Starting a business
If you are starting a business, you will likely want to set up a structure which will limit you against personal liability. You may operate as a sole proprietor or partnership, but those entities don’t protect you from liability. In order to protect yourself personally against claims and business debts, you may want to set up a corporation (usually an S-Corp) or an LLC (limited liability company). See Resources below for helpful links.
Use an attorney or incorporate online
My fee for setting up a corporation or an LLC is affordable, and there is no reason for you to incorporate online. I would rather keep my fee low, provide guidance, and get you going. With an online company you are on your own, and do not have an attorney to work on legal matters such as leases, licenses, contracts, and disputes. With an online company, you do not have a “corporate lawyer” who will try to keep you out of trouble, and refer you to attorneys specializing in particular aspects of business law. In addition, you will need help from an attorney for your personal matters, and are likely to turn to the attorney that helped you set up your business for advice.
Setting up a corporation
Setting up a corporation in Massachusetts requires filing Articles of Organization with the Massachusetts Secretary of State and paying the filing fee, now $275.* Thereafter, you must file an annual report and pay an annual fee, now $125.* (There are some discounts if you file electronically.) You will pick a name for your corporation, and can check with the Secretary of State to see if the name is available. Your attorney should help you acquire a Federal Tax ID number (EIN). The corporation will issue stock certificates to its shareholders, who will elect the board of directors, and the board of directors will elect the officers. The shareholders will usually have control of the corporation in proportion to their ownership of shares of stock. The corporation will buy liability insurance, and other insurance policies including worker’s compensation. If you grow you will need to offer health insurance.
The shareholders should instruct corporate counsel to create a shareholder’s agreement, which will provide direction to the shareholders, particularly about selling their shares of stock, and which will help resolve conflicts. You should have regular meetings, take votes, and keep minutes of your meetings. A corporation must pay a minimum corporate excise tax to the Massachusetts Department of Revenue, which is currently $456* per year. Most small corporations elect to do business as S Corporations, where shareholders of the S Corp report the flow-through of income and losses on their personal tax returns.
Forming an LLC
A Massachusetts LLC is similar to a corporation, but less formal. The owners are referred to as “members,” whereas the owners of a corporation are its “shareholders.” Members of an LLC are taxed like a sole proprietorship, partnership, or S Corp, with income from the LLC passing through to the LLC members. Unlike the shareholders in a corporation, members of an LLC do not receive stock certificates, although it is possible to issue membership certificates.
To set up an LLC, you must file a Certificate of Registration with the Massachusetts Secretary of State, and pay a filing fee, now $500.* Thereafter, you must file an annual report and pay an annual fee, now $500 per year.* Given the lack of formality requirements, an LLC really needs to have an Operating Agreement among the members. The members need to determine if the LLC will be member managed, or manager-managed. The members and managers should have regular meetings, take votes, and keep minutes of the meetings. The informality of an LLC is a drawback, and if you do decide to form an LLC, you need to keep organized records.
A common mistake for most first-time businesses is in not seeking the advice of a CPA, a tax accountant, regarding the particulars of your business. If you are setting up a corporation, your CPA can advise you as to whether an S-Corp will work for you, or whether you will have to go with a C-Corp. Additionally, a CPA will guide you through the details of the tax advantages or disadvantages of a corporation versus an LLC, and the details of payroll taxes. Your accountant should give you some guidance about bookkeeping, and selecting accounting software to run your business. If you work with an accountant early on, you will find that filing your annual tax returns will be more streamlined and less painful.
Very small businesses
Where your business is small and not producing a lot of income, it may be that the costs of creating and operating a corporation or LLC, are too expensive. In that case it is very important to purchase liability insurance to protect you against lawsuits, and to have a homestead on your house. Your personal assets will still be at risk for unpaid debts. If you are undercapitalized and the business is not doing well for any reason, you would be well-advised to seek counsel from your CPA and determine whether your business is viable.