This great article explains what the LLC (Limited Liability Company) has to offer an entrepreneur. It gives examples of different types of businesses and their success rates.
It also explains how to form an LLC in Massachusetts and possible costs, ongoing fees, and expenses.
The 5 Steps to Form an LLC in Massachusetts:
Here is a great step-by-step guide on how to form a Massachusetts limited liability company (LLC).
Step 1: Name your Massachusetts LLC
The first step is to choose the name of your new business. You cannot use any word that is already used by someone else.
There are several websites out there that will help you come up with a company name.
You can also have your attorney or professional consultant help you with this step.
A name such as “Killerdough Inc.” might be good for a bakery where all the employees’ names end in “dough,” but probably not for a financial consulting firm.
- Names cannot have certain words in them that are restricted by the state of Massachusetts. Here is a list of these words:
- If your business name is already taken, there are several ways to proceed, but it will take time and money.
- Your LLC name cannot contain terms such as a bank, trust, or insurance or refer to the nature of your business (e.g., “Photographer” Limited Liability Company).
Step 2: Appoint a Massachusetts resident agent.
It’s a great idea to appoint a registered agent service for your LLC. A resident agent is usually your accountant or business lawyer.
The resident agent will be required to sign important formation documents for your LLC and act as the liaison between you and the Massachusetts Secretary of State.
To appoint a Massachusetts resident agent, follow these steps:
- Decide on an individual or business entity that will serve as your resident agent. This should be someone who knows how to handle legal paperwork, i.e., an accountant or lawyer. Keep in mind that if your resident agent is a CPA, they must be registered under the Massachusetts CPA system.
- Send a notarized statement to the Secretary of State, along with your LLC’s name and address, indicating that you are appointing your chosen agent to serve as your resident agent for this LLC. Be sure to state that they are being appointed PA in good standing.
- Keep a copy of this letter as proof of appointment.
Step 3: File Massachusetts Certificate of Organization
As soon as your LLC is formed, you will have to file a Certificate of Organization with the Massachusetts Secretary of State.
This will be a public record that shows the date and type of business entity you have formed.
Certificate of Organization filing fee is $40 for LLCs with 100 or fewer shareholders, $60 for LLCs with 101 to 250 shareholders, and $80 for LLCs with 251 or more shareholders.
You have three options when submitting your Certificate of Organization:
- You can file by mail. Send the Certificate of Organization to the following address:
- You can file by email:
- Or you can file in person at 25 Beacon Street, Boston, MA, from 8:30 am to 4 pm on weekdays (except holidays).
Step 4: Create an operating agreement
An operating agreement is a document that you can use to define the rules and regulations of your business.
The operating agreement is an important part of your business structure, so take time to create one that works for you.
What should an LLC operating agreement contain:
- Name and business address, and registered agent
- The name, address, social security number, and date of birth of each member
- The percentage shares of ownership each owner will bring to the company
- Any events that will cause a dissolution of the LLC. You should include language that allows your LLC to be dissolved if a member leaves or dies. This way, it won’t be necessary to file documents with the state to dissolve your business.
Step 5: Apply for an EIN
You will need to apply for an Employer Identification Number (EIN) within 14 days of the date you file your Certificate of Organization.
Once you have filed your Certificate of Organization, you will be able to submit that document with your application for an EIN. The application process can take 1-2 weeks.
How to get an EIN?
- Apply online at www.irs.gov
- Submit Form SS-4 to your local IRS office. This must be done in person. Make an appointment if you can; it will go much faster than if you walk in without one. You may have to bring documentation with you to prove that you are authorized to act on behalf of your LLC for your EIN application (power of attorney form).
- Call the IRS at (800) 829-4933
Pros and cons of Massachusetts LLC
Pros of forming a Massachusetts LLC:
- Allows for more LLC flexibility in terms of operations and business structure.
- Gives you the ability to create multiple LLCs in one state. For instance, my wife and I have separate corporations with over $1 million combined value. We created an LLC together with $50,000 in assets, and it is taxed as one entity with a total value of $1 million.
- You have the ability to make any type of investment, which means that it will be easier for you to raise capital for your business.
- No double taxation. Your business is taxed as a single entity. This is the best advantage of forming an LLC in Massachusetts. The IRS classifies an LLC in the same way as a partnership, which means you don’t have to worry about double taxation. Your business is taxed once, and you don’t have to worry about the IRS wanting more money from you. For instance, say you and I are equal partners in a fund. If we file under the partnership structure, the IRS will tax each of our incomes separately, as well as the total value of the fund. However, if we were to file under an LLC structure, we would only be taxed once.
- You can choose an operating manager to run your business. This will be someone who has experience running a company, and you can ask them to run the business for you. There are various ways in which you can choose to do this. You can have someone oversee the day-to-day operations of your company, or you could have a full-time CEO who handles the day-to-day operations while also being available for consultation for any issues that may arise. This is especially useful if you travel often or if you are simply a part-time entrepreneur. In this case, the operating manager will handle all of the work and will make sure that your company is still running smoothly.
- You are not responsible for other people’s debts. If one of your employees steals from you, he or she will be held liable for that debt, not you. The same goes for customers who may plagiarize some of your products and sell them as their own. You will not be held accountable for these debts.
- You can choose to have a certain level of anonymity. In other words, you can have your business name as a separate LLC, and the bank will not be able to look into the finances of the company. This is especially useful if you are soliciting investors from an outside source that isn’t associated with your business. Also, if you have any LLCs that are not public, they are not counted in the LLC filing when calculating the annual tax liability (i.e., State corporate tax). This is very important for those who decide to incorporate foreign entities or ones that have limited liability protection.
- You can choose to collect money from your customers as a percentage of their sales. For instance, let’s say you sell a $10 product on your website, and it brings in an average of $3 per sale. If you decide to set a 10% commission, you will earn $30 per sale. This also makes it easier to track sales and keep track of expenses.
Cons of forming a Massachusetts LLC:
- You have no liability limited protection for your investors or employees, nor do you have any voting power. A major reason many choose to form an LLC is that they want some type of protection for their assets and their personal assets if they incur debt or lawsuits. They also want some kind of operating power in the event that they need to make decisions.
- Federal tax liability will be higher. In addition to the State Corporate Income Tax of 6.25%, you will have to pay 1.45% for federal taxes if you choose to incorporate in Massachusetts. For instance, let’s say you do $10,000 worth of business per year, $3,600 of which is for tax purposes. That means that you will be taxed $3,632 on the net profit (the difference between sales and tax expense).
- The legal fees can be expensive. Although forming an LLC in Massachusetts is relatively simple and straightforward, the cost of the initial consultation, filing fees, and any other administrative costs could be costly. It is important to take this into account when deciding whether or not you will form an LLC.
- You will not have any voting power. As mentioned above, this is one of the major reasons why many choose to incorporate. They want to be able to vote in the event that they are faced with any major business decisions.
The TRUE Cost to Start a Massachusetts LLC (Optional & Required)
As you can see, it is not very difficult to create a Massachusetts LLC. The true cost, however, can be substantial. A Massachusetts LLC will cost you $500.
This is the filing fee, which covers everything from the initial consultation to a certificate of formation.
It does not include a business license, so if you want to keep your business open for business during this period, you must pay another $50.
You will also need to pay for a letter of formation for each member of your LLC. Each letter will cost you $15, which is just the cost per letter.
You will also have to pay $15 per year for the State Corporate Tax. This fee is required whether you incorporate or form an LLC.
- Total Government State Fees: $385
- Additional Costs to Consider:
- Tax Preparation: $100-$1000 (For standard tax preparation, the IRS may let you e-file. You will also be able to pay your taxes online using a credit card.) if you have investment income, the IRS will be able to help you compute your deductions for federal taxes.
- Accountant’s Fees: $500+ (In Massachusetts, all businesses are obligated to file a Form 1120 every quarter. They must also file a Form 1120-S for any LLCs owned by non-resident aliens.
Bare Minimum Cost to Start an LLC in Massachusetts
- Legal Consultation: $300
- Initial Paperwork: $150
- Additional Fees: $375 (Mail, Website, Business License, Bank Accounts)
- Total Cost: $1,000+
Now that we’ve established the true cost of starting an LLC in Massachusetts, I will go into greater detail about the costs associated with both forming an LLC and running a company.
LLC Name Reservation Fee
The first thing you should do is reserve your LLC name. There are a number of domain registrars that will allow you to do this very easily.
For instance, the domain registration service, Godaddy, charges $15 for every year that they hold your registration.
You will also need to pay $2 per year for any renewals or name transfers that you may have later on in the future (i.e., if you want to transfer your name out of Godaddy’s service and into another registrar).
- Legal Costs: $0
- Additional Costs to Consider: $15 per year
Business Domain Name & Website Cost
There are a number of domain registrars that will allow you to purchase a business name or domain.
In addition to the domain registration cost, you will need to pay for an SSL certificate.
This is a very common security measure, and it costs around $10 to $20 per year (you can choose to buy multiple certificates in case your website is hacked).
You will also need to pay for the domain hosting costs. This is the cost that you would pay to have your website hosted.
(If you do not know how much it costs, you can Google search for web hosting prices at a specific website.)
- Legal Costs: $0
- Additional Costs to Consider: $200-$2,000
Certificate of Organization Fee
This is the cost to get your LLC registered and recognized by the State of Massachusetts. It will cost you $300.
Your certificate of organization will be mailed to you, but it is recommended that you have your LLC filed with the Secretary of State’s office directly.
This way, you will not need to worry about it being lost in the mail or having it damaged.
Articles of Organization Fee
When filing your Articles of Organization, you must first pay a $50 certificate of organization fee. This is used to document that the foreign LLC exists and that it has been properly registered in Massachusetts.
- Legal Costs: $0
- Additional Costs to Consider: $50
Many attorneys will offer a flat fee for creating your Articles of Organization.
If you have a straightforward business that does not require any special handling, this is an option that many people prefer.
However, if you are creating a stock company and will need to fill out additional documents to protect the initial investor, or if you have any other complicated legal stipulations or contracts, you should consider hiring an attorney.
Attorney fees can become quite high, especially if you need to hire them on an ongoing basis. For a business that generates $200,000 in annual profits, your attorney will most likely charge $600 per hour. For more information on how to choose an attorney, feel free to check out this article.
- Legal Costs: $2000+
- Additional Costs to Consider: $600+ per hour (This is just a very rough estimate. It all depends on the length and complexity of your contract.
Foreign Qualification Fee
If you are using your LLC exclusively for offshore investment, you will need to pay a $200 foreign qualification fee.
This is required if you will not be doing any business in Massachusetts.
- Legal Costs: $0
- Additional Costs to Consider: $200
Foreign Qualification Certificate of Good Standing Fee
If you are using your LLC for business purposes, you will need to pay a $50 certificate of the good standing fee.
This is required if you are not incorporated in Massachusetts. (To be clear, you will need to pay for a certificate of the organization even if you go on to form an LLC.)
- Legal Costs: $0
- Additional Costs to Consider: $50
LLC Annual Fees
Every year, all LLCs must pay a $50 LLC tax and a $5 member tax. This will be reported on your annual report, which also costs $5.
- Legal Costs: $0
- Additional Costs to Consider: $60
Separate Your Personal and Business Assets
I would strongly advise having a plan for how you will handle your personal and business assets.
If you are going to form an LLC solely for your personal financial reasons, you should absolutely do so.
However, if you are also going to use this LLC as your business, I would advise that you have a different plan in place.
1. Opening a business checking account:
To open a business bank account is a necessity if you are going to make any payments for your business.
Make sure to ask whatever financial institution you decide to open your account with if they require a business license. If they do, I would recommend going with a bank that does not require one (i.e., Charles Schwab, TD Bank).
2. Getting a business credit card:
Depending on the type of expense you are making (i.e., travel, hotels), you may be able to get a business credit card. If you can, this is much preferable to paying with cash or with your personal credit card.
Not only will it make your payments more trackable, but it will also be a good way to build up your business credit for future loans and investments.
Massachusetts LLC Tax Filing Requirements
Massachusetts LLCs file their taxes on an annual report. The return is due on or before May 1st.
There is a $50 tax assessed for filing the report and a $5 penalty assessed for late submission (after May 1st).
Massachusetts Sales Tax
The first time that an LLC pays sales tax on a given transaction, it will be charged the Massachusetts sales tax rate. There is no rebate!
However, if the company has been in business for over one year, then they can file a quarterly return to receive their sales tax rebate. This is available for tax periods that start on or after January 1st of the second year after formation.
If your business purchases goods or services from another company engaged in interstate commerce (i.e., if you are running a one-man business and purchase office supplies from a distributor), you will be subject to adding the Massachusetts sales tax rate to all their purchases.
If the business buys from another Massachusetts company, then they will not be subject to paying the sales tax rate for that transaction. If the business does not have any sales yet, they will not have to pay any sales tax!
Massachusetts Employer Taxes
If your business is actually making money, then you will be subject to an additional Massachusetts employer tax.
This is based on a percentage of your profit, and it tends to be pretty high. For example, in 2017, the rate was 9%.
Business Licenses and Permits
For many small businesses, this is not a necessity. However, if you think that your business may require some form of permit or license, it is important to check with your local city/town government.
This is especially important if you will be selling items to the public (i.e., a retail store). You should also check with your state government for any other licenses or permits that may be required.
- Business License: $100
- Additional Costs to Consider: $3.75 per employee (up to $1500)
File Your Massachusetts LLC Annual Report
You can file an annual report electronically. There is no specific type of Form LLC-1 that you need to fill out.
Usually, a checklist will be provided along with the form that you can use to quickly fill it out. The form must be sent by certified mail. If your annual report is not postmarked by May 1st, then you risk losing your business registration.
In fact, your business will be considered delinquent if you are still in business by June 1st. This is what can happen if you are not organized beforehand.
Compare the Best LLC Services Available
Forming an LLC is not as easy as most people think. You will have to go through a series of different steps—many that I’ve outlined above.
You will need to be organized. You will need to know exactly what you’re doing.
If you don’t, it may seem like the best idea in the world at first, but your LLC could very well disappear in the blink of an eye.
I’ve done my best to research the best LLC services available in Massachusetts. Many of them specialized in a particular area of law. You can check out some below:
- John Joseph’s. You really can’t go wrong with John Joseph’s. They have packages for all different types of clients—from people who just want to know how to file an LLC (you may even qualify for the $100 package) to those looking for a more comprehensive service.
- The Boston Company, The Boston Company, is another one that I highly recommend. They have some pretty solid packages. If you’re unsure of what’s best for you, they will offer suggestions based on your specific needs. The best part is that they’re extremely affordable.
- The Secretary of the Commonwealth of Massachusetts can be the registered agent for your LLC. This individual (or business) acts as an alternative to you if you have to be out of town or you’re unable to run your company at one point or another. This is a must-have for companies that do not want to close their doors when they are away.
Q. What happens if I don’t incorporate?
A. Technically, just by showing up to do business, you’re already in the wrong. That’s because Massachusetts law requires all businesses to be incorporated.
Q. What is the most commons mistake that people make when forming an LLC?
A. Not determining who will be responsible for every aspect of the business.
Q. How do I change my street address?
A. You can update your LLC’s address by controlling access to the business by yourself, giving someone authority to manage it, or through the state office in Massachusetts that maintains all businesses’ records.
Q. What is a Massachusetts commercial driver?
A. A Massachusetts commercial driver license allows you to drive heavy trucks and buses with passengers on public roads and highways and operate vehicles that carry goods for hire only during non-driving hours.
Q. What is a Massachusetts business license?
A. A business license is a license issued by the state of Massachusetts that permits a business to conduct its operations in the state.
Q. What are some of the most popular types of businesses in Massachusetts?
A. Lawn care companies, daycare centers, and auto dealerships are some examples of popular types of businesses in Massachusetts which require little start-up costs and have low overhead costs.
Q. Who can I talk to if I need help with filing my LLC?
A. The Secretary of the Commonwealth’s Office has a team that works to help people file their LLC.
Q. What is the most common type of business in Massachusetts?
A. The most common type of business in Massachusetts is a sole proprietorship.
Q. What are some good reasons why I should form an LLC?
A. An LLC can offer protection for your personal assets if some sort of disaster happens to your business, it can help you take advantage of tax breaks that are available to LLCs, and an LLC is a great way for you to expand your small business into a larger one over time.
Q. How does a registered agent for an LLC work?
A. The registered agent for an LLC acts as a representative of the LLC in all legal matters.
Q. What are some of the more popular industries in Massachusetts?
A. Some of the more popular industries in Massachusetts include insurance, financial services, and tourism and leisure services.
We live in a world of instant gratification. We want things now, and we want them cheap.
As a result, we often overlook all the extra work that goes into our decisions. Although it may seem like there’s not much time or money to spare when you’re trying to form an LLC, you really cannot underestimate the amount of work that goes into doing it right.
The longer you wait, the more time and money you will lose down the road.
I hope that you found this guide helpful in understanding the basics of LLC formation for new businesses. I wish you the best of luck in your endeavors.