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What is an S corporation?

On Behalf of | Oct 16, 2024 | Business & Commercial

An S corporation, or S corp, is a business structure that provides tax advantages while still offering the benefits of a standard corporation. In Maryland, this setup is particularly appealing to small and medium-sized businesses aiming to optimize tax outcomes.

The basics of an S corporation

Technically, an S corporation is not a separate type of business entity. Instead, the term refers to a tax status that qualifying corporations or LLCs can choose. By electing S corp status, business income and losses pass directly to shareholders, which avoids the double taxation that C corporations face.

When does an S corporation make sense?

Several circumstances make an S corporation beneficial. First, unlike C corps, S corps allow income to be taxed at individual rates, which often reduces the total tax burden.

Second, they also reduce self-employment taxes. Owners can classify part of their income as salary (taxed via payroll) while the rest as distributions, which do not carry self-employment taxes.

Finally, they offer liability protection. Like other corporations, S corps protect personal assets from business liabilities that offers an added layer of security.

Common business types using S corporations

Many Maryland businesses benefit from S corp status. Primarily, professional services providers utilize S corps. Law firms, medical practices and consultancies often choose S corps for both tax savings and liability protection.

Another one is family-owned businesses. Small family-run companies often find S Corps helpful for passing income directly to family members without the double taxation.

Finally, S corps are common with real estate firms. Real estate businesses leverage S corps to streamline income management and protect owners’ personal assets.

Steps to form an S corporation

First, register your business in Maryland as either a corporation or LLC. Next, file IRS Form 2553 to the IRS. Select the S corporation status. However, you must also ensure compliance with all Maryland state rules for S corporations.

An S corporation can be a powerful tool for businesses looking for tax savings and liability protection. By understanding the structure and its benefits, business owners can decide if this option aligns with their goals.