And now, the gripping conclusion of my 3-part post:
Part 3 – Corporations & Fees
Back in ye olde times, prior to the enacting of the MA LLC statute, your only business entity option in Massachusetts was to file as a corporation. (Ok, it was 1995 – fun fact, the Billboard Number 1 song for that year was Coolio’s Gangsta’s Paradise – feel old??).
Corporations provide legal protection (recall my lengthy moat metaphor in the last post) and tax benefits. Like an LLC, in order to make sure that the corporation is not just in name only, certain corporate formalities must be adhered to (I’m talking water in the moat, sharks, and a solid wall again). This included things like written by-laws, issuing stock certificates and maintaining a ledger, holding shareholder meetings and board of director meetings, and opening a corporate bank account.
For some reason, entrepreneurs have no problem accepting that running a corporation requires adhering to formalities. Rarely is the question “can I form my own corporation” posed. Perhaps it’s because the corporation is the Granddaddy of legal entities and therefore garners more respect. But the actions which determine whether a corporation is in name only, or is functioning correctly and providing legal protection, are the exact same for an LLC. The steps that proverbial bandits will take to pierce the “corporate veil” are the same that they will take to storm the LLC castle. Whether you form a corporation or LLC if you do not follow the proper steps in creating and running it, your legal protection is quite literally paper-thin. (And paper will not hold up to those bandits’ arrows and fireballs!)
How do you decide between an LLC or a corporation? It’s typically based on factors unique to the business ownership, business plan, and desired tax advantages. (“It depends” strikes again!) If there are no ownership issues or tax factors that lend themselves to favor corporate formation, often the LLC is the preferred choice because of its simplicity and ease of formation and operation.
So, what does all this mean for you, in practical, non-GoT terms? Ideally, much like with insurance, you want the full protection of your entity there but never want to have to use it. We all, begrudgingly perhaps, accept that insurance is a necessary evil as a cost of doing business. While I’d rather a more positive embracing of all things LLC and adhering to formalities, if I can get you to begrudgingly accept that it is also a necessary evil, I will take that as a win.
How about operating in another state? What about Delaware? I know you have questions.
You can file in another state as a foreign entity (foreign meaning out of state in this context). You would do that if you have a nexus in that state – a significant amount of revenue, or a nerve center (warehouse, secondary retail location, etc.). Or if you start in another state, you can file as a foreign entity here in MA.
As for Delaware, its corporate laws, tax laws, and access to its unique court system have traditionally been a draw for big businesses. But for a smaller business or solo business owner, the expense more often than not outweighs the benefits.
If you file in DE, but work/run your business here, you still have to file in MA. So you doubled your tax filings (and accountant fees) and state filing fees. Unless you have investors insisting on a DE registration – you probably want to skip it.
Let’s talk fees for a minute because I know that costs factor into decision-making for new entrepreneurs. There are some of you who have read my three posts nodding and agreeing with each word (and hopefully not groaning at my metaphors), but still will get to the end and say, but the $520 MA LLC filing fee is so expensive, lawyers are even more expensive! And then you weigh the costs and decide it can wait until_______________ (fill in the blank with some arbitrary point in time or some revenue figure). But liability and exposure to risk start the minute you launch your business; bandits don’t wait for that point in time or dollar figure you picked.
You are right, the MA LLC filing fee (and annual report fee) is expensive in relation to other states and even compared to filing a corporation. As of January 2021, the MA LLC filing fee is $500 (plus a $20 online convenience fee); the filing fee for a corporation is $275 for the first 275,000 shares of stock (plus a $15 online convenience fee). Why is the LLC more expensive? Good old “Taxachusetts”!
Corporations in MA all pay an annual corporate excise tax, with the minimum payment due being $456. An LLC, (unless treated as a corporation by the IRS – you can talk to a CPA or Enrolled Agent for more information on that front, I will stay in my lane), is not treated as a corporation in MA for tax purposes and does not have the same minimum excise tax. So rather than changing the MA tax code to capture that lost minimum excise tax, the Commonwealth just built it into the LLC filing fee. (Sneaky!)
So, in the course of operating your business over a year, you actually might pay MORE as a corporation, than as an LLC. Of course, those wild maniac CPA/EAs can do their accounting wizardry and help ease the burden of this with deductions and credits and incantations (math isn’t my strong suit, I assume there’s actual magic involved). The real difference is that the LLC filing fee feels like a bigger hit to the checkbook because it isn’t folded into the tax return like the Corporate excise tax. But at the end of the day, it is a predictable cost you can budget for ($10/week set aside covers the fee).
As for attorneys, no, we generally aren’t cheap, but we are available at a variety of rates. But unlike your insurance premium which you will pay (and will likely increase) annually if done right, you only need to draft your operating agreement and create the proper legal foundation once. Unless you add or remove members to/from the LLC, drafting the Operating Agreement, creating the castle wall, and the applicable attorney’s fee, are a one-and-done deal.
TL;DR: Corporations and LLCs must both adhere to formalities for proper liability protection; choosing an entity should be a team effort; budgeting for the associated costs is important and totally feasible; do it right the first time and sleep better at night; CPAs and EAs are wizards.