How to Start an LLC in Massachusetts? (Step by Step Guide)
Starting a Massachusetts limited liability company can be a great way to get your company up and running. There are a few steps you will need to take in order to make the process go as smoothly as possible.
I have collaborated with legal experts and referenced my experience as a business consultant to come up with everything you need to know about starting an LLC in Massachusetts.
We'll explain the benefits and downsides of forming an LLC in this state and provide a step-by-step guide on how to complete the process. Additionally, you can use one of these LLC formation services in Massachusetts that we use and recommend.
Quick Summary:
- To form an LLC in Massachusetts, one must choose a business name, appoint a registered agent, and prepare for tax and regulatory requirements.
- Drafting an operating agreement is highly recommended for outlining the LLC's ownership and operating procedures.
- According to the Small Business Administration data, in 2023, there were 36,985 new small business openings and 22,784 closings in Massachusetts, highlighting the active yet challenging business environment.
- Personally, I believe choosing the right LLC structure is essential for maximizing legal protections and operational efficiency in Massachusetts.
How to Form an LLC in Massachusetts
To form this type of business entity, business owners have to take some steps that will make their LLC legally and officially recognized as a company. The steps are as follows.
1. Choose the Type of Your LLC (Mandatory)
When choosing the type of your Massachusetts LLC, consider these options, each with its own advantages and disadvantages:
- Single-Member LLC:
- Advantages: Complete control over decisions, simple management structure, and straightforward tax filing.
- Disadvantages: Limited opportunities for raising capital and potentially greater scrutiny from the IRS.
- Multi-Member LLC:
- Advantages: Ability to pool resources and share responsibilities, potential for diverse skill sets among members.
- Disadvantages: Potential for internal conflicts and more complex tax filing requirements.
- Professional LLC:
- Advantages: Tailored for licensed professionals, it offers liability protection while maintaining professional standards.
- Disadvantages: Limited to specific professions and may require additional state compliance.
- Series LLC:
- Advantages: Allows for separation of assets and liabilities across different series within the same LLC.
- Disadvantages: Complex structures may not be recognized in all states.
Each type serves different business needs, so choose based on your specific situation, considering factors like the number of members, type of business, and desired liability protection.
2. Choose a Name for Your Massachusetts LLC (Mandatory)
Future LLC owners in Massachusetts will have to choose a unique name for their company.
As a business consultant, I've guided many clients through the process of naming their businesses.
In the larger landscape, 7,078 is the number of 2023 projected business formations within four quarters, according to the U.S. Chamber of Commerce, showcasing a dynamic environment for new enterprises in Massachusetts [1].
There are specific guidelines you must follow to ensure that your desired business name is approved by the state:
- The name cannot be the same as that of an already existing business.
- It must include the words "Limited Liability Company" or its abbreviation, "LLC."
- LLC names cannot contain certain words that are prohibited, such as "Bank," "Corporation," and "Insurance."
- Terms and phrases that contain any words associated with a government agency are also not allowed.
To determine if your desired business name is already in use, visit the Massachusetts Secretary of State's website (Secretary of the Commonwealth Corporations Division).
You can file a reservation with a Name Reservation with the Secretary of the Commonwealth Corporations Division. The desired name will be reserved for 60 days for a filing fee of $30.
You must still complete all of the relevant LLC formation paperwork in Massachusetts before you may conduct business under that name.
3. Select a Registered Agent (Mandatory)
A registered agent is an integral part of forming Massachusetts LLC. A registered agent is a company or person authorized to receive legal and tax notices on behalf of the business.
The registered agent must have a street address in Massachusetts where they can receive mail and other legal documents for the business.
If you do not have a registered agent, the Massachusetts Secretary of State will not allow your LLC to conduct business in the state.
Once you have appointed a registered agent, make sure to keep their contact information updated if it changes.
4. File the Certificate of Organization (Mandatory)
The Certificate of Organization is a document that outlines the basic information about your LLC.
It must include the following:
- Business name and physical address
- Members
- Registered agent
- Purpose and nature of the company
- Designated representative
If you file the Certificate of Organization online, you will need to pay a filing fee of $520. If you file by mail, the Massachusetts Corporations Division charges a filing fee of $500.
If you wish, the Massachusetts Corporations Division will send you back a stamped and certified copy of the Certificate of Organization once it has been filed.
Here is additional information on the cost of starting an LLC in Massachusetts.
Steps to Take After Forming an LLC in Massachusetts
5. Create an LLC Operating Agreement (Optional, but Recommended)
In my experience as a business consultant, I've seen firsthand how a well-drafted Massachusetts LLC operating agreement can be a lifesaver.
Though not legally required in Massachusetts, this document, which outlines the rights and responsibilities of LLC members, has proven crucial for several of my clients in resolving disputes and clarifying operational procedures.
It's a foundational tool for ensuring smooth business operations and safeguarding member interests.
"Starting January 1, 2024, under the Corporate Transparency Act, most U.S. corporations and LLCs must disclose their beneficial owners to FinCEN. In Kansas, this includes anyone with significant control or over 25% ownership. They must provide their name, birth date, address, ID number, and an ID image."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
Operating agreements should include:
- The name of the LLC and its registered agent
- The purpose of the LLC
- How profits and losses will be allocated
- Voting requirements
- How the LLC will be managed
- Any restrictions on who can become a member or withdraw from the LLC
- Procedures for amending the operating agreement
You don't have to create your own operating agreement. You can find templates online or hire an attorney to help you draft one. Just make sure that whatever you choose meets Massachusetts state law.
Once you have an operating agreement in place, make sure to keep a copy with your business records.
6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)
A federal employer identification number or employer identification number (EIN), is a nine-digit number assigned by the Internal Revenue Service (IRS) to business entities.
The EIN is also used for tax reporting purposes.
If you hire employees or open a business bank account, you will need an EIN in order to file employment taxes and report wages.
You can apply for an EIN online through the IRS website, by mail, or by phone. This service has no filing fee.
7. Open an LLC Bank Account (Optional, but Recommended)
From my experience advising new business owners, one of the most critical steps for LLC owners is to keep personal and business expenses separate.
This is not just a recommendation but a necessity.
Opening a bank account specifically for your LLC is imperative. I recall a client who initially mixed personal and business finances, leading to complicated tax issues and jeopardizing the LLC's legal standing.
Having a separate business bank account is key to maintaining the integrity of your corporate veil and ensuring clear financial records, which is essential for both legal protection and smoother financial management.
If you are not located in Massachusetts, consult with an accountant or lawyer in your area to see what banks offer the best services for small businesses.
To open a bank account, you will need an EIN and the company's credit history. The credit history is simply a report of how well the LLC has managed its finances in the past.
Keep in mind that the majority of banks will probably ask to see your operating agreement, which is another reason to have one in place.
Related Articles:
- Massachusetts LLC Business Search
- How to Cancel an LLC in Massachusetts
- Best LLC Services in Massachusetts
- How Long Does It Take To Form an LLC in Massachusetts
8. File Your LLC Annual Report (Mandatory)
Drawing from my experience in LLC formation, filing your LLC annual report is a crucial compliance step to maintain your LLC's good standing in the state.
Your annual report is due annually on the anniversary of your LLC's formation. It's important to keep track of this date to stay compliant.
Before you start the filing process, make sure you have all the required details. This includes your LLC's legal name, principal office address, the names and addresses of managers or members, and your LLC identification number.
The Massachusetts Secretary of the Commonwealth allows you to file the report either online on their website or by mail. Online filing is generally quicker and more convenient.
The filing fee for an LLC Annual Report in Massachusetts is $500 for online submissions and $520 for paper filings, as per the latest information. Always check the Secretary of the Commonwealth's website for the current fee.
9. Obtain Business Licenses and Permits
Obtaining business licenses and permits is a crucial step in creating your LLC. The specific licenses and permits you need will vary depending on your LLC's business activities.
Some of the most common licenses and permits for LLCs include:
- A Business License from the City or Town Clerk's Office
- A Sales Tax Certificate from the Department of Revenue
- An Employer Identification Number (EIN) from the IRS
- A Certificate of Registration from the Massachusetts Corporations Division
Make sure to research what licenses and permits your LLC will need before you start operations so that you can avoid any costly fines or penalties.
If your LLC provides professional service, the chances are you will need additional licenses and permits.
For example, if you are an architect, you will need a permit from the Board of Registration of Architects. If you are a lawyer, you will need a license from the Board of Bar Overseers.
10. Choosing Your Tax Structure
Massachusetts LLCs are taxed based on their classification.
There are several options, each with its own pros and cons.
- Sole Proprietorship:
- Pros: Simple to set up, full control of the business, and easy tax filing.
- Cons: Personal liability for business debts and limited growth potential.
- Partnership:
- Pros: Easy to establish, shared responsibility, and more capital available.
- Cons: Joint liability and potential for partnership disputes.
- Corporation:
- Pros: Limited liability, easier to raise capital, and perpetual existence.
- Cons: Complex and costly to set up, double taxation (on corporate income and shareholder dividends).
- Limited Liability Company (LLC):
- Pros: Limited liability, flexible profit distribution, and pass-through taxation.
- Cons: More complex than a sole proprietorship or partnership, varying state rules.
I lean towards an LLC. It offers a balance between the simplicity of a sole proprietorship and the protections of a corporation. The flexibility in tax options and protection against personal liabilities makes it suitable for many small businesses.
Benefits and Drawbacks of an LLC in Massachusetts
Benefits
- Personal Asset Protection: Like in other states, LLCs in Massachusetts provide limited liability protection. This means the personal assets of the members are generally protected from business debts and lawsuits.
- Pass-Through Taxation: LLCs typically benefit from pass-through taxation, where income is reported on members' personal tax returns, avoiding the double taxation faced by C corporations.
- Flexible Management Structure: Massachusetts LLCs have no restrictions on the number or type of members, and they can be managed by members or managers.
- Fewer Compliance Requirements: Compared to corporations, LLCs face fewer state-mandated annual requirements and formalities.
- State-Specific Programs: Massachusetts may offer specific incentives for small businesses, including certain types of LLCs, such as tax incentives, grants, or resource support.
In the dynamic economic environment of 2023, small businesses in Massachusetts accounted for 36,985 openings and 22,784 closings, as per Small Business Administration data, illustrating the active role they play in the state's economy [2].
This vibrant market reflects both the opportunities and challenges facing new LLCs.
Drawbacks
- State Tax Rates and Fees: Massachusetts has a relatively high tax environment, which includes an excise tax for LLCs. This could be a drawback for businesses sensitive to higher tax rates.
- Annual Report Filing: LLCs in Massachusetts are required to file an annual report with a fee, which is an additional administrative task and expense.
- Franchise Tax: Unlike some states, Massachusetts imposes a franchise tax on LLCs, which is a tax for the privilege of doing business in the state.
- Complexity in Multi-Member LLCs: For LLCs with multiple members, the management and profit distribution can become complex, requiring detailed operating agreements.
- Limited Growth Potential: While LLCs offer flexibility, they might not be the best structure for businesses planning to go public or seeking significant outside investment.
DIY vs. Professional LLC Formation
DIY LLC Formation
Pros:
- Cost-Effective: Typically less expensive as it avoids professional fees.
- Direct Control: Complete control over the formation process and documents.
- Learning Experience: Gain a deeper understanding of your business and state laws.
Cons:
- Time-Consuming: Requires significant time investment to research and complete forms accurately.
- Risk of Errors: Without legal expertise, there's a higher risk of making mistakes in formation or compliance.
- Lack of Customization: Templates may not fit specific business needs, potentially leading to future legal issues.
Professional LLC Formation
Pros:
- Expertise and Accuracy: Professionals are knowledgeable about state laws and can ensure accuracy in the formation process.
- Time-Saving: Outsourcing this task frees up time to focus on other aspects of the business.
- Customization: Services often offer tailored solutions to meet specific business needs.
- Compliance Assistance: Many services provide ongoing support for maintaining legal compliance.
- Peace of Mind: Confidence that the LLC is formed correctly and legally sound.
Cons:
- Higher Cost: Professional services are more expensive than the DIY approach.
- Less Direct Involvement: Less hands-on experience with the formation process.
- Dependence on Service Providers: Reliance on external parties for accuracy and timeliness.
The choice depends on your unique situation, including your level of legal knowledge, the complexity of your business, time availability, and budget considerations.
There is no one-size-fits-all answer, and both options have their merits. Consider what you value most in the formation process and choose accordingly.
FAQs
Do I Have to Register as a Foreign LLC in Massachusetts?
You have to register as a foreign LLC in Massachusetts for your company to legally operate in the state for a fee of $500.
Is Business Insurance Required in Massachusetts?
Business insurance is not required in Massachusetts, but it would be advisable to acquire a policy to protect the assets of the company.
Do I Need a DBA for My LLC in Massachusetts?
You need a DBA for your LLC in Massachusetts if you want to operate under an assumed name (a name other than your personal name). You can do this through the Massachusetts Secretary of State's website.
References
- https://www.uschamber.com/small-business/new-business-applications-a-state-by-state-view?state=ma
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-MA.pdf
