What Types of Documents Do I Need for a Massachusetts LLC?

The majority of new small businesses forming in Massachusetts are taking advantage of the flexibility and simplicity of a Limited Liability Company (LLC).  An LLC allows the organization to limit personal liability of its owners and operators; avoid double taxation by taking advantage of the flow-through taxation structure; avoid the administrative and procedural headaches and documentation required of corporations; and allow its owners/operators to expand its ownership base, and adjust profit and loss allocations.   LLCs are for the small start-up business and the more sophisticated, large enterprise. 

Rather than acting as a sole proprietorship, a single member LLC may be created by a single individual conducting permissible and legal business activity. In this instance, only Articles of Organization are required for the LLC, however, every LLC should have a written Operating Agreement.  If your LLC does not have an Operating Agreement, then Massachusetts law (M.G.L. ch. 156C, et seq.) will determine the rights and obligations of the managers and members of the LLC, as well as set out rules for determining how certain factual scenarios are resolved (e.g. the termination of business affairs; or the death or disability of an owner). Your Operating Agreement will set up and detail your organization’s policies and procedures for profit and loss distributions; succession; adding new owners (members); management and governance; and death/disability/wind down/liquidation.

If you are entering into a partnership with one or more partners, then it is critical that you set out and enter into a written Operating Agreement.  In essence, you will be able to formalize the importance features of your partnership, and ensure that both parties’ rights and interests are protected. Here, your Operating Agreement for your Massachusetts LLC can establish procedures for management, day to day decision making, the amount or type of authority of the managers, the exit of a member from the partnership, contributing capital to the organization; and adding new members to the partnership. 

Beyond the basic documents for an LLC, you may need additional documents depending on your type of business and operational structure.  You may need agreements with employees regarding confidentiality of information, trade secrets, customer lists and the like; no solicitation of clients and customers; and non-competition agreements to preclude your employees from working for your immediate competition, or setting up a competing enterprise in your market.  You may also want to sell or vest ownership of the organization to some key employees or set up a structure for succession of your membership interests.  If you are purchasing or leasing equipment, or dealing with a commercial landlord or purchasing commercial space, you will certainly require written contracts in these instances.  

Should I Set Up a Massachusetts S Corporation?

An S Corporation in Massachusetts can provide strong benefits to business owners and operators.  The primary benefit of an S Corporation is that it avoids the dilemma of double taxation. In other words, taxes will to have to be paid for the activities of the corporation AND for the profits that will be distributed to the shareholders by way of dividends and share appreciation.  A C Corporation is taxed at the entity level and personal level of taxation. The double taxation issue is solved by “passing through” all corporate profits and losses to the shareholders, who will claim those items on their individual income tax return. 

Another substantial benefit of an S Corporation is that it provides its shareholders and officers limited liability. The liabilities of the corporation will be treated separately from the individual shareholders and officers.   Except in narrow circumstances, or in the case of a disregarded entity, the shareholders and officers of a corporation will not have to answer for the debts, civil claims, taxes, and other liabilities of the corporation. 

An S Corporation may also avoid the Self-Employment tax. The current rate is 15.3% of the first $118,500.00 in earnings. Partnership income that is distributed to members of an LLC will be subject to the Self-Employment tax because the members of the LLC are not subject to tax withholding. In comparison, an S Corporation and the wages paid to the owners are subject to withholding, and the individual pays 6.2% for FICA payroll taxes. The employer (corporation) will pay the other “half” of the FICA payroll taxes. 

If you are planning on expanding your corporation to a larger number and different types of shareholders, which is common for an enterprise that raises funds among numerous private investors, an S Corporation may create some disadvantages. S Corporations are limited to a maximum of 100 shareholders, and those shareholders must be United States citizens and permanent residents.  An LLC cannot retain ownership of S corporation stock.  The S Corporation may also have only one class of stock and each shareholder has equal voting rights; there can no be preferential rights to dividends or special voting rights (no preferred stock).

Selection of an S Corporation or C Corporation, or a Limited Liability Company, or other entity, depends on your desired organizational structure, objectives and plans for future growth.  Please contact Attorney Stefan Cencarik for a consultation so that I may advise you on the best entity for your business.  I serve all businesses, entrepreneurs, and individuals in the greater Boston area.