How to Incorporate a Business in Massachusetts
Many new business owners have questions about creating a business entity. Why do it, what kind of legal entity is most appropriate, and how to get it done. This is just one of the legal issues start ups face, but it should be first on your list.
There is nothing illegal about operating as a dba, but there are good reasons to form an LLC or a corporation.
The primary reason is liability protection. If you are operating as a dba, you may have personal liability for the debts of your business. We often hear people saying they will incorporate as soon as they start earning real revenues. The reality, however, is that your business is likely to owe people money before it becomes profitable. Protecting you and your personal assets from these liabilities is exactly the reason most people choose to create a legal entity.
Another reason to incorporate is to protect your business name and identity. Once you establish a business entity in your state, nobody else can establish another business with a name that is the same or too similar. To fully protect your brand and name, you will want to look into trademark protection. But incorporating is a good first step.
A third reason is that there may be some marketing or credibility advantage to have "inc" or "LLC" after your business name. Your target consumer may want the reassurance that your business is backed up by a formal legal entity or business structure.
LLC. vs. S Corporation
There are several types of corporations available to choose from. Here is a primer on the key differences you should be aware of.
An LLC is a limited liability company authorized by Massachusetts law. For tax purposes, it is considered a "pass through entity." That means you as the owner only pay taxes once on the revenue. The LLC will not file a separate tax return. Instead, you will report the revenue and expenses on your individual tax return and pay income tax on the net profit.
An "S Corporation" is a corporation formed under Massachusetts law that is entitled to the same kind of pass-through tax treatment. It is formed as a corporation and you can secure the same tax benefits if you meet certain criteria under the United States Tax Code. The name "S Corporation" refers to Chapter S of the tax code that sets for those criteria.
If you are a corporation and do not qualify as an S Corporation, your business will pay corporate tax on its revenues. You will also pay regular income tax on the income you receive from the company. This kind of double taxation is why most people look to create either an LLC or an S Corporation.
From a legal and liability perspective, the benefits are the same with either an LLC or an S Corporation. There can be some differences in tax consequences that you should discuss with an accountant. When in doubt, keep in mind that it is easier to change from an LLC to an S Corporation than it is to go the other way. This is why many of our clients choose to begin as an LLC.
How to Incorporate
If you are the only owner of your business, the process of forming a single member LLC in Massachusetts is pretty straightforward.
It is possible to do it on your own using the Massachusetts Secretary of State's online filing system, or through an internet provider. You will need to fill out the articles of incorporation, identifying the manager of the LLC, a registered agent for service of process within Massachusetts, and the name and business address of the company. You will also need to pay a $500 filing fee to the Commonwealth of Massachusetts.
To form a corporation, you can also follow the online directions on the Secretary of State's website. You will need to provide similar information, but also information about the number of shares of stock issued and outstanding, as well as a listing the officers and board of directors.
Whichever business structure you choose, it is a good idea to have at least an initial consultation with a business lawyer. You may still choose to file on your own, but an attorney can help you spot issues you may need legal advice about.
In particular, if you have a business partner, it is important to get professional advice before creating your business structure and filing the articles of incorporation. You will want to address issues like decision-making, distributions, sharing of profit and loss, and transfer of interests early on before problems arise.
Maintaining Your Legal Entity
Your LLC or S Corporation will have perpetual existence as long as you continue to meet the reporting requirements. In most cases you will have to file an annual report each year, and pay the annual fee to the Commonwealth of Massachusetts. You should also file updates if anything in your original articles of incorporation changes. This includes changes in your registered agent, manager(s) of the LLC, or officers and directors of a corporation.
What is Not Publicly Disclosed
All of the information in your articles of incorporation will be publicly available. Other documents relating to your legal entity do not have to be disclosed. For example, for either type of corporation you will want to have an operating agreement. The operating agreement will address governance of the company and any agreements between owners/partners. You should keep this up to date and with the important books and records of the company, but it is not available for public view.
In an LLC, you also do not have to publicly disclose all of the owners. All the state requires you to disclose is who the manager or managers of the LLC are. These usually are also owners or members of the LLC, but that does not have to be the case.
How We Can Help
Unsure whether it is time to move from a solo proprietorship or partnership to a corporate entity? We can help you assess your needs and guide you to an informed decision. You can use the button below to schedule a free consultation, or give us a call at (781) 784-2322.
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