September 11, 2015
MA and Single Member LLCs
Massachusetts and Single Member LLCs
GENERAL
Massachusetts has approved single member LLCs to organize under state law. In the past, an LLC had to have two members. By allowing single member LLCs, a sole proprietorship can now convert to a single member LLC and get liability protection from creditors.
Like the shareholders of a corporation, the owner of an LLC (called “member” rather than shareholder or partner) is generally not liable for the debts of the business except to the extent of his or her investment. Thus, the owner can operate the business with the security of knowing that his or her personal assets are protected from the entity’s creditors. This protection is far greater than that afforded by partnerships. In a partnership, the general partners are personally liable for the debts of the business. Even limited partners, if they actively participate in managing the business, can have personal liability.
Consider also that holding oneself out as an LLC instead of a sole proprietorship may have marketing benefits. Leslie Kagan, owner of Kagan Associates, a management consulting firm, notes that “...there’s something deliberate about deciding to be a company, rather than just an individual, that implies stability and commitment to clients.” Leslie goes on to say that while the addition of three letters to a company name may, in reality, change very little, prospective clients may perceive an LLC as a more established firm, and the cost of setting up the LLC represents “inexpensive marketing dollars.” Leslie is reachable at lkagan@kaganassoc.com.
COST TO SET UP
In Massachusetts, the cost to set up an LLC is minimal. You will need to use the services of a lawyer to complete the filing. Each year a filing fee of $500.00 is due to the Secretary of State. You need to file a form and submit this with the filing fee. You should also attend to having an annual meeting and producing minutes for the meeting.
OPERATING AS AN LLC
To insure that you have liability protection as a single member LLC, you need to observe the formalities and operate the business as an LLC. The owner should have a separate checking account for the LLC and a separate set of records for the LLC. All business income and expense should pass through the business account so that the entity stands alone. The owner should have annual meetings and produce statements about the past business year and expectations for the future. The owner should enter contracts through the LLC, and not personally.
TAX FILINGS
The IRS considers a single member LLC as a disregarded entity. That means that for tax purposes you will not need to change the way you file taxes. You will continue to file a Schedule C. This will save you a considerable amount in tax preparation fees.
CAVEAT
While an LLC can limit liability exposure, it cannot do the following:
- Protect the owner against a claim based on negligence or professional malpractice
- Protect the owner from LLC debts which the owner has personally guaranteed
- Protect the owner who has fraudulently used the LLC for an inequitable purpose to the detriment of the claimant
CONCLUSION
All sole proprietorships in Massachusetts should consider the single member LLC. You should contact a lawyer for more information on formation and legal aspects. Let us know if you have formed an LLC and be sure we have the tax ID number for the LLC. Otherwise, for tax purposes, nothing will change.
Important note: This is a summary and, as such, it is not intended as a complete explanation of all applicable situations. Many exceptions, definitions, and special rules in the law have been paraphrased, simplified and/or omitted. Also, a technical correction act may change some of the information presented in this article. Readers should not take specific action based on this summary without first consulting the statute and regulations or seeking advice from a qualified professional.
Information in this material is for general purposes only. You should consult Sechrest & Bloom, LLC
at 978-263-7771 for specific recommendations about your particular situation.
This article was supplied or updated on October 4, 2005.