Moratorium on Evictions and Foreclosures Extended to October 17, 2020

On April 20, 2020, Governor Baker signed into law An Act providing for a moratorium on evictions and foreclosures during the COVID-19 Emergency, which severely limits the ability of landlords and mortgage lenders to enforce lease obligations, and conduct evictions and foreclosures during the COVID-19 crisis. This emergency moratorium was extended by 60 days, until October 17, 2020. That means, absent exigent circumstances, landlords and mortgage lenders cannot take affirmative steps to impose penalties upon or enforce their rights against tenants and homeowners who fail to pay rent or monthly principal and interest payments as a result of COVID-19. These restrictions apply to residential and (certain) commercial tenants alike.

With respect to commercial tenants, the Act primarily protects for profit and non-profit small businesses that occupy a property for commercial purposes. Businesses that are excluded from the Act include a premises occupied by a tenant that (i) operates multi-state; (ii) operates multi-nationally; (iii) is publicly traded; or (iv) has not less than 150 full-time equivalent employees.

The Act forbids Landlords from filing an eviction action for non-payment of rent. Landlords may not impose late fees or report non-payment to the Consumer Reporting Agencies (Credit Bureaus) if the tenant provides proof that the non-payment of rent relates to the pandemic. Mortgage lenders are also obligated to grant a forbearance to homeowners who cannot pay their monthly principal and interest payments as a result of the pandemic.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Governor Baker Ends Smoke / Carbon Monoxide Inspection Exemption

Governor Baker has rescinded the Emergency Order that allowed parties to residential real estate transactions defer smoke and carbon monoxide inspections until after closing. This means that parties presently entering into a purchase and sale agreement for a residential property in Massachusetts are unable to defer the required smoke and carbon monoxide detector inspection to a date after closing. The rescinding of the order does not invalidate any inspection deferral that agreed to in the purchase and sales agreement pursuant to the terms of the Order. Those transactions that closed prior to July 10, 2020, now have until October 8, 2020 to schedule an inspection with the local fire department, and obtain a signed certificate of inspection.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Remote Online Notarization is Now Here in Massachusetts

Real Estate and Estate Attorneys are now able to notarize important documents by way of remote videoconferencing. Governor Baker signed into law Bill S. 2645 which temporarily allows attorneys and notaries public to remotely notarize documents under certain conditions:

• All parties and the notary public must be located in Massachusetts. The Notary should confirm the location of the signatory at the outset of the video conference. The signatory must also swear and affirm that they are present in Massachusetts.

• All signatory parties must provide proof of identity during the video conference or by emailing a copy of a State ID or Passport to the Notary Public. It is recommended that the Notary receive a copy of the ID prior to initiating the video conference and then verify identity during the video conference.

• The notary must observe execution of the documents through real time electronic video conferencing. It is recommended that the signatory hold up the document so that the Notary can verify the document being signed and that the camera be placed at an angle so that the Notary can observe the signing.

• All executed documents must be sent to the notary for the stamp and signature immediately after the video conference.

• If a Mortgage is being executed, the signatory and Notary must hold a second video conference to confirm that the document signed was executed by the signatory.

• The Notary certificate must state that the signatory remotely appeared before the Notary Public.

• The notary public must execute an affidavit confirming under the penalties of perjury

  that the notary public has: (i) received a copy of each principal’s current identification credential and visually inspected the credential during the initial video conference with the principal, if applicable; (ii) obtained each principal’s verbal assent to any recording of the video conferences; (iii) taken each principal’s affirmations as to physical presence of the principal within the commonwealth; and (iv) been informed and noted on the affidavit any person present in the room, including a statement of the relationship of any person in the room to the principal.

• The Notary Public must retain the Affidavit for a period of 10 years and it does not need to be recorded at the Registry of Deeds.

This new law will ease the pressure and burden on Notaries Public and Attorneys who have struggled to adhere to social distancing standards during the COVID-19 pandemic.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Median Price of Closed Single Family Real Estate in MA is $416,000.000

The Massachusetts Association of Realtors® (MAR) recently reported that the median price for Massachusetts single-family homes is now $416,000 and the median price for Massachusetts condominiums is now $428,500.  These prices are based on recent sales prices of homes in Massachusetts and can be used to estimate home value on the market. The increase for single family homes is a 6 percent increase from March 2019, which was $390,500.00. The increase for condominiums is a 14 percent increase from March 2019 which was $375,000.00. It was reported that closed sales in March 2020 have decreased by 3 percent due to the COVID-19 pandemic, however, the demand for housing remains strong and residential real estate inventory is at record low levels. This is helping keep the value of residential real estate in Massachusetts steady and at its current market value.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Source: The Massachusetts Association of Realtors® (MAR); www.marealtor.com. Northshore Legal LLC claims no rights or ownership of any content or source materials contained in this Post.

SBA Loan Programs Expanded

The Small Business Association Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL) Programs quickly ran out of the urgently needed funds that small businesses are depending upon to make payroll and pay rent. In response, the U.S. Congress has expanded funding to the SBA programs that are part of the CARES Act. The PPP will receive $310 billion in additional funds, and the EIDL fund will receive an additional $60 billion in funding. The new legislation also sets aside $60 billion of the PPP funding for small and medium-sized community banks, which will provide extra help for self-employed individuals and small businesses that do not have relationships with larger banks.

If you have already applied for an EIDL, the SBA will process applications in their system. If you have not applied for an EIDL, the SBA application page will open as soon as they are ready to accept new applications. It is recommended to monitor the SBA web site, https://www.sba.gov/disaster-assistance/coronavirus-covid-19 for the moment the applications re-open.

If you have already applied for a PPP loan through a certified SBA lender, it is recommended that you contact your lender to ensure that your application is complete and if the application is in queue to be submitted to the SBA.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

MA Now Provides Additional Protections for Homeowners and Tenants

In response to the COVID-19 pandemic, on April 20, 2020 the Massachusetts legislature and Governor Baker extended temporary protections to homeowners and rental tenants.

The new legislation and law provides two important protections for homeowners: A moratorium on foreclosures for the sooner of 120 days from enactment or 45 days after the end of the state of emergency, and 180 days of mortgage forbearance for homeowners experiencing a financial impact from COVID-19.

The new legislation and law provides additional protections to residential and small business rental tenants. The following provisions are in effect for the sooner of 120 days after enactment or 45 days after the end of the state of emergency. Landlords may not impose late fees or report to consumer reporting agencies for a tenant’s late or failure to pay rent. Landlords may not sent a Notice to Quit for a failure to to pay rent. The only exception for a Notice to Quit is if the tenant is engaged in criminal activity or has violated the lease terms by creating a health and safety risk. Additionally, Massachusetts Courts are prohibited from are accepting new non-essential eviction cases and all pending eviction cases are present placed on hold.

These protections are aimed at ensuring that residents and occupants of residential real estate in Massachusetts are provided housing during the current pandemic.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

IRS has Granted Extensions for 1031 Exchanges

The IRS released Notice 2020-23 that provides numerous extensions to address taxpayer issues due to the outbreak of of the novel coronavirus (COVID-19) in Massachusetts and the United States. The IRS has issued extensions that relate to 1031 exchanges for real estate investments. The Notice extends any 45-day or 180-day deadline that occurs between April 1 and July 14, to July 15, 2020 for real estate and proceeds that part of a 1031 exchange.

Real Estate exchangers that benefit from an extension of the 45-day deadline are those entities or persons that closed, or will close, on their relinquished property between February 16th and May 31st. If the 45 day deadline expires within this time period, the deadline is extended to July 15, 2020. If the 180 day period is after July 15, 2020, then the exchanger must still close within 180 days.

Real Estate exchangers that will benefit from an extension of the 180-day deadline are those that closed on their relinquished property between October 4th, 2019 and January 17th, 2020. In this instance, the 180 day deadline has been extended to July 15, 2020.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

COVID-19 Relief for Small Businesses is Here

The Small Business Administration (SBA) now offers loan programs under the recently passed CARES Act for small businesses.  These programs can provide immediate funding to small businesses to help cover payroll, benefits and key business expenses.  On April 3, 2020, the SBA began accepting applications from small businesses (Corporations and LLCs) and sole proprietorships. On April 10, 2020, the SBA will accept applications from independent contractors and self-employed individuals may apply.

SBA certified lenders are now accepting applications for the Payroll Protection Program (PPP). The PPP provides forgivable loans to small businesses so long as 75% of the loans are used to fund payroll for existing employees. The remaining 25% may be forgiven if used for rent, mortgage interest and utilities. The small business must also retain the employee and no reduce compensation to the employee. The payroll costs, interest on mortgages, rent and utilities must have been effective or established prior to February 15, 2020. You may use the loan proceeds to pay for employee benefits such as vacation, medical, parental, family,, or sick leave; group health care benefits including insurance premiums; retirement benefits; and State and local taxes assessed on compensation.

if the loan is not forgivable, the loans is made on a two (2) year repayment term and at an interest rate of one-half of a percent (0.5%). Payments are deferred from the first six (6) months, however, interest will continue to accrue. There are no application fees or pre-payment penalties.

In order to apply for the PPP loan, you must contact your Bank where you maintain your primary accounts. Your Bank should be SBA certified. Most lenders, as of the date of this Blog, have a dedicated web-page for COVID-19 relief. You will need to complete the PPP loan application and submit it with the required documentation to the Bank by June 30, 2020.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Real Estate Services is an Essential Business Activity in Massachusetts

On March 23, 2020, Massachusetts Governor Charlie Baker issued an emergency order requiring all businesses that do not provide “COVID-19 Essential Services” to close their physical workplaces and facilities to the the public and workers. Since the enactment of the emergency order, it has been amended to include “Residential and commercial real estate services, including settlement services.”

Residential and commercial real estate brokerage may resume their brick and mortar agency operations. However, the real estate brokerages must observe the rules that preclude gatherings of ten or more persons, and the current social distancing and hygiene rules.

The amended order also means that real estate attorneys in Massachusetts may also resume their normal business operations. Real estate attorneys provide “settlement services” by acting as the closing and escrow agent throughout the real estate transaction. There are many purchase and sales agreements that were entered into prior to the date of the emergency order, and there are numerous transactions that are scheduled to close during the month of April. If real estate attorneys were not considered as essential during the current crisis, the damages suffered by homeowners and buyers, as well as the Massachusetts economy would be unprecedented.

Northshore Legal LLC specializes in real estate law, and represents buyer and sellers of residential and commercial real estate. We will continue to provide updates throughout the pandemic crisis. We can be reached at consultation@northshore.legal or 781-463-6063.

Federal SBA Relief for Small Businesses is Now Here

The Federal CARES ACT (Coronavirus Aid, Relief, and Economic Security Act), in part, provides immediate relief for small business owners who are facing capital crunches due to the present economic slowdown. This article will provide a brief overview of the programs presently available for small business owners in Massachusetts and throughout the United States.

The Small Business Administration (SBA) has expanded the 7(a) Small Business loan program to provide employers with payroll assistance to ensure that employees stay employed. The Paycheck Protection Program (PPP) Loans provides provide cash-flow assistance through 100% Federally guaranteed loans to employers who maintain their payroll during the pandemic. If employers maintain their payroll, the loans would be forgiven, and if certain conditions are met. Effective April 3, 2020, small businesses and sole proprietorship can apply through any Federally insured banking institution that is Small Business Administration (SBA) certified. On April 10, 2020, independent contractors and self-employed individuals may apply for 7(a) loans. It is recommended that any businesses that require case assistance to retain employees and pay for critical health care benefits contact their preferred SBA lender as soon as possible.

Under the Small Business Debt Relief Program, the SBA will assist with SBA loan payments, including all principal, interest and fees for a period of six (6) months.

Under the Economic Injury Disaster Loans and Emergency Economic Injury Grants Program, small businesses are eligible for a $10,000.00, and the funds must be used to keep employees on payroll, to pay for sick leave, meet increased production costs due to supply chain disruptions, or pay business obligations, including debts, rent and mortgage payments.

This article is merely a brief of the Federal assistance. Please visit the SBA on the Web for more detailed information, or visit: https://www.sba.gov/page/guidance-businesses-employers-plan-respond-coronavirus-disease-2019-covid-19?utm_medium=email&utm_source=govdelivery and https://www.sba.gov/funding-programs/loans

Northshore Legal LLC of Lynnfield, MA is a boutique law firm and is led by Stefan E. Cencarik, Esq. We specialize in residential and commercial real estate, business transactions, corporate law, and probate. We can be reached at 781-463-6063 or consultation@northshore.legal.

MA Division of Banks Advises Lenders and Services to Offer Mortgage Relief

Due to the outbreak of of the novel coronavirus (COVID-19) in Massachusetts, the Division of Banks has strongly encouraged and advised all Banks, mortgage servicers and mortgage lenders to implement homeowner relief programs to assist real estate owners in Massachusetts who face financial difficulty. The main objective is to ensure that the financial service industry provides programs and assistance to homeowners so that they may avoid the eventual loss of their family home. (These guidelines are not mandatory at the time of this Blog entry). The recommendations include the following:

• Postponing all real estate foreclosures for a period of 60 days;

• Waiving late payment fees and any online payment fees for all monthly mortgage payments for a period of 60 days;

• Forbearing mortgage payments for 60 or more days from their monthly due dates;

• Refraining from reporting late payments to consumer reporting agencies for 60 days;

• Providing loan modification assistance to mortgage borrowers;

• Ensuring that the servicing operations are active and that homeowners can reach the lender with questions and concerns;

• Contacting Borrowers to ensure that they are aware of any mortgage relief options.

Northshore Legal specializes in commercial and residential real estate, and represents clients throughout Eastern Massachusetts. We will keep you updated on the developing events concerning the current pandemic.

1031 Exchange Deadline Can Be Extended Due to COVID-19

Due to the outbreak of of the novel coronavirus (COVID-19) in the United States and Massachusetts, the IRS has issued tax relief Notice 2020-18 pursuant to the President’s issuance of an emergency declaration. The IRS Notice postpones the due date for filing Federal Income Tax returns and for making Federal tax payments to July 15, 2020. Returns and payments were due on April 15, 2020.

This is good news for real estate investors in Massachusetts that are presently engaged in a 1031 exchange transaction. For those real estate investors that are subject to an exchange period deadline of April 15, 2020 it is possible and advised to take advantage of the 90 day extension. If you closed your relinquished property between October 18, 2019 and December 31, 2019, it is now possible for you close close your replacement property by July 15, 2020. If you are an real estate investor and have questions about your transaction, please contact one of our Lynnfield, Boston area real estate lawyers at 781-463-6063.

Obtaining a Smoke / Carbon Monoxide Certificate during the COVID-19 Pandemic

For residential real estate transactions in Massachusetts, the parties must obtain a certificate of inspection from a local fire department indicating that the property has been equipped with functioning and adequate smoke and carbon monoxide detectors. Specifically, MG.L. ch. 148 s. 26F mandates that the Seller in any residential real estate transaction in Massachusetts equip the property with smoke and CO detectors, and obtain certification from the local fire department. It is customary for a residential real estate attorney at any closing to receive the original certificate of inspection from the Sellers or the Listing Agent for the Seller prior to or at closing. Otherwise, the assigned attorney, as settlement agent, will suspend or reschedule the closing.

Due to the outbreak of of the novel coronavirus (COVID-19), many local Fire Departments have suspended inspections for the installation of approved smoke and carbon monoxide detectors. On March 20, 2020, Governor Baker issued an Executive Order permitting the deferral of smoke detector and carbon monoxide alarm certificate inspections as required under Sections 26F and 26F½ of MG.L. ch. 148 so long as:

1. The Parties to the sale or transfer have agreed in writing that the buyer assumes responsibility for equipping the property with approved smoke detectors and carbon monoxide alarms.

2. The buyer agrees as a condition of taking title to equip the property with approved smoke detectors and carbon monoxide alarms immediately upon taking title.

3. An inspection as otherwise required under sections 26F and 26F½ occurs no more than 90 days after the state of emergency is lifted.

This Executive Order allows parties to shift the burden of installation and inspection to the Buyer, and defer such until after closing. However, Buyers and Sellers of real estate in Massachusetts should be aware that there are costs associated with the certification process and purchase of the detectors. It is recommended that parties speak to their real estate attorney to discuss a credit from the Seller to the Buyer to cover these costs, and a holdback or escrow from the sale proceeds to cover these costs. The Executive Order makes no mention of cost shifting and this can be an important issue for all parties.

Tenant Considerations in Commercial Real Estate Purchases

Financing non-residential real estate and investment properties that are occupied by tenants create numerous issues and considerations for the Buyer, Seller and Lender. Here is a brief overview of some of the issues and documents that need to be addressed prior to any commercial real estate transaction.

Collateral Assignment of Leases and Rents

Most, if not all, commercial lenders will require the Buyer to executed a Collateral Assignment of Leases and Rents at closing. This document will provide the Lender a security interest in the future rents due from the tenants. The Buyer / Borrower’s rights as the landlord under the leases are assigned to the lender and permit the Lender to step in to collect rents if there is an event of default. This is a customary document in most commercial real estate purchase transactions that are financed.

Estoppel Certificates

Estoppel Certificates are typically requested by a Buyer from Seller that provides a certification concerning the material features and issues of the landlord-tenant relationship. These certificates will confirm the terms of lease, including its term, amount and payment of base and additional rent, and security deposit amounts. It will also confirm that there is no default of, or modification of the lease. The Certificate will also confirm whether the tenant has any claims against the Seller / Landlord. These certificates are crucial since it will confirm the expectations concerning the lease agreement and preclude the tenants from raising unmentioned or unliquidated claims against the new landlord / Buyer.

SNDAs

A subordination, non-disturbance, and attornment agreement, a/k/a/ "SNDA," will define the parties rights between a Lender and the tenants in the event that the Landlord / Buyer defaults on the loan obligations. By providing a lease to a tenant that predates the recording of a mortgage, a landlord creates a leasehold and those interest may take priority to a new lender and mortgagee. So, a lender will request that a tenant subordinate its interest to the mortgage and the Lender will be able to terminate the lease under a power of sale during a foreclosure. The non-disturbance provision provides that if the Lender accepts title to the property at foreclosure, it will not interfere with the tenant’s use and possession (granting a right of quiet enjoyment) so long as the tenant is not in default. Finally, attornment obligates the tenant to recognize the Lender as the new landlord in the event of a foreclosure. This is a customary document that is designed to protect the rights of the Lender in the event of a default.

1031 Exchanges: A Primer

A 1031 Exchange is a real estate transaction that permits real estate investors to sell investment property and use the funds to acquire a replacement property without having to pay capital gains tax at transfer. This type of exchange is method of deferring tax that is governed by Internal Revenue Code Section 1031, and is related rulings and regulations. There are several strict rules for compliance in order to qualify for a 1031 transaction, and it is crucial that you hire an experienced qualified intermediary and agent to assist you with this process. A real estate investor is unable to perform these tasks itself.

The subject real estate must be used in a trade or business or for business, and the replacement property must be “like kind.” First, the relinquished and replacement properties must be used in a trade or business, or for investment purposes. In other words, conducting valid business operations on the property or renting property to tenants is acceptable. Second, the relinquished and replacement property must be “like kind,” which is broadly interpreted to include properties as previously described.

Before entering into a purchase and sale agreement, it is recommend that you retain a professional 1031 exchange provider that will serve as a qualified intermediary. This organization will ask that you enter into an exchange agreement and will hold the proceeds of your relinquished property in escrow until the time you need to pay for the replacement property. These escrowed funds cannot be access by the Buyer / Seller, and can be used to pay the existing liens and closing costs of the relinquished property, and purchase price and closing costs for the replacement property.

After the closing for the relinquished property you will have forty-five (45) days to identify the replacement property that you will purchase. You may initially identify up to three (3) replacement properties. If you designate multiple properties, you can use your sale proceeds and tax deferred gains to purchase multiple replacement properties. Within one-hundred and eighty (180) days of the closing date for the relinquished property, or before the due date for the investor’s tax return. Here, it is important to note that if you close the relinquished property after October 17 and before December 31, you will have less than one hundred and eighty (180) days to close on your replacement property. Here, the timing of the sale of your outbound investment property, and purchase of replacement properties is absolutely crucial. In addition to retaining a professional qualified intermediary, it is important to line up replacement properties prior to the sale of the relinquished properties, and to watch the calendar when scheduling closing dates late in the year.

If you are a real estate investor, and require require assistance in your real estate transactions, please contact Northshore Legal at 781-463-6063.

Is your Massachusetts LLC or Corporation in Good Standing?

It is vital that a Massachusetts corporation or partnership remain in good standing with the Commonwealth of Massachusetts. Good standing exists when a Massachusetts entity registers itself with the state; files all necessary documents; and pays all applicable fees and taxes to both the Secretary of State and Department of Revenue. 

When in good standing with Massachusetts, an entity may request a certificate indicating its good standing and compliance.  Such certificate can be necessary when an entity enters into an asset purchase agreement; contract to purchase a commercial building or land; lease of equipment or business fixtures; or where an individual or entity seeks bank financing or capital.  The certificate of good standing is one of many common conditions to close the aforementioned transactions. 

To remain in good standing with the Secretary of State, annual reports must be filed with the applicable fee/tax paid (depending on entity type.)  A corporation will pay the filing fee with the Secretary’s office and then pay taxes to the Department of Revenue. A partnership will pay $500 to the Secretary’s office when filing the annual report.  An entity will not be issued a certificate of good standing if it’s fallen behind on filing annual reports with the Secretary of State. An entity may file annual reports for previous years so as to place the entity in good standing and avoid dissolution of the entity by the Secretary of State. The entity is responsible for the past due filing fees, and a reinstatement fee if the entity has been dissolved.

 A Certificate of Good Standing (issued by the Secretary of State) provides the following information:

1. Name of the entity;

2. Date the entity was formed;

3. Confirmation that the entity has filed all annual reports and paid all related fees;

4. Confirmation that there are no proceedings pending for dissolution of the entity;

5. That no articles of dissolution have been filed by the corporation; and,

6. That according to the records of the state secretary the entity appears to be in good standing.

 The Certificate of Good Standing does not provide an opinion nor make any warranties regarding:

1. The financial health of the entity’s business;

2. Whether there are pending lawsuits or judgments against the entity;

3. Whether the entity is subject to a bankruptcy proceeding; and,

4. Any number of the countless conditions that often affect a business (such as market conditions.)

To remain in good standing with the Department of Revenue, an entity must timely meet all tax obligations, including corporation taxes (excise, use and sales); room occupancy taxes (if applicable); meal taxes (if applicable), and withholding taxes . The Certificate provides no representation concerning unemployment insurance obligations and other taxes provided by statute. Nor does the certificate make any opinion or representation on the financial health of the business, or any other condition not related to taxes owed.  The Department of Revenue may issue a Certificate of Good Standing and/or Tax Compliance upon request by a corporation, LLC, LLP or other entity.  

If you have questions about your business entity, or how to revive a dissolved entity, or a related issue, feel free to contact one of our Massachusetts business and corporate lawyers at 781-463-6063. 

S-Corporation vs. C Corporation

New business ventures are often faced with several critical questions and decisions when creating a new business. The first step is to determine the the nature of the Massachusetts corporate entity that they desire to operate (i.e., corporation, limited liability company, etc.). This decision depends on several factors including the type of business (services or products), the contemplated ownership structure, tax considerations and potential financing opportunities.

If a new business owner decides against forming a Massachusetts Limited Liability Company, and determines that forming a Massachusetts Corporation is the most advantageous entity, the next important step is to determine whether the entity will be taxed as a C-corporation or S-corporation. The “S” and “C” Corporation designations refer to different sub-chapters of the Internal Revenue Code (Federal tax laws), and are more particularly described below.

C-Corporations

A corporate entity will be taxed as a C-Corporation by default unless it makes an election to be taxed as an S-corporation.  A C-Corporation is subject to double taxation, once at the entity level and then again on the shareholder level, when dividends (profit distributions) are paid out to the shareholders. Funds that are earned in a C-Corporation can be retained within the entity rather than being passed through (and taxed) to shareholders, and the corporation can also carry losses Therefore, as opposed to an S-corporation, money that is earned in the C-corporation will be retained within the company rather than passing through to the individual shareholders. Additional benefits include the ability to hold initial public offerings (IPOs), carry back of losses up to three years and less limitations on the type of shareholders.

S-Corporations

S-corporation status is the most common election made by small businesses. However, the small business must meet several requirements, including the entity must have only “allowable” shareholders, less than 100 shareholders and there may be only one class of stock. In other words, the number of Massachusetts Corporation shareholders will be limited and all will have the same voting rights and distributions.

S-Corporations are treated as a “pass-through” entity, similar to a Massachusetts Limited Liability Company (LLC). In other words, the company will not be taxed at the entity level, and will only be taxed at the shareholder level. Each shareholder will then be responsible for paying their own taxes on their share of income derived from the corporation.

If you are forming a new entity and creating a new business, please contact one of our Lynnfield based business attorneys at 781-463-6063.

The Value of Outside General Counsel for Your Business

One of the many values of our business lawyers is that we help ensure that you are positioned to effectively resolve issues that arise in the lifecycle of a business. It is important for business owners and entrepreneurs to carefully consider the value of advice of a business attorney rather than exercise financial restraint when making important decisions that often significantly affect the success of a business. Rather than risk the serious consequences of decisions made without the consultation of a business attorney it is suggested that business owners conduct a careful cost/benefit analysis into whether one should hire a lawyer. Consulting with an attorney at the onset is similar to insurance: your decision help’s you mitigate risk and minimize loss when potentially disastrous events occur.

Business and Entity Formation

A business attorney can help you select the right type of business entity to meet your objectives and needs.  There are several entity choices available in Massachusetts: Corporations (both C-Corporations and S-Corporations), Limited Liability Companies (LLC), Partnerships (Limited Partnerships and Limited Liability Partnerships), as well as other specific entity types for professionals, charitable purposes, and other highly specialized business. Selection of the proper entity type will establish a foundation for sustainable long term growth, investment return, limited liability for parties, favorable taxation, dealing with external issues and pressures, and other matters. 

Contracts / Negotiation

An attorney knowledgeable on business law in Massachusetts can make sure that your rights and interest are protected.  It is critical that the contract provisions that deal with particular issues and contingencies are not only fair, but also align with your interests in any given transaction.  An attorney specialized in these areas can consult and assist in contract negotiation and work on the “fine tuning” of contractual terms. The type of contracts that a business attorney might review includes employee agreements, commercial leases, equipment purchase agreements, buy-sell agreements, licenses, and bank-investor financing documents.

Intellectual Property

It is essential for a business owner to consider their intellectual property rights. This can manifest itself in trademarks, service marks, copyrights, and patents.  Intellectual property can also include other types not specified in Federal statute, including issues such as trade secrets and formulas, customer lists, methods and processes. You should consider protecting your intellectual property from competition as well as protecting it internally from employees, partners and other shareholders. A competent business attorney can help you navigate legal protections available to protect what makes your business unique. 

Asset/Stock, Interest Sales and Mergers and Acquisitions

During a businesses lifetime, the owner(s) will want to expand the business or take advantage of an exit opportunity.  A business attorney can help you craft and implement a strategy for the sale of the shares or membership interests to an outside organization, or to your own employees or other shareholders, or members.  An acquisition will allow shareholders to exit the business by converting their interest in the entity to cash or another option(s). If you find yourself at the beginning of these discussions with a potential buyer it is critical that you consult a business lawyer such as ourselves at 781-463-6063. 

Disregarding Entity Protections in Massachusetts

In prior Blog posts, our Lynnfield based Lawyers specialized in Massachusetts business law explained that the main benefit of a properly formed Massachusetts corporation is the limited liability afforded its officers and shareholders.  One exception to limited liability however is disregarding the corporate entity, otherwise known as “piercing the corporate veil.” The exception allows a claimant (such as a creditor) to hold either the officers or shareholders personally liable for claims against the corporation. 

In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court stated that the criteria for disregarding the corporate entity:

‘(a) when there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control, in the activities of another and there is some fraudulent or injurious consequence of the intercorporate relationship, or (b) when there is a confused intermingling of activity of two or more corporations engaged in a common enterprise with substantial disregard of the separate nature of the corporate entities, or serious ambiguity about the manner and capacity in which the various corporations and their respective representatives are acting.’

The main reason usually cited for disregarding the corporate entity is, in rare situations, to prevent gross inequity by providing an injured party a remedy by permitting parties to disregard the corporate protections. A plain example of a situation where an entity is disregarded is when a small business owner runs a “shell corporation” (a corporation without any meaningful assets or capital) that comingles business with personal financial affairs, that doesn’t follow corporate reporting, formal procedures, nor officer duty requirements, and that is used to provide a direct source of funds and/or assets to a shareholder, or that is used to perpetuate fraud.

Massachusetts court use 12 factors to determine whether to disregard a corporation’s liability protections (e.g. pierce the veil):

1.      pervasive control;

2.      nonfunctioning of officers and directors;

3.      confused intermingling of business activity assets, or management;

4.      thin capitalization;

5.      use of the corporation in promoting fraud.

6.      nonobservance of corporate formalities;

7.      common ownership

8.      absence of corporate records;

9.      no payment of dividends;

10.  insolvency at the time of the litigated transaction;

11.  siphoning away of corporate assets by the dominant shareholders;

12.  use of the corporation for transactions of the dominant shareholders;

Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).

If you as a Massachusetts business owner is interested in reviewing the validity of your organization, or are interested in learning more about the services we provide in business legal consulting, please contact us at 781-463-6063.