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Due to its thriving economy and highly skilled labor force, Massachusetts is considered one of the best states for new businesses to succeed. To start a business in the Bay State, you first have to decide on your type of business entity. The most common among these, particularly for small businesses, is an LLC.
You could, of course, hire an LLC formation service to explain the benefits of LLCs and walk you through the process. But why spend money on an LLC service when you could follow this detailed guide? Starting an LLC in Massachusetts is relatively straightforward. Here are 12 steps to make it happen.
What is an LLC?
An LLC, or limited liability company, is a type of business entity popular among small business owners due to financial liability protections and potential tax benefits. Unlike owners of sole proprietorships, LLC owners create a separate legal entity for their business, meaning they’re not financially responsible for claims brought against their company in a lawsuit.
LLC owners are known as “members.” There are two types of LLCs: single-member and multi-member. Single-member LLCs have only one owner, while multi-member LLCs have two or more owners.
Is an LLC right for you?
A Massachusetts LLC might not be the best option for every aspiring business owner, though LLC formation does come with advantages, including:
- Pass-through taxation. LLCs have a “pass-through” tax structure, meaning the company doesn’t pay federal corporate taxes on its profits. Instead, the LLC is taxed at the personal income level of its members. The only exception to this rule is if the LLC elects to be taxed as a C corporation, whereby all business profits are taxed at the corporate tax rate.
- Personal asset protection. An LLC protects its owner(s) from legal damages or financial liability in the event that someone sues the company or the company goes under. This means the owner(s) are in no danger of losing personal assets, like houses and vehicles. However, LLC owners are still liable for acts of their own negligence.
- Easy to form. Compared to more complex types of business entities, LLCs are relatively simple to set up. Massachusetts limited liability company owners typically only need to file a Certificate of Organization form and pay a formation fee of $500.
1. Choose an idea for your LLC
The first and most crucial step in starting an LLC is developing a solid business idea. You may already have an idea or two. Here are two questions you can ask yourself as you start making moves:
- Who is your customer? Understand your potential customers. Without them, there’s no business. Look at similar companies and marketplaces where comparable products or services are sold. Insights on industry trends can give you a better sense of your position within the market.
- What’s your projected profitability? Your business’s survival depends on its ability to yield a financial gain. It isn’t enough to simply make money. You have to be profitable and earn more than you spend over the long term. Ensure you know how many products or services you need to sell to cover your costs and turn a profit.
2. Name your Massachusetts LLC
Your LLC name defines your corporate identity. Think of a name that’s catchy, short, and stands out. Your LLC name should convey what your company does. Before locking in your name, ensure a suitable domain name is available so consumers can easily find you online.
In Massachusetts, these are the specific guidelines to follow when naming your LLC. The name must:
- Be available. You can’t choose a name already taken by another company. Search this database of Massachusetts business entities to check the availability of your desired name.
- Include the necessary words. Your Massachusetts LLC’s name must contain one of the following words or abbreviations: limited liability company, limited company, LLC, LC, L.L.C., or L.C.
- Be dissimilar from the name of a government agency. For example, you can’t name your company “Massachusetts Department of Transportation LLC” or “FBI LLC.”
3. Create a business plan
A business plan is useful for establishing your company’s goals and laying the foundation for a successful launch. It also makes it easier for you to secure financing through small business loans or from investors. A workable business plan includes a summary of your company, a description of its products or services, logistics/operations plan, marketing plan, market analysis, and a company organization chart.
4. Choose a resident agent in Massachusetts
A resident agent—called a registered agent in most other states—is an individual or business entity that serves as your LLC’s official representative. Your resident agent is responsible for handling legal documents, tax forms, and other correspondence with the state government.
You may appoint yourself or another company employee as your resident agent, as long as your appointee resides in Massachusetts and can accept documents during standard business hours. You can also hire a registered agent service to handle government correspondence on your behalf. These professional services charge you a fee, but can free up your time to focus on growing your company.
5. File your Massachusetts LLC Certificate of Organization
To officially establish your company as an LLC in Massachusetts you must fill out the Massachusetts Certificate of Organization form, which asks for information about your LLC, including your company name, office address, resident agent’s name and address, and purpose of the business. Then, file your form online through the state’s Corporations Online Filing System. You can also download the form and mail it in or drop it off in person.
There’s a $500 filing fee to submit a Certificate of Organization. If you file your form in person or by mail, make your check payable to “The Commonwealth of Massachusetts.” Once you receive word that the secretary of the Commonwealth has approved your certificate, your LLC is officially recognized as a business entity in Massachusetts.
6. Get a federal employer identification number (EIN)
The Internal Revenue Service requires all LLCs to obtain a federal employer identification number (EIN) (also called a federal tax ID number), which works much like an individual’s Social Security number. This nine-digit number allows you to file federal and state taxes, open a business bank account, hire employees, and obtain lines of credit. To get an EIN for your company, go to the IRS website and click Apply Online Now.
7. Obtain business licenses and permits
To ensure your LLC follows all federal, state, and local regulations, it’s vital that you obtain all necessary business licenses and permits. Requirements vary depending on your specific industry or business type (i.e., retail, transportation, health care, real estate). Check out the following links on the official Massachusetts government website to help you determine your specific license and permit needs:
8. Understand Massachusetts tax requirements
The Commonwealth of Massachusetts taxes business transactions of physical goods at a sales tax rate of 6.25% with some notable exceptions—clothing, groceries, medicine, and prescription medicine are all tax-exempt products. Massachusetts does not require businesses to collect taxes on the sale of digital goods, like music files and stock photos downloaded online, with the sole exception of pre-written computer software sold online.
In Massachusetts, you only need to charge sales tax on out-of-state sales if your business has a physical presence in another state. For a more in-depth overview of taxable goods and services, refer to the Massachusetts Department of Revenue.
To ensure you comply with Massachusetts tax requirements, take the following actions if they apply to your business:
- Register for a seller’s permit. If your LLC needs to charge sales tax on goods or services, you need to register for a seller’s permit via the state’s MassTaxConnect system. This authorizes your LLC to collect sales tax.
- Register for employer taxes. Any business with employees in Massachusetts must sign up for the unemployment insurance tax through the Department of Unemployment Assistance’s website and register for Employee Withholding Tax using the state’s MaxTaxConnect System.
- File sales tax returns on time. Businesses that collect less than $8.33 per month in sales tax only need to file a sales tax return once a year; businesses that collect up to $100 per month in sales tax must file a quarterly sales tax return; and businesses that collect more than $100 per month in sales tax must file a monthly sales tax return by the 20th day of each month.
9. Prepare an operating agreement
An LLC operating agreement is a legal document that outlines how your Massachusetts LLC conducts business. Massachusetts does not require your LLC to have an operating agreement, but it’s a good idea to make one and have it readily available to reference to prevent internal conflict. Operating agreements often contain:
- Profit and loss distributions
- Management and voting powers
- Purpose of the business
- Liability clauses
- How to handle changes to membership structure
- Capital contributions
- Information about the certificate of organization
- Information about how to dissolve the business if desired
10. Examine business insurance options in Massachusetts
Massachusetts requires two types of business insurance for LLCs: workers’ compensation insurance, to help cover the costs of medical expenses for work-related employee injuries, and commercial auto insurance, for accidents involving business vehicles.
You may want to consider these additional types of insurance to protect your LLC and personal assets in the event of a misfortune:
- General liability insurance. General liability insurance covers your LLC against any legal actions resulting from accidents, injuries, or negligence.
- Professional liability insurance. Professional liability insurance provides coverage for any damages due to claims of negligence or misconduct.
- Commercial property insurance. Similar to homeowner’s insurance on a house, commercial property insurance protects your Massachusetts LLC from costs associated with fire or weather damage, or theft.
- Cyber liability insurance. Protects your LLC from costs associated with cyber threats, like data breaches and ransomware.
11. Understand financial considerations
Starting a business can be costly, and you might need to make other investments beyond applying for an LLC to get your Massachusetts business up and running. Consider, for example, the costs of employee salaries, marketing, renting office or retail space, inventory, equipment, raw materials to make your products, and computer software. To cover these costs you can take out a small business loan or apply for other types of financial programs, like Shopify Capital.
12. Market your LLC
As of 2020, there were over 700,000 small businesses in Massachusetts, so it’s crucial to develop a stellar marketing plan to ensure your new LLC stands out from the crowd. First, design a brand logo that expresses your company’s mission and embodies its identity. Then construct a marketing plan to increase your LLC’s visibility. Effective methods for reaching your company’s target market include creating a website, building a social media presence, digital/print advertising, and creating video marketing campaigns.
Starting an LLC in Massachusetts FAQ
How much does it cost to start and maintain an LLC in Massachusetts?
Starting an LLC in Massachusetts costs, at minimum, $500, which is the fee required to file your Certificate of Organization with the Massachusetts Commonwealth Corporations Division. Massachusetts also requires LLCs to file an annual report with the Division for an additional $500. Some LLCs may also need to pay fees associated with their specific business licenses and permits, workers’ compensation insurance, and commercial auto insurance.
Do you need a resident agent for your LLC in Massachusetts?
Yes, all LLCs incorporated in Massachusetts must name a resident agent—also called a registered agent—with an in-state local address.
How do state taxes work for LLCs in Massachusetts?
Massachusetts imposes a state-wide 6.25% sales tax on most physical goods and some services. For a detailed overview of taxable goods and services, refer to the Massachusetts Department of Revenue.