Starting a Company in Massachusetts
Checklist for starting a business in Massachusetts:
A corporation is an independent legal entity separate from its owners. It can own assets, acquire debts. Corporations, like individuals, have rights and responsibilities. The corporation is a separate legal entity from its owners and shareholders. Thus, a corporate owner’s personal assets are also usually protected from liability. The corporate owner is only liable up to the extent of capital he has invested in the company. If the company goes bankrupt, the owner’s personal assets cannot be used. A corporation consists of shareholders, officers, directors. An individual can be the sole shareholder, officer, and director. The board of directors is responsible for issuing the company stocks and setting the value of the shares.
BUSINESS CORPORATION (I.E. Inc., P. C., etc.):
- EXCEPTIONS TO PERSONAL LIABILITY: Corporate owners can sometimes be PERSONALLY liable for the corporate entity’s debts. Instances where a corporate owner is liable personally are things like not paying taxes, signing a personal guarantee for a loan, securing a business loan with personal property ( and the corporation defaults on the loan), owner signing a contract in his/her own name, using credit cards to secure business funding, and fraud or sloppy record keeping.
- S Corporation Election: In the case of an S Corporation election, the corporation is treated similarly to a partnership for tax purposes. Instead of the “corporate entity” being a “person” for income tax purposes, the shareholders are taxed on their personal income. This avoids the double-taxation that C-corporations face. The S Corporation must have fewer than 100 shareholders, each shareholder must be a person rather than an entity, each shareholder must be a resident of the US, and only certain classes of stock can be issued (can be problematic for selling stock.) For more information on S-Corps in Massachusetts, click here.
PROCESS OF MAINTAINING A CORPORATION:
- Corporations are taxed on their net income after salaries are distributed to employees and overhead is factored in. The dividends apportioned to the shareholders are taxed in conjunction with this. Additionally, corporations must pay an annual corporate excise tax.
- Regulatory requirements:
- Shareholders and directors hold at least one meeting a year.
- The company must keep the minutes from these meetings.
- Maintain a corporate ledger listing each shareholder's name and the percentage of the company they own.
- A corporation must file annual reports and financial statements with individual states in which it's active.
- The corporation must keep written bylaws of the company's rules and regulations at its primary business location.
- Must keep corporate records to prove they are operating according to IRS and state regulations.
- State Corporate Filings:
- Domestic Corporations: (a few of the pertinent forms are listed here, for an exhaustive list, click the link).
- Articles of Organization: these must contain a corporate name, the number of authorized shares, the supplemental information that is not a permanent part of the articles, and at least one incorporator's signature. Must be consolidated into ONE document.
- Annual Report: within two and one half (2½) months after the close of the corporation’s fiscal year end. Costs are outlined in the link in number 5.
- Articles of Amendment: mechanism to change or delete the Articles of Amendment (Art. 1-4) stipulated in number 1.
- Statement of Appointed or Registered Agent: each corporation must maintain a registered office and a registered agent in the Commonwealth. If the corporation does not currently have a registered agent, a statement of appointment must be filed. The registered office may, but need not be, the same as the corporation’s place of business.
- Articles of Correction: A domestic corporation may correct a filed document if the document contains a typographical error or incorrect statement, or was defectively executed, attested, sealed, verified or acknowledged.
- Article of Dissolution: Mechanism to legally end the corporation. To do this, a corporation must file all annual reports owed by it for the prior 10 years. If the corporation has not completed its current year at the time it files articles of dissolution, it will be required to file an annual report for the current fiscal year if more than six months have passed since the close of its prior fiscal year or if the corporation has issued additional shares during the prior fiscal year.
- Article of Merger for domestic entities: Mechanism to merge one or more domestic corporations with one or more domestic corporations or domestic other entities by filing articles of merger for domestic entities. All entities involved must be organized under the laws of the commonwealth.
- Articles of Entity Conversion of a Domestic Other Entity to a Domestic Business: mechanism to incorporate certain business models.
- Articles of Share Exchange Involving Domestic or Foreign Corporations or Foreign Other Entity: paperwork for acquiring shares of other corporations.
- Application of Reservation of Name: If a corporation or other business entity wants to reserve a corporate name prior to incorporating or filing a certificate with the Corporations Division, a name reservation may be filed in accordance with M.G.L.A. c156D § 4.02; 950 CMR 113.18.
OTHER BUSINESS FORMS TO CONSIDER:
- Sole proprietorship: The individual owner reports all income and deductible expenses for the business on his personal income tax return. No vehicle for sheltering income from tax. There are no legal formalities for a sole proprietorship like other forms of organization. For liability, the individual and business are the same. Legal claimants can pursue assets of the owner.
- Partnership: Consists of two or more owners. Treated like a sole proprietorship for tax and liability purposes. Earnings are distributed according to the partnership agreement, and taxes are paid personally by each partner’s share of the income. For liability, each party is jointly liable. An injured party may pursue one or more of the partners for any amount.
- Incorporating in Delaware: Many corporations opt to incorporate in Delaware. The state has a separate chancery court to decide corporate cases, thus case precedent interpreting nuanced corporate laws is more predictable than other states. Delaware also does not tax entities that do not do business in the state. However, there are disadvantages of incorporating in Delaware, like having to pay fees in addition to your home state, finding a registered agent that resides in Delaware, franchise taxes, and filing annual reports in both Massachusetts and Delaware.
- Limited Partnership: Partnership that has both limited and general partners. The general partner assumes the management responsibility and unlimited liability for the business. The limited partner has little voice in management and is not individually liable for the company’s debts.
- Limited Liability Corporation: In an LLC, owners are not individually liable for the company’s debts, and the LLC itself is NOT a tax-paying entity like a corporation. LLCs function under the terms of an operating agreement, a document comparable to a partnership agreement. LLCs must also file an annual report with the Secretary of the Commonwealth. This has less requirements than a corporation, but more requirements than the entities above. Click here to see the process and required paperwork for an LLC.
While both corporations and LLCs are similar in shielding the owners from liability, there are differences in taxing, selling ownership, and governing requirements. If you are wondering which avenue is best for your business interests, it would be best to talk to a lawyer about your business structure to see which entity makes the most sense.
- For information on the process for other types of corporations (non-profit, foreign), click this link.
- Calculate the potential filing fees (initial and annual) for your specific corporation by clicking here.
OTHER STEPS FOR STARTING A BUSINESS:
- Obtain an Employer Identification Number: This is essentially a way to ID your business for tax purposes. You can find more information online by clicking this link to the IRS’ website on EINs.
- Workers Comp: Insurance coverage that shields you or your corporate entity from having to pay out of pocket if your workers get injured. Consult with a local insurance business insurance agent to find coverage.
- Town/DBA registration: Official way to set up business through the town clerk’s office. Click this link for more information.
- Employment laws and tax: Must withhold various things like social security taxes, federal income taxes, medicare taxes from the employee's check. For more Click this link.
- Sales tax number, collecting sales taxes.
- Professional licensing: Consider any licensing fees or tests unique to your trade.
- Local and government requirements, board of health, state licenses, approvals, etc.
- Be aware of requirements and developments in the realm of employment law: Employment Eligibility Verification (all employers must give employees 1-9 form, generally must accept whatever ID they provide as long as not counterfeit); knowledge of federal minimum wage laws (1/1/2021 $13.50; restaurant/service $5.55); legal differences and liability implications between an independent contractor and employee, affirmative action and sexual harassment laws, FMLA allowances for employee sick leave, child labor laws, and anti-discrimination laws, etc.. *The explanations for each of these laws is a brief generalization ONLY. It is incumbent upon business owners to research these in more detail than what is provided above.
- Contract and lease reviews for business spaces, and considerations for building modification based on preferences of the landlord.
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.