certain similarities, they’re not the same thing. LLCs offer more flexibility regarding management structure and profit sharing, while S corps offer more liability protection. You’ll find out more about this subject later on in the article. 

Tax Considerations for an S Corporation in Maryland

As S corp status pertains to a tax classification rather than a business structure, it’s crucial to familiarize yourself with the various tax implications that accompany this status. Here’s a brief overview of how taxes function within the context of an S corp classification.

Maryland Tax Treatment of S Corporations

In Maryland, business entities such as S corporations, partnerships, and limited liability companies (LLCs) don’t need to file a corporation income tax return. Instead, they file as pass-through entities using Form 510 Maryland Pass-Through Entity Income Tax Return.[1]

Maryland Franchise Tax for S Corporations

S corporations in Maryland have to pay the annual franchise tax. This tax is calculated based on the company’s net worth or the number of shares issued and outstanding, whichever is greater. 

Pass-Through Taxation

Pass-through entities use Form 510 mentioned above to report their income, adjustments, gains, losses, and other important information. In turn, these are passed onto the partners, shareholders, members, or beneficiaries in order to be taxed individually. 

Every member must file a Maryland income tax return and pay any taxes owed on their distributable or proportional share of the pass-through entity’s items for that tax year. Unless the pass-through entity is subject to the non-resident member tax, payment of Maryland income tax is not required when submitting Form 510.[2]

Requirements for Forming an S Corporation in Maryland

S corporation status isn’t available to all businesses, as there are specific eligibility requirements set forth by the Internal Revenue Service (IRS) that must be satisfied to qualify.[3] 

Your company must meet the following criteria to elect S corp status: 

• Be a domestic corporation

• Have only allowable shareholders, which may include individuals, certain trusts, and estates, but cannot include partnerships, corporations, or non-resident alien shareholders

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations

To obtain S corporation status, the corporation must file Form 2553, Election by a Small Business Corporation, signed by all shareholders. Swyft Filings’ online filing service can assist you in navigating this challenging process to ensure you don’t overlook any of the requirements before obtaining S corp status.

Filing as an S Corp in Maryland

You’ve done your due diligence and confirmed that your business ticks all the boxes necessary to apply for S corp status. The smart move would now be to take advantage of Swyft Filings’ tried-and-true six-step process. That way, you’ll have your company set up as an S corporation in Maryland in no time. 

Step 1: Choose a Business Name

Choosing a business name requires more than just relying on your creativity and familiarity with your target audience. You need to consider the state and local regulations, ensuring that your choice doesn’t violate another entity’s naming rights. Moreover, it’s vital to verify that the name you have in mind isn’t already in use in Maryland.

Firstly, it’s essential to come up with a list of potential business names by considering factors such as your brand identity, products or services, and intended audience. Once you’ve reached a consensus, you can continue. 

Next, you’ll have to check whether the name is already taken. You can check now by using our free business name search. 

If you've got a phenomenal idea for a business name but need some more time before filing, you're able to reserve a business name with Maryland for up to 30 days. All you have to do is file a corporate Name Reservation Application with the Maryland Department of Assessments and Taxation.[4] The name reservation can be renewed for additional 30-day periods if needed and will cost you $25. 

Step 2: Appoint Directors and a Registered Agent

To operate an S corporation in Maryland, you must designate at least one director before holding the first S corp shareholders meeting. The primary responsibilities of a corporate director include overseeing the adoption, modification, and revocation of bylaws, as well as supervising, electing, and terminating officers.

With your initial S corp directors in place, you’ll need to find your S corp a registered agent. In Maryland, businesses have to publicly identify their registered agents before filing for their Articles of Information.[5] 

A registered agent is responsible for accepting tax documents and service of process for your corporation. Your registered agent must be either an adult citizen of Maryland, a Maryland-based corporation, or a Maryland-based LLC. 

It’s worth noting that an LLC isn’t allowed to serve as its own agent. However, you may choose to appoint one of your shareholders as a Maryland registered agent. Nonetheless, it’s typically advisable to engage a professional registered agent service.

Step 3: File Articles of Organization

Since S corp status represents a tax classification, business owners must file for an LLC or C corporation before applying for S corp status. Because of this, the next thing on your to-do list is to file the Articles of Organization or Articles of Incorporation form with the Maryland State Department of Assessments & Taxation.[6] 

The document must disclose some basic information about your business for the public record. This includes the company name, purpose, business address, and your registered agent’s name and physical address. 

You can complete this process online or mail your filing, check, or money order to: 

State Department of Assessments and Taxation

Charter Division

301 W. Preston Street, Room 801

Baltimore, Maryland 21201-2395 

The filing fee is $100. Keep in mind that the standard waiting time for the Articles of Organization, also known as Certificate of Formation, is about 6-8 weeks. You can, of course, pay some extra money for an expedited review. 

Once you form a business with the Maryland Department of Assessments and Taxation, you must file an annual report. The annual report filing deadline falls on April 15 each year. If you miss the deadline, you'll be fined $300. 

Step 4: Create an S Corp Operating Agreement

Although an operating agreement typically outlines how a limited liability company (LLC) will be managed, an S corporation utilizes corporate bylaws and articles of incorporation to organize its business operations. Essentially, the S corporation operating agreement is a governing document for the business entity. 

The operating agreement should possess the following: 

• Company name, phone number, and address

• Names of members, their roles, and responsibilities 

• Number of shares owned by members

• Specific guidelines for accounting, holding meetings, and voting

• Procedures for the company dissolution or sale

• Procedures on how a member may legally withdraw 

To guarantee they’ve covered all of the aspects of an operating agreement, business owners should seek the help of professional accountants.

Step 5: Apply for an Employer Identification Number

Your next-to-last step is to apply for an EIN (Employer Identification Number). The term refers to a nine-digit number assigned to a business entity. Its purpose is to make your business easily identified by the IRS when reporting taxes, such as employment and income taxes. 

Besides tax reporting, EINs enable businesses to open bank accounts, apply for credit, and hire employees. We’ll obtain an EIN for you. You can also apply by reaching out to the IRS.

Step 6: File Form 2553 for S Corporation Election

The last and probably the most crucial step you need to take before you can classify your company as an S corporation is filing Form 2553, Election by a Small Business Corporation.[7] Once you fill out and file this form, you’ll complete the process of the S corporation election for your business entity. 

Your deadline to submit this form is two months and 15 days into the current tax year. However, your best bet is to file this form in the tax year that precedes the one in which you want to classify your business entity as an S corp. 

If you miss the deadline, you can still get S corp status for the current tax year. LLCs can simply file Form 8832, Entity Classification Election. This will allow you to get S corp status at any period of the tax year.[8]

Maryland S Corp vs. Maryland LLC

Choosing between an S corp and LLC might sound absurd since they’re both pass-through tax classifications. However, both terms have pros and cons, which will help you make a smart decision concerning the tax classification of your business entity. 

Advantages of Starting an LLC in Maryland

• Gain peace of mind from the division and restriction of your personal liability from that of your business liability and financial obligations

• Pay only $100 in state filing fees to file for a Maryland LLC 

• Access efficient and uncomplicated handling of filing, management, compliance, regulation, and administration tasks

Disadvantages of Starting an LLC in Maryland

• More complicated to transfer ownership in a limited liability company than within a corporation

• May dissolve if a member leaves

Advantages of Forming an S Corporation in Maryland

• Have the ability to use the cash method for accounting

• Gain limited liability as the personal assets of individual shareholders are protected from the debts and liabilities of the S corp.

• Access favorable tax treatment of income

• Continue operating without interruption after the departure or death of any single director, owner, or founder

Disadvantages of Forming an S Corporation in Maryland

• Handle extra costs and paperwork for the formation and ongoing maintenance

• Follow restrictions on stock ownership and issuance

• Get decreased flexibility in how gains and losses can be allocated among shareholders

Ready to File for S Corp Status in Maryland?

As a small business owner, there’s a good chance you’re considering taking advantage of the various benefits of forming an S corporation. S corps can significantly reduce the amount of taxes you pay each year. However, it’s not like achieving S corp status doesn’t have its difficulties. Fortunately, there’s a solution for that.

To overcome these difficulties, you can always opt for Swyft Filings. In addition to helping you form your business entity, we can assist you in filing an LLC with S corp tax status in no time. 

Frequently Asked Questions

What is an S corporation in Maryland?

An S corporation in Maryland is a business entity taxed much like a partnership or sole proprietorship, providing limited liability protection and the so-called pass-through taxation for shareholders.

Does Maryland recognize S corporations?

Yes, Maryland recognizes the federal S corporation. Therefore, Maryland doesn't demand a state-level corporation election. 

What is the turnaround time for filing for S corp status with the IRS?

The process of obtaining S corp status may involve a waiting period of up to 60 business days for the acceptance of your application by the IRS.

What is the difference between an S corp and an LLC?

An LLC is a business entity providing limited liability protection to its owners or members, while an S corp is a tax classification allowing pass-through taxation. 

What are the requirements for an S corporation in Maryland?

To qualify as an S corporation in Maryland, you must follow the guidelines outlined by the IRS:

• Be a domestic corporation

• Have only allowable shareholders, which may include individuals, certain trusts, and estates, but cannot include partnerships, corporations, or non-resident alien shareholders

• Have no more than 100 shareholders

• Have only one class of stock

• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations

Are taxes for LLCs and S corps the same?

They’re not. LLC owners may be required to pay self-employment taxes on their income, while S corporations may have to pay corporate tax on a portion of their profits.

What is the S corp tax rate?

The tax rate for S corp owners or shareholders depends on their taxable income and filing status, which determines their personal income tax rate.

How do I dissolve an S corporation in Maryland?

To dissolve an S corporation in Maryland, you must file Articles of Dissolution with the Maryland State Department of Assessments, by mail or in person. You’ll have to pay a $100 filing fee plus an extra $50 when opting for expedited processing.

Bibliography

1. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.” Accessed April 5, 2023. 

2. Comptroller of Maryland. “Business Income Tax Information.” Accessed April 5, 2023.

3. Internal Revenue Service. “S Corporations.“ Accessed April 5, 2023. 

4. Department of Assessments and Taxation. “Corporate Name Reservation Application.“ Accessed April 5, 2023. 

5. Maryland Business Express. “Register Your Business.“ Accessed April 5, 2023. 

6. Department of Assessments and Taxation. “Articles of Organization.“ Accessed April 6, 2023. 

7. Internal Revenue Service. “About Form 2553, Election by a Small Business Corporation.“ Accessed April 6, 2023.

8. Internal Revenue Service. “About Form 8832, Entity Classification Election.“ Accessed April 6, 2023.