Are you thinking of expanding your traditional sole proprietorship? Or do you have an exciting new business idea that you want to introduce into the market in Massachusetts? Then the first step towards achieving your goal will be to set up a company in the State.
A Limited Liability Company, or an LLC, can be an excellent choice for the business you are trying to form. It protects your personal assets from legal liability and, at the same time, gives you great operational flexibility.
Massachusetts has its own set of procedures for forming an LLC; making a mistake could mean starting from scratch. The State has a unique process for obtaining a DBA (a “trade name”), and the State will forcibly dissolve your LLC if you repeatedly miss the annual report filing deadline.
Let us go through the process of setting up an LLC in Massachusetts by guiding you through each step involved in the process.
Name your Massachusetts LLC
Naming your LLC is the very first step to setting up your business. You will use your name for all transactions, business, advertisements, etc. Make sure the name you select is catchy, interesting, and unique.
You are not at total liberty to choose whatever name you desire. You will have to follow the naming guidelines set by the state of Massachusetts. So, let’s have a look at what can and cannot be done while naming your LLC.
Section 3 of the Limited Liability Company Act states that no new entity formed should have a name similar to any other entity incorporated in the Commonwealth of Massachusetts.
The name cannot be directly or deceptively similar to an existing entity. For example, if an LLC by the name of Florence Flowers, LLC exists, you cannot create another LLC by the name of Florence Florals, LLC.
The section further states that the name should include the words ”limited liability company”, ”limited company”, or the abbreviation ”L.L.C.”, ”L.C.”, ”LLC” or ”LC”.
Your LLC’s name cannot include words or phrases that give the impression of it being a State functionary. For example, you cannot use words like “Treasury,” “Police,” “Army,” etc.
Your LLC’s name must not include any professional designation, such as Doctor, Attorneys, etc., without such a professional being part of your LLC.
Similarly, usage of certain words, like “Bank” or “University,” is restricted and involves obtaining the written consent of concerned authorities and additional paperwork and compliance requirements.
Does Your Business Require a DBA?
A DBA, or Doing Business As Certificate, enables your LLC to conduct business under a name different from the name it has registered. A DBA is something to look into if you would like your LLC to change its marketing strategy or enter a new market entirely. Nike is the perfect example of how a DBA can be used. The company was earlier called Blue Ribbon Sports, but it decided to operate under the name Nike.
In Massachusetts, DBAs are issued by the city or town your LLC is formed. You will have to contact your county clerk’s office to know the specific details of how your LLC can obtain a DBA.
Access Your LLC’s County Clerk and ApplyApply for DBA
Fee: May vary according to the rules of each County
Doing a Name Search & Name Reservation
It is advisable to ensure that the name you have chosen is not identical or similar to any existing entity’s name. Massachusetts provides a repository where you can conduct a Business Entity Search.
If you have zeroed in on a name for your LLC but, for some reason, are not yet ready to form your LLC, you can have the name reserved with the State. Your LLC’s potential name can be reserved for 60 days in Massachusetts. There is also a provision to extend the reservation for another 60 days. The reservation can be made by filing the application with the office of the Secretary of the Commonwealth. As of now, there are no options to file it online.
Reserve a Name by Mail or in-personDownload Form
Mail or submit in-person to:
Secretary of the Commonwealth
One Ashburton Place, Room 1717
Boston, Massachusetts 02108-1512
Fee: $30 for every 60 day reservation
Registering Your Business Domain
A digital presence is becoming important day by day, and so you might want to consider setting up your business online too. You can register a domain name and keep it reserved for your LLC, regardless of when you would like to develop a website for your business. You can check if the desired domain is available or not and register the one that best suits your LLC.
Choose a Resident Agent in Massachusetts
Your LLC will be required to keep track of many official filings, for example, tax filings, annual reports, and subpoenas. A registered agent acts as a liaison between the State and your LLC and is responsible for receiving all official communications on behalf of your company. Massachusetts mandates that your LLC choose a registered agent at the time of registration of your LLC.
Who Can Be a Resident Agent?
You can appoint any of the following persons as the resident agent for your business:
- An individual residing in Massachusetts and above the age of 18
- A domestic entity authorized to conduct business in Massachusetts
- A foreign entity authorized to conduct business in Massachusetts
The registered agent should have a physical street address in the State and be available during business hours on all working days.
Individual Resident Agent v. Commercial Resident Agent
You can appoint yourself, a friend or family member, other members of your LLC, or even another business entity as your LLC’s registered agent. However, it is advisable that you hire a professional registered agent service as it has many advantages.
Maintaining constant communications with the State can be overwhelming for an individual. If you unknowingly miss out on an important document, your LLC might suffer significant damages. A registered agent service ensures that you don’t fail to duly respond to any notice or other communication that may be sent to your LLC.
You might not want to receive certain documents like a subpoena in front of your employees. A registered commercial agent service can deliver these documents discreetly to you. The registered agent’s address is available for the public to access on the concerned websites. So if you work out of your home or a private office, having a professional registered agent service will help you maintain privacy.
Additionally, if you plan to expand your LLC to other states, you can avail of the same commercial resident agent, given most commercial registered agents have a presence in multiple States.
File the Certificate of Organization with Massachusetts
The Certificate of Organization is a formal document that registers your LLC with the state of Massachusetts. It is to be filed with the office of the Secretary of the Commonwealth of Massachusetts. Once this is completed, your LLC is registered and is recognized in the eyes of the law.
The Certificate of Organization is the most important document your LLC will file and contains crucial details about your LLC, such as:
- Federal Identification Number.
- Name of the LLC and its office address.
- The general character of business.
- Name and address of Resident Agent.
- Name and address of each manager if it is different from the office.
- If different from the office location of each person in addition to the manager(s), the name and business address are authorized to execute documents filed with the Corporations Division.
- If different from office location, the name and business address of each person authorized to execute, acknowledge, deliver, and record any recordable instrument purporting to affect an interest in real property recorded with a registry of deeds or district office of the land court.
You can choose to file the document online, via mail or through fax. Fax filings are required to be accompanied by a cover sheet.
The state of Massachusetts does not currently offer expedited filing services. The usual processing time for your Certificate of Organization is two business days.
Publish Notice of Formation
Publishing a notice of formation is not mandated by the state of Massachusetts.
Create an Operating Agreement for your Massachusetts LLC
An operating agreement is a legal document. It lays down the rules of your LLC’s internal operation and functioning.
Conflicts often arise between members of an LLC on issues like ownership, capital contribution, and voting rights. To avoid such conflict within your LLC, consider drafting an operating agreement.
Though not mandated by law, it is a good practice to have an operating agreement. It provides a framework concerning the duties of members of the LLC and its managers and acts as a guiding force in matters of the day-to-day functioning of the LLC.
There are no prescribed templates for an operating agreement, and you may draft one according to the needs of your business. However, irrespective of the nature of your business, it shall be advisable for your operating agreement to cover the following matters:
- Organization Details
- Duties of Members and Managers
- Management and Voting
- Capital Contributions
- Division of Profit and Losses
- Bookkeeping Procedures
- Procedure for adding new members
- Requirements concerning Meetings and Procedures thereof
The above points are illustrative in nature, and you can draft an operating agreement as you deem fit for your LLC.
Writing The Operating Agreement Yourself vs. Hiring a Service
You can write your operating agreement yourself. However, if your LLC needs a detailed operating agreement, or if you feel you will not be able to draft a competent operating agreement, you can also hire a professional to do this job for you. Most commercial resident agents also offer drafting services, including operating agreements.
You can also seek the help of an attorney. Experts in the laws of Massachusetts, these attorneys will help you draft an operating agreement that suits the needs specific to your business model.
Limits of Operating Agreement
There is no fixed format for this agreement. But, you cannot use the Operating Agreement to preclude the application of the law on your LLC. Illegal activities cannot become legal through clauses of the operating agreement.
Moreover, if you do not have an operating agreement, the concerned provisions of the State’s laws will govern your LLC. As these will be general laws, they might not always be in the best interest of you and the other members, as well as the LLC. Hence, it is essential to draft your agreement to control the governance of your LLC to the extent the law allows you.
Obtaining an EIN for your Massachusetts LLC
EIN stands for Employer Identification Number. It is a nine-digit number that the Internal Revenue Service allocates to your LLC. The IRS uses the EIN to identify an operating business entity for taxation purposes.
You can think of an EIN as the social security number of your LLC. It is necessary to have an EIN for your LLC to obtain loans, open a business bank account, apply for a credit card, etc. The IRS issues an EIN, and you can apply for it online or through the mail.
File Annual Reports in Massachusetts
An annual report is a document used by the authorities to get the latest and updated information about all the business entities operating in the State.
In Massachusetts, Section 12 of the Limited Liability Company Act mandates filing an annual report by every LLC registered in the State. This report contains basic information about your LLC and does not contain your financial statements. Filing annual reports on time ensures that your LLC stands well with the authorities.
The annual report is due before your LLC’s formation anniversary. For example, let us imagine you formed your LLC on May 22nd, 2020; your first annual report due date will be May 22nd, 2021. You will have to file your annual report before May 22nd every year.
If you miss this deadline, the State marks your LLC as ‘delinquent.’ Repeated failure to meet the deadline results in your LLC being forcibly shut down by Massachusetts.
An Annual Report should contain the following information:
- Federal Identification Number.
- Name and address of the principal office of the LLC.
- The general character of business.
- Name and street address of the resident agent.
- Name and address of all managers, if any.
- The name and business address of the person(s) and manager(s) authorized to execute documents filed with the Corporations Division. At least one person shall be named if there are no managers.
- The name and business address of the person(s) authorized to execute, acknowledge, deliver and record any recordable instrument purporting to affect an interest in real property.
You may file the report online using the Corporations Online Filing System of the State. Or, you can send the duly filled form by mail, fax or in-person to the Secretary of the Commonwealth, One Ashburton Place, Room 1717 Boston, MA 02108-1512 (Fax: (617) 624-3891). Remember, fax filings are required to be accompanied by a cover sheet. The filing fee is $500 for online submissions and $520 if you submit your report via hard copy. The fee is payable to The Commonwealth of Massachusetts and is non-refundable.
Tax Liability For Your Massachusetts LLC
The way your LLC will be taxed depends upon the number of members in your LLC. There are four ways in which LLC will be taxed:
- Sole-proprietorship: a business owned by a single person
- Partnership: a business owned by multiple people
- C – Corporation: income is split or segregated for taxation
- S – Corporation: tax liability is split between the business and its owner
Federal Tax Liability
You must pay Federal self-employment tax (presently 15.3%) on the profits you take from your LLC. Apart from this, you are also liable to pay Federal Income Tax. The way your LLC will be taxed depends upon the number of members in your LLC.
If your LLC has more than one member, it will be taxed as a ‘partnership’ by default. In this case, apart from filing Form 1040, you’ll have to file your partnership return in Form 1065 and provide information in K-1 of each partner. If you would like your LLC to be taxed like a C-Corp or S-Corp, you can do so by filing Form 8832 and Form 2553, respectively.
State Tax Liability
Apart from the federal taxes, businesses are also subject to State taxes. You will have to pay sales tax to sell physical products in Massachusetts. The sellers can charge this from the consumers and then pass it on to the Government by filing a tax return. All physical products like furniture, home appliances, and motor vehicles are subject to sales tax. There are also certain exemptions, like prescription medicines, gasoline, clothing, etc. For more information, you can read the detailed list of exempted products.
To start selling your product, you will first have to register for a seller’s permit that makes you eligible to sell your products and collect the sales tax. There is no application fee and no expiry.
There is no requirement to pay any sales tax if you’re purchasing the products for resale. For this, you will have to fill out a resale certificate. When purchasing products for resale, you can show this certificate, and the seller cannot charge sales tax.
To avoid state penalties, you should be charging customers the correct amount of taxes. Taxes need to be collected in broadly two categories:
- In-state sales: If you are selling your product within the state of Massachusetts, it is pretty simple to charge sales tax. You need to charge tax at a flat rate of 6.25%.
- Out-of-state sales: When you are selling your product outside the state of Massachusetts, you can only charge sales tax if you have a nexus in that state. In other words, you can only charge sales tax if you have a physical office in that state, have employees, have a drop delivery service, etc.
The state provides options for filing your sales tax. If your company gathers tax between $8.33-$100 a month, you should file it quarterly, and if your business collects more than $100 a month, you should file it monthly. If your business collects less than $8.33 tax in a month, you should file the returns annually.
For annual filings, the deadline is 20th January of the following year. The deadlines for quarterly filings are 20th April, 20th July, 22nd October, and 22nd January for the previous quarters, respectively. For monthly filings, the due date is the 20th or the next business day from the 20th of the following month.
Miscellaneous Tax Liability
If you’re an employer, you must register for Unemployment Insurance Tax with the Department of Labor and Industrial Relations. You will also need to register for Employee Withholding Tax on your employee’s behalf.
Permits & Licenses
You must register for additional permits and licenses based on the business you will transact. These permits can be at a federal, state or local level.
Federal Licensing requirements will depend on the business activity carried on by your LLC. If your company is engaged in any area of business regulated by the Federal Government, you will be required to obtain relevant Federal Licenses and Permits.
Some business activities requiring Federal Licenses and Permits are:
- Alcoholic beverages
- Firearms, ammunition and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics.
If your LLC is engaged in business in the State and plans to sell or lease goods or services under the purview of sales tax, you must obtain a Sales and Use Tax Registration Certificate. You can visit State’s MassTaxConnect website to get the certificate.
Additionally, Massachusetts requires businesses undertaking certain professions and companies located in certain specified areas to obtain special licenses. You can visit the State’s Professional Licenses and Permits to get more information.
Depending on where you operate your business, you may also be required to get the local government’s license and permit. In Boston, enterprises working with flammable chemicals must require a special fire department permit. To know more about local licensing requirements, get in touch with the office of your town or city government.
For more information regarding;
Business Bank Account & Phone Number
If you have a common account, it won’t be easy to differentiate between your expenses and business expenses. Your income and expenditure and the LLC’s income and expenditure would be impossible to distinguish. Therefore, it is advisable to have a separate bank account for your LLC. This will also help you in filing tax returns. Moreover, this will protect your assets from legal complications that might be instituted against the LLC during its business. A court might attach your assets in paying damages to a creditor. A separate bank account is advisable in such scenarios. For opening a bank account, you will be required to provide your LLC’s EIN, among other information.
Most network providers offer business/Enterprise plans; you should choose the one that best suits your LLC and its business. It is advisable to have a separate business phone number that can be handled by you or other members/employees of your LLC. When you are not available, others can take calls from customers.
Massachusetts is an excellent choice to start your business journey. The State has a booming economy driven by innovation and technology. The State has several schemes aimed at helping newly set up businesses, such as the Economic Development Incentive Program Credit (EDIPC), the Economic Opportunity Area Credit (EOAC), Investment Tax Credit, Research Credit, Community Investment Tax Credit (CITC), etc. Check with your local administration and ascertain if your LLC is eligible for these schemes.
$500 is not a small sum of money, so double-check everything before filing the Articles of Organization for incorporating your LLC. You would not want to repeat the process, losing money in non-refundable fees. Your LLC must meet its annual report filing deadlines because not doing so could mean the end of your LLC. We would like to wish your business, along with your new LLC, the best of luck!