Incorporating in Massachusetts

BY ERIC C. BELANGER, ESQ.

belanger@endeavorlegal.com

The organization of a corporation is a complex matter and should be taken seriously. The information presented here is intended to make you aware of certain steps that must be taken, decisions that need to be made and the legislative requirements of organizing and maintaining a business corporation in the Commonwealth of Massachusetts.

Determining Whether to Incorporate

Prior to deciding to incorporate, the organizers (AKA the “incorporators”) should consider alternatives to forming a corporation (such as organizing a limited liability company).  It is not necessary to incorporate or form a limited liability company to start a business, but it makes good business sense to do so as the business owner’s personal assets will be protected from law suits and the liabilities of the business.  There are both advantages and disadvantages to incorporation.  Both a business attorney and an accountant should be consulted regarding the legal and tax obligations of incorporation and the consequences of choosing to operate a business under the umbrella of a corporation.

Statutory Obligations of a Massachusetts Business Corporation

Once the business is incorporated, the officers of the corporation have continuing statutorily mandated obligations regarding the maintenance of the corporation.  They will be responsible for submitting records, information and fees to various governmental agencies on a regular basis.

Secretary of the Commonwealth of Massachusetts. A corporation comes into existence when its Articles of Organization are filed with the Secretary of the Commonwealth of Massachusetts.  A corporation must also file an Annual Report with the Secretary of the Commonwealth within two and ½ months of the end of the corporation’s fiscal year.

Massachusetts Department of Revenue.  Corporations must pay corporate taxes to the Massachusetts Department of Revenue.  The appropriate officers of the corporation should be in contact with the corporation’s accountant to ensure that these taxes are paid.  Certain businesses must obtain a sales tax number from the Department of Revenue.  All state tax-related questions should be directed to either an experienced accountant or the Massachusetts Department of Revenue.

Incorporation

Step One:  Preparing to Incorporate. Once it has been determined that incorporation is the right choice for the business, the organizers of the proposed corporation must gather the information and prepare documents necessary to completing the Articles of Organization.  This information and documentation includes: a name for the corporation, identification of officers and directors, selection of a fiscal year, determination of the number of shares of capital stock to authorize for issuance to prospective shareholders, preparation of mandated corporate by-laws and board of director and shareholder resolutions.  In addition the organizers should consult with their business attorney to determine the appropriateness of preparing an agreement between the shareholders governing ownership rights.

Step Two: Completing the Articles of Organization.

Article I – Name of the Corporation.  The incorporators must select the name by which the corporation will be known.  One of the following words or abbreviations must be included in the name selected for the corporation: Corporation (Corp.), Incorporated (Inc.) or Limited (Ltd.).  The name selected must not be substantially similar to that of any existing company conducting business in the Commonwealth of Massachusetts.

Articles II – Corporate Purpose.  If desired, the specific purpose of organizing the corporation may be included in the Articles of Organization.  For example “to operate a restaurant and to engage in any other business permitted by law.”

Articles III & IV – Authorization of Stock, Preferences, Rights & Limitations. The incorporators must determine the number and type of shares of stock to authorize for issuance to shareholders.  Authorized stock may be common stock and/or preferred stock and may be of various classes.  Each type of stock may have different rights and privileges; however, any such rights and privileges must be included in the Articles of Organization.  An incorporator of a new small business corporation often authorizes 275,000 shares of common stock which provides the corporation with the greatest number of shares which can be issued for the minimum filing fee of $275.00.  There is an additional $100.00 fee for each additional 100,000 shares or fraction thereof authorized.  The creation of classes of stock with different rights and privileges can eliminate the corporation’s ability to elect to be a “S-Corporation” taxed under Sub-Chapter S of the Internal Revenue Code.

Article V – Restrictions on the Transfer of Stock.  The Articles of Organization may include restrictions upon the free transferability of some or all of the authorized stock.  For example, the Articles of Organization may provide that any shareholder wishing to dispose of his stock for any reason must first offer the stock to the corporation and other shareholders at a fixed price.  Restrictions on the transferability of the stock of the corporation can also be put into effect through the use of a shareholders agreement which need not be filed with the Secretary of the Commonwealth.  Employing a shareholders agreement to restrict transfers of the corporation’s stock eliminates the necessity of amending the Articles each time the arrangement between the shareholders changes.

Article VI – Special Corporate Powers.  Certain corporate powers may be exercised only if specifically set forth and described in the Articles of Organization.  If these powers are not included in the initial filing, and the corporation later intends to exercise such powers, the Articles of Organization must be amended.

Article VIII – Additional Information.  Although the following is not considered a permanent part of the Articles of Organization such information must be included in the initial filing of the Articles:

• The principal business address of the corporation.

• The name and address of the corporation’s registered agent for the service of process in Massachusetts.

• The name and address of the directors, president, treasurer and secretary of the corporation.

• The date the fiscal year of the corporation ends.  Fiscal year end often has important tax consequences; as such it should be chosen carefully and upon consultation with an accountant or tax attorney.  Many corporations select December 31st.

• A brief description of the type of business in which the corporation intends to engage.

• The address where the books and records of the corporation will be maintained.

Other Considerations Regarding Incorporation

Federal Employer Identification Number.  A corporation must apply for an Employer Identification Number (commonly referred to as the EIN or Federal Identification Number).  The EIN is required for Federal taxation purposes and is also used as a reference number for filings with the Secretary of the Commonwealth.  Corporations apply for an EIN by completing IRS Form SS-4 and filing such form with the Internal Revenue Service.

Licenses and Permits. Prior to commencing business operations, corporations are often required to obtain licenses and permits from state, county and municipal authorities in order to begin operations.  For example, prior to opening for business, new owners of bars and restaurants serving alcoholic beverages and providing entertainment to customers on premises must either obtain, or complete transfers of, licenses to sell alcohol at the state and municipal levels and receive municipal licensing of the type of entertainment the restaurant wishes to provide.

Workers’ Compensation. The corporation may be required to maintain insurance coverage under Workers’ Compensation laws.  The company the corporation selects for its payroll processing will be able to provide this information.  In the alternative, the incorporators or the officers of the corporation may ask an accountant or attorney to recommend an insurance provider.

Electing S Corporation Status Prior to incorporation, the organizers should consider the advantages and disadvantages of electing to be taxed under Subchapter S of the Internal Revenue Code.

Corporate Maintenance. Each year a corporation must:

• File an Annual Report with the Secretary of the Commonwealth.  The Annual Report must be filed by the 15^th day of the 3^rd month after the corporation’s fiscal year end. Annual Reports not received by the Secretary of the Commonwealth on or prior to the due date are assessed a late fee.

• File a Corporate Excise Tax Return with the Massachusetts Department of Revenue.  This return must be filed by the 15^th day of the 3^rd month after the corporation’s fiscal year end.

• File a Federal Corporate Income Tax Return with the Internal Revenue Service (IRS).  This return must be filed by the 15^th day of the 3^rd month after the end of the corporation’s fiscal year.

• File Changes in the Corporation.  Once organized, the corporation may wish to make changes in the original Articles of Organization.  For instance, the business might move and, therefore, change its principal place of business; it might be necessary to increase the capital stock of the corporation or even change the corporate name.  Changes such as these do not take legal effect until the proper document is filed with the Secretary of the Commonwealth.

Penalties and Fines for Non-Compliance. Corporate responsibilities must not be taken lightly.  Officers and directors of the corporation are responsible for ensuring that the corporation fulfills its legal duties.  Massachusetts law provides that penalties may be assessed against corporations and officers who fail to comply with legal requirements.  For example, failure to pay excise taxes to the Department of Revenue or to file the Annual Report with the Secretary of the Commonwealth can result in significant fines or lead to the involuntary dissolution of a corporation.

Not Every Lawyer is Familiar with the Incorporation Process

Many attorneys are not familiar with the incorporation process and simply file “form” Articles of Organization with the Secretary of the Commonwealth without taking into consideration the specific needs of a particular business venture.  Similarly, these attorneys often neglect to adopt corporate by-laws, shareholder and board of director resolutions and other relevant documentation such as shareholders’ and cross purchase agreements.  The failure to complete any of these actions can leave the shareholders of the corporation open to personal liability for the acts of the corporation.

Avoid Using Online Services to Incorporate Your Business Venture

Issues often arise when persons wishing to organize a corporation use an Internet-based company to file their incorporating documents.  These online organizations charge a smaller fee by eliminating the thought processes and decision-making that goes into properly documenting the specific needs of a particular business enterprise.  The failure to put proper agreements in place between the shareholders of a corporation can create unintended obligations and relationships between shareholders.

Retain an Experienced Massachusetts Business Corporations Lawyer to Incorporate Your Business Venture

Everyone organizing a corporation should consult attorneys well versed in the incorporation process and familiar with the representation of small and start up business ventures.  Experienced business attorneys will make detailed inquiries regarding the proposed business enterprise and the anticipated ownership structure of the corporation to be organized.  They will use this information to prepare the Articles of Organization, corporate by-laws, shareholder agreements and other documentation tailored to the needs of the fledgling business venture and will continue to work with the corporation as its business grows and evolves.