The Sword and Shield - Non-Disclosure Agreements in Massachusetts

What purpose do Non-Disclosure Agreements (NDAs) serve, and why would I want to "complicate" my relationships with employees, other businesses, and investors?  The time for hand shake deals and unspoken understandings is over. No matter how strong your relationship with any individual or company, relationships and attitudes can change in an instant.  It is, therefore, impossible to predict how employees, other businesses, and investors will treat your private discussions, sensitive information, and intellectual property when a relationship suddenly deteriorates.

A non-disclosure agreement (NDA) drafted by a qualified Boston business lawyer will act as your shield and sword. What types of instances call for a NDA, and what types of benefits do these agreements provide your business? There are numerous situations that call for a non-disclosure agreement (NDA): 

- Protection of intellectual property internally - What measures to do you have in place to protect your contact lists, special methods,  unique processes,  knowledge base and best practices, formulas, and other trade secrets from your employees?  What is preventing your employees from quitting their position at your business, and then starting a new competing business in your market? What is precluding a key employee or manager from working for your competitors?  Intellectual property, in general, can be the essence of any Massachusetts business, and the exposure or misuse of this information could negatively impact the revenues of a business.  

An NDA can preclude internal misappropriation of intellectual property by entering into a contract that specifies the ability of a party to disseminate, use, copy, or appropriate intellectual property.  Typically, an NDA will provide the business a right to seek an injunction from a local Court so as to obtain an order to prevent the party from violating the terms of the NDA.  This Court order will compel the party to abide by the terms of agreement, or face any penalties for contempt of court. 

- Protection of intellectual property externally - What types of limitations do you place on external entities or individuals who may need to use your intellectual property from time to time? What rights do your consultants, strategic partners, and other parties have to your intellectual property, and what happens when  you stop doing business with one another. A well drafted NDA can set parameters on the use of your intellectual property outside of your business. And you will have an enforceable contract with pre-determined remedy for enforcing your rights to prohibit misuse of your property.  

-Confidentiality of sensitive discussions - How would your key employees, managers or minority shareholders or members react if they discovered that you were considering offering your ownership interest for sale? What do you think your competition would do if they found out that you were considering merging with another company, or planned on laying off a portion of your workforce? Would you want your proposal disclosed to a party other than your potential new customer? The list of the types of sensitive business discussions that need to remain confidential are endless.  A well drafted NDA can restrain other parties from disclosing information that may provide other parties a competitive advantage, or the disclosure of information that could negatively effect a business.  

The few examples above show that the benefits of an NDA far outweigh any concerns for complicating or scaring others while doing business in Massachusetts. It is, therefore recommended that you have a qualified business lawyer review your non-disclosure agreement, and other business contracts to ensure that your rights are protected and that they comply with Massachusetts law. And, if your business is not using a NDA, it is highly recommended that you accept that this protective measure is a best practice.  

Company Policies and Employee Manuals: Dust Collecting Binders or Necessary Safeguard?

Hiring employees for your Massachusetts business entails a significant amount of responsibility and legal liability.  What is your policy for addressing particular circumstances that will, without a doubt, occur during the operation of your business?  In other words, what is your paid and unpaid leave policy? What is your sexual harassment or violence in the workplace policy? What are the rules for performance and conduct of employees in the workplace? What is your procedure for termination of employees? These types of questions and significant concerns for your business can continue in perpetuity. 

Regrettably, most small businesses do have an oral (or unofficial) policy for addressing these types of circumstances, or have some semblance of how to deal with these problems as they arise.  However, this approach will not reduce the risk of an employee lawsuit for wrongful termination, unpaid wages (subject to treble damages and attorneys fees under the Massachusetts Wage Act), and other grounds for suing an employer for damages.  Most small businesses with 1 to 25 employees do not have company policies and an employee handbook. The reason is that these small businesses operate lean and mean, or have rapidly expanded to the point that they do not have the time and resources to structure the internal affairs of the organization. This oversight can be disastrous when an incident occurs or dispute arises, and a former employee hires an attorney to file a lawsuit against your business.  

At a minimum, all businesses should have a basic set of written company policies, including: At will employee policy; sexual harassment policy; anti-harassment policy; anti-discrimination policy; safety policy; Method and frequency of payment of wages; COBRA and mini-COBRA (Businesses with 20 or more employees); Breaks and facilities for nursing mothers; Maternity leave; Military leave, and

A Massachusetts small business should also have a basic employee manual that recites company policy, as well as states rules and procedures for: Orientation; Use of company technology and equipment (Cell phone, Internet, E-mail, and Computer); Compensation; Confidentiality and non-disclosure; Intellectual property; Drug use and testing; Non-smoking; Conduct; and Termination.  

Off the shelf or downloadable Internet forms containing template company policies and employee manuals are not enough to protect your business. These templates may not be in compliant with Massachusetts law, and are not tailored to your specific business needs. They may also be incomplete, poorly drafted, or written so as to protect the employee and NOT your business. Remember that if an employee files a lawsuit against you, your written policies will be strictly interpreted against you. And not having any policies at all can put the success and health of your business at risk. 

The Law Office of Stefan Cencarik, PLLC specializes in assisting small businesses and entrepreneurs in Boston and its surrounding areas, including Suffolk, Middlesex, and Essex counties.  To discuss whether your business is in compliance or protected against potential liability, please contact Stefan Cencarik, your business lawyer, at 617-669-9780.  

So, You Want to Buy a Business and You Have Never Done This Before . . .

Would you perform a root canal, or other surgical procedure on yourself?  The most common (and rational) answer is: NO.  Most Boston area businesses and residents will hire a professional to assist them when they have a highly complex, specific need. What makes a business purchase different from a surgical procedure or even the purchase of a new home? What type of prudent business decision are you making when you do not hire a qualified business lawyer to protect your interests and make sure you are receive the fruits of your deal? Hiring a business lawyer serves as the shield and sword for your financial interests in any business transaction.  This is neither a "do it yourself" task for an experienced entrepreneur or savvy business person, nor a person entering the world of business ownership for the first time.     

A new business owner may consider exercising fiscal discipline by deciding not to hire an attorney to assist them with their business purchase.  Often new Massachusetts business owners want to avoid having to borrow or obtain additional funds, and/or have to pay out more funds to attorney in addition to the purchase price.  This decision can be fatal for a number of reasons. You do not have an experienced third party to provide you with an outside counsel that is based on experience, best practices and tribulations. You will not have an individual that is not personally vested in your deal to provide you with objective advise, opinions, and  advocacy (if necessary) during a transaction.  You also will not have an independent party to assist you in the due diligence and legal relations that you will invariably enter into. 

Non-employee companies, main street businesses, suppliers, and venture funded, high growth companies all can benefit from a business lawyer who can ensure that you make a strong start out of the gate.  As soon as you make an offer (or even earlier in the negotiation process) you should consult with a qualified Boston business lawyer to ensure that you are protected each step of the business transaction.  Attorney Stefan Cencarik works closely with experienced and new entrepreneurs alike, and is committed to helping you close the deal on-time and on budget.  

Disregarding the Corporate Entity in Massachusetts: Business Owners Beware

In previous articles, Stefan Cencarik, a Lynnfield based Massachusetts Business Attorney explained that the primary benefit of a valid Massachusetts corporation is limited liability for its officers, directors, and shareholders.  One exception to the principal of limited liability is disregarding the corporate entity, also known as “piercing the corporate veil.” This exception will allow a creditor or other claimant to hold either the officers or shareholders personally liable for the debts and other claims against the Massachusetts business corporation. This is the worst case scenario for a business owner who wants to protect their own personal financial assets from business creditors. 

In My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619 (1968) the Massachusetts Supreme Judicial Court outlined 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 primary purpose of disregarding the corporate entity is to, in rare situations, allow parties to omit the corporate liability protection and to prevent gross inequity by providing an injured party an equitable remedy. The most common example of situation of an entity that may be disregarded is the instance where a small business owner:

Runs a “shell corporation” (without any significant assets or capital); that comingles business and personal financial affairs; fails to follow any corporate reporting, formal procedures, and officer duty requirements; and that is used to provide a direct source of funds or assets to the shareholder, or is used to conduct fraudulent activity.

There are twelve factors used by Courts in Massachusetts to determine whether to disregard the corporate form: (1) common ownership; (2) pervasive control; (3) confused intermingling of business activity assets, or management; (4) thin capitalization; (5) nonobservance of corporate formalities; (6) absence of corporate records; (7) no payment of dividends; (8) insolvency at the time of the litigated transaction; (9) siphoning away of corporate assets by the dominant shareholders; (10) nonfunctioning of officers and directors; (11) use of the corporation for transactions of the dominant shareholders; (12) use of the corporation in promoting fraud. Evans v. Mulicon Construction Corp., 30 Mass. App. Ct. 728, 733 (1991).

On October 30, 2015, Attorney Stefan Cencarik, a Massachusetts Business Lawyer, explained the importance of observing corporate formalities (Factors #5 & 6) so as to maintain a valid Massachusetts corporation.  Future blog posts will address significant factors so that business owners may avoid disregarded entity status.  If you or any other Massachusetts business owner becomes interested in reviewing the validity of your organization, please contact Attorney Stefan Cencarik at 617-669-9780.  Attorney Cencarik provides legal services in Essex, Middlesex, and Suffolk Counties, Massachusetts, and serves Lynnfield, Boston, Peabody, Beverly, Salem, Danvers, Wakefield, Reading, North Reading, Andover, Woburn, Burlington, Saugus, and many more towns and cities. 

The Importance of Strategy Prior to Exiting a Business Venture

What is your plan for exiting your business?   At some point, a business owner or group of partners will want to retire, work on other ventures,  recoup their investment or “Cash out” their business interest. Sometimes there instances when an individual’s participation or ability to run the business can be affected by financial problems, illness, divorce, disability, and/or death.  It is, therefore, crucial to develop an exit strategy for your business so that you have a plan in place to “move on” while maximizing any financial benefits and limiting any ongoing liability.    

There are several options for successful business succession planning.  These options include an all asset purchase and sale to a third party; a stock / interest purchase and sale to a third party or employees or other partners / shareholders; private equity acquisition; employee / key management stock and interest purchase programs; and intra-family transfer of business interests.  The best option for a successful business succession plan depends on your objectives, and nature and character of your business. 

The business law attorneys at the Law Office of Stefan Cencarik, PLLC provide business succession planning services, and can work with you to ensure that your ends goals for your business are met when the time comes.

The Importance of Corporate Formalities for Any Massachusetts Corporation

One of the foundations of the law of corporations is limited personal liability for the officers and shareholders. In other words, the liabilities of a corporation are treated as separate and distinct from the personal liabilities of the officers and shareholders.   However, in Massachusetts, there is an exception to the rule of limited liability.  In the context of litigation, a reviewing Court may “disregard the corporate entity,” and hold the officers and shareholders liable for the debts and claims against the corporate entity under certain special circumstances.  These circumstances are reviewing together as a whole, rather than on an individual basis, and, it is therefore important to undertake responsibility to ensure that your Massachusetts Corporation complies with existing law and does not meet the criteria for disregarding a corporate entity.  

One of the twelve circumstances that a Court may take into account when disregarding a corporate entity is examining whether the corporation has complied with and observed corporate formalities. The lesson here is that a Corporation must strictly observe corporate formalities. What exactly are corporate formalities? A corporate is required to maintain, keep, and observe certain records and formal procedures that indicate that the corporation maintain a separate existence from the shareholders’ personal business affairs.  Some of the necessary corporate formalities include the following:

·       Stock Register (Ledger): A written record that states the names and addresses, as well as the amount of shares, owned by each shareholder of the corporation.

·       By-Laws: This is an established set of rules and procedures that state how the corporation will be operated, and how the corporation will deal with certain factual scenarios affecting its business affairs.

·       Board of Director Meetings: The Board of Directors must meet frequently, as specified by the Corporate By-Laws, and a record (meeting minutes) must be maintained and kept on file.

·       Shareholder Meetings: Shareholder meetings must occur at least once per year, and a record (meeting minutes) must be maintained and kept of file.

·       Meeting Minutes: A record that states the date, time (time of commencement of meeting, time of conclusion of meeting, time of significant event, decision, vote, etc. at meeting).

·       Bank Accounts: The corporation must maintain a separate bank account from the individual shareholders.

·       Tax returns: The Corporation must file all of its income tax returns with the Massachusetts Department of Revenue and Internal Revenue Service, and pay all taxes due on such returns.

·       Annual Reports: The Corporation must file current annual reports with the Massachusetts Secretary of State, and maintain a resident agent for service of process inside the Commonwealth at all times.

·       Permits / Licenses / Certificates: The Corporation should maintain current and active licenses, permits and certificates requires for its type of business, including a DBA certificate filed with the proper town or city.

The above is not a conclusive list of corporate formalities that must be observed by all Massachusetts corporation. Compliance with observation of corporate formalities is essential for maintaining the corporate status and limited personal liability for corporate officers and shareholders. There may be other formalities that should be observed including, evidencing that assets are titled in the name of the corporation, all business transacted occurs in the name of the corporation, rather than the shareholders, etc. Typically, the corporate Secretary undertakes the responsibility for maintain compliance.

New small businesses can begin to maintain corporate formalities by ordering a “corporation kit” from most well-known office product suppliers.  These kits will contain templates for meeting minutes, stock registers, shares of stock, notices required for board of director meetings, notices required for shareholder meetings, as well as a corporate seal necessary to execute these documents.

If you are an established business, please feel free to contact me at 617-669-9780 to verify whether you are in compliance with observing corporate formalities. 

Those Internet Forms Can Be the End (of You and your future)

Fiscal discipline and use of legal forms downloaded from the Internet from a (supposedly) reputable online retailer seems to be a growing trend among Massachusetts individuals and businesses. Rather than enter the painstaking process of finding an experienced business or real estate attorney that will charge a fair rate, return phone calls and e-mails, and deliver a result; many people turn to the Internet for help.  There are dozens of on-line retailers that sell "legal forms" for the price of $79.00, and sometimes less.  The Web-sites are often advertised throughout the Web and television, and typically have "famous" lawyers, celebrities, and major publications endorse the product. These Web-sites allow a client to purchase and download a "legal form" for issues concerning business law, real estate, and estate planning that follows the "one size fits all" methodology of approaching legal issues.  

Here, the old cliche rings true: "You get what you pay for." When you download "legal forms" off the Internet, what exactly are you getting and what are you paying for?

Cost Savings - How much are you really saving, and what is the potential cost to your financial future and peace of mind? Many of these "legal form" sites provide package deals and an array of "value added" benefits at different price levels.  Compared to the cost of hiring legal counsel, the cost savings of using the Internet to practice law can be substantial for very simple legal matters, and, on the other hand, the costs can be the identical for more complex matters. Cutting a few corners when  planning for the succession of your family business or assets is not a prudent decision.  If you are making decision involving thousands (or millions) of dollars, why would you trust a legal form provided to you on the Web by an unknown author? Legal services from a qualified and experienced business, real estate, and estate planning attorney cannot be substituted by fillable forms when making life and game changing decisions. 

Accountability - Who authored the form that you just downloaded? What are their qualifications, and what type of experiences did that person have that caused them to draft that document a certain way?  Was the form created based on your individual circumstances, or are you buying a template? Who do you speak to if you have legal questions when you need to make decisions in filling out the form? Who do you speak to when an issue arises after the form becomes important, or ends up being reviewed by a Judge or Jury?  The accountability issues concerning online legal forms are endless.  You can be assured that a qualified Boston area business, real estate, or estate planning attorney will be able to answer all of these questions, and fulfill any legal service and consulting need.  When you download and use a "legal form," you will not have a local attorney with verified qualifications that will remain accountable to you and the state bar.  

Advice & Counsel - A form is just a form.  You may receive a brief synopsis of Massachusetts State law that was copied from public information, or some instructions on how to fill out the form. However, you cannot expect an advice on best practices, shared experiences, or any planning or recommendations from an attorney.  You are essentially on your own. Many of these legal form Web-site try appear to be helpful and make promises that a qualified "legal expert" may be available to assist, for an additional (hidden and not so up front) fee. (And in this instance, who is this "legal expert" or "top attorney"? Are they qualified to advise and do they have experience with Massachusetts law? Where is this person located?). 

Confidentiality - Not all "legal form" web-sites allow instant download of forms.  For more complicated business, real estate and estate planning documents, you will be required to submit information via an online form, and you wait up to thirty (30) days for the entire process to be finalized.  In other words, you are submitting confidential information via the Internet to a company (that you met on the Internet) that is tasked with securely storing your information, and performing legal work (by someone that you have never met).  When you hire a local Boston area attorney, your confidential information is protected.  You can assured that it will not be submitted via the Web, or stored by an unknown company.  Additionally, what are the legal form company's duties of confidentiality to you?  They may state that they retain or treat all information as confidential, however, those companies have no legal duty (or accountability) to you as opposed to a local attorney.  

Personalized Needs and Service - The digital age has removed the old fashioned, personalized service from professional services that our parents grew up with.  Legal form web-sites are no different from any other impersonal, digital experience. You rarely deal with a live human being, and when you do it is with a complete stranger outside of Massachusetts.  Depending on whether you select the right attorney, doing business with an attorney will enable you to receive a more intimate level of service with a local professional who will be responsive to your questions, concerns, and overall legal needs. Web-sites cannot substitute real human interactions, and the many benefits that personalized service will provide you in terms of making you feel at ease with any legal process. 

I have heard numerous tales of horror from existing and prospective clients, colleagues, and friends about Internet "legal forms."  Some of these accounts have resulted in  costly, time consuming, and nerve wracking court battles where no party ever truly wins.  When Massachusetts business or individual seeking legal services turn to the Internet to solve a legal need in areas of business law, real estate, or estate planning, they are taking a substantial amount of risk, and making a very expensive  bet that a standardized form will provide a long term, ironclad legal solution.   Take this article as a tale of caution because those Internet Forms Can Be the End (of you and your future). 

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.  

What types of entity are available for my business?

In addition to making a decision on what your business name will be, one of the most important decisions that any new entrepreneur must make is to decide their business entity type.  It is very important to properly select the type of business entity structure that suits your business needs.  By doing so, you will maximize the tax, liability, and other benefits that flow from each type of entity. It is, therefore, essential that you contact one of our Massachusetts business lawyers to provide legal guidance as to the best entity for your business.   

The most commonly used types of business entities available in Massachusetts comprise the following:

Sole Proprietorship (D/B/A; personal name)

Also, frequently referred to as a D/B/A company, a sole proprietorship is the simplest form of a business entity.  A sole proprietorship is an unincorporated business and does not offer the limited liability protections of a corporation or partnership.  Some small business owners begin their business as a sole proprietorship and then seek to incorporate their business once they achieve success in their business. Sole proprietorships avoid the administrative requirements and fees associated with an incorporated business.  However, due to the casual structure of the sole proprietorship and liability issues that a business owner can potentially face when problems arise, a sole proprietorship is not the best type of entity structure.

Corporation (Corp.; Inc.; Co.)

A Massachusetts Corporation is an independent business entity from the business owners (shareholders).  The Corporation will provide a limited liability for the shareholders, and that entity will be responsible for the debts, expenses, and civil claims against the corporation. A Corporation can either taxed as either a C Corporation or S Corporation.  A Corporation must abide by numerous procedural formalities and follow certain rules in order to maintain its legal status in Massachusetts.

Professional Corporation (P.C.)

A Professional Corporations is just like a Massachusetts Corporations, however, this type of entity structure is limited to a group licensed professionals only.  This means that the shareholders must be licensed to practice some type of lawful professional in Massachusetts.  These profession include, but are not limited to: attorneys, certified public accountants, dentists, engineers, physicians and surgeons, veterinarians, chiropractors, podiatrists, physical therapists, psychologists, optometrists, and registered nurses. The P.C. provides limited liability for the shareholders, however, the corporation will not protect a professional from being held liable for their own malpractice / negligence in performing services and their duties as a professional.  

Limited Liability Company (LLC)

Massachusetts law provides for the use of the Limited Liability Company (LLC) type of entity.  An LLC provides its members with the substantial benefits of limited liability for debts and claims against the LLC.  The LLC also provides the passed through tax advantages to the business owners – in other words, the profits and losses are passed through to the owners, and taxation will not occur at both the entity and individual level. Many business owners prefer to establish an LLC due to these substantial benefit and also take advantage of the flexibility and ease of administering the entity.   

Partnerships (Partnership; GP; LP; LLP)

In Massachusetts, the significant business law allows several types of partnership entities:  A general partnership, a Limited Partnership; and Limited liability Partnership. 

A general partnership is similar to a sole proprietorship, however, this unincorporated business involves at least two persons who own the business and share in its profits and losses.  This type of business structure has the same disadvantages as the sole proprietorship and also can lead to a very acrimonious “business divorce” when the basic structure of the partnership is not established.

A Limited Partnership (LP) will involve at least one general partner and one limited partner.  The general partner will make day to day and operational decisions.  The limited partner will not participate in the day to day and operational decisions, and typically take the role as an investor in the business.  The limited partner’s liability is limited to the amounts contributed (capital contribution) to the partnership as long as that partner does not exercise control over the business. The general partner, on the other hand, will assume full liability for the L.P.’s debts and other claims, provided, however, a Corporation or LLC can be a general partner of an L.P.

A Limited Liability Partnership (LLP) is a partnership and allows each partner to take limited liability for the other partner’s negligence, malpractice, errors or omissions. LLPs effectively function similar to a general partnership.  An LLP is frequently used by (but not limited to) attorneys and accountants.

If you or a colleague have any questions about what type of business entity that would be best for a particular business, please contact your local Massachusetts business attorney, Stefan Cencarik, at 617-669-9780.

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.

Issues for Business Founders to Address When Starting a New Partnership / Business Venture

When one or more like-minded persons decide to engage in any type of Massachusetts business venture, it is crucial to perform proper planning at the inception of the business.  At the outset, the founders (or partners) in the new business venture can avoid costly, time consuming, and frustrating issues that plague many small businesses in Massachusetts. The downside of improper planning and preparing for the different contingencies that may arise during the formation and operation of business is that some of these issues turn into a dispute, and some others into litigation.

It is crucial at the outset to select the correct business entity for your organizational structure and business objectives. It is equally important to set out each founder’s status, influence, participation, and financial interest in the organization.  It is recommended that, at a very early stage, that business founders discuss several issues, including the following:

What role and status will each founder have in the organization?

Will each founder participate in the day to day affairs of the organization? Will each found work full time?

Who will own certain percentages of the business interests?

What are the restrictions on the transfer and sale of the business interests?

What are the conditions for raising capital, sell business interests, and/or brining on new partners?

Will the founders contribute additional capital to the business if necessary to operate the business?

What happens if one of the founders contributes additional capital to the business and the other founder is unable/unwilling to do so?

What happens to the business if a founder becomes disabled, ill, or dies?

What are the conditions for removal of a founder from the operations of the business?

How can the founders separate their personal assets and liabilities from those of the business entity?

What is the desired business succession plan for the business entity?

Who will own the intellectual property of the business? (This is particularly important if one partner carries over certain patents, trademarks, Copyrights, customer lists, trade secrets, and the like to the business).

This list may be used to generate a discussion prior to meeting with one of our business law attorneys. These are some of the issues that we can address in the planning stage for your business.

Are you an entrepreneur or business setting up, or expanding in the north shore, including Lynnfield, Wakefield, Reading, Andover, Danvers, Peabody, Beverly, Woburn, or Saugus? Contact Attorney Stefan for a free consultation at 617-669-9780.