Incorporation Information Kit

Organization of a Massachusetts Business Corporation Information Gathering To Do List

A. Information Gathering and Decision Making

Below is a checklist of information that will need to be gathered, and decisions that will need to be made, prior to incorporating our corporation.

1. Purposes and Powers

  • Get information needed to draft a description of specific business purpose.
  • Power to be a partner?
  • Any particular/unusual powers?

2. Corporate Name

  • Availability
  • Must include "Incorporated," "Corporation" or "Limited," abbreviated or spelled out
  • Consider federal and state trademark registration.

3. Post Office

  • Needed for Articles of Organization

4. No Par vs. Par Value Stock

5. Consideration for Issuance of Stock

  • Permissible consideration includes cash, tangible or intangible property, note, services, a debt or expenses.
  • Stock with par value cannot be issued for less than par value, and an amount equal to the aggregate par value of shares issued must be received in cash, property, past services or expenses paid. A debt or note of the purchaser is not considered property for this purpose.
  • Consideration must be actually received or incurred by, or conveyed or rendered to, corporation.
  • Directors must determine value of non-cash consideration for purposes of allocation to capital account.
  • Keep Internal Revenue Code Section 351 in mind if property is used as consideration.

6. Number of Shares to Issue

  • In original issuance, any value can be attached to shares. Thus, while economics (and a desire not to risk piercing the corporate veil as a result of being undercapitalized) will dictate the amount of money received upon the original issuance, it won’t dictate the number of shares.
  • Issue enough shares so original shareholders without new issue but not so much that authorized shares are largely used up. Note that in later issuances of the then outstanding shares will be important in determining the value for which new shares are issued.
  • Of course, one must keep in mind the proportion of ownership (voting and economic) between shareholders.

7. Stockholders

  • Get names for stock certificates.
  • Consider need for stockholders agreement.

8. Directors

  • Need minimum of 3 unless there are less than 3 stockholders.
  • Get names and residential and business addresses.
  • Set maximum number for bylaws.

9. Officers

  • Need President, Treasurer and Clerk.
  • The latter must be Massachusetts resident unless the corporation has a resident agent.
  • These Office can be combined but looks better if there are at least 2 officers -if only one principal, combine President and Treasurer for control.
  • Any other officers (e.g., V.P.)?
  • Get names and residential and business addresses.

10. Control Devices

  • Consider current and expected stockholder profile – control provisions should not be considered in a vacuum.
  • Right of first refusal agreement (especially desirable if Sub-S corporation because status lost whenever there are more shareholders than statutory limit).
  • Voting agreement among shareholders.
  • Guaranteed buy-back by corporation (provide for installment payments so as not to drain corporation of its cash).
  • Repurchase right (consider Internal Revenue Code Section 83).
  • What percentage to amend articles and/or bylaws?
  • .Removal of directors without cause?
  • .Unanimous approval of directors for issuance of new shares? Preemptive rights?

11. Depository Account

  • What bank?
  • Who authorized to sign checks?
  • Who authorized to Borrow?

12. Accounting and Tax Matters

  • Have corporation get outside accountant.
  • Order Taxpayer I.D. Number.
  • Determine fiscal year

13. Housekeeping Matters

Determine date for annual stockholders’ meeting -must be within 6 months of end of fiscal year.

Choosing An Entity

The following is an outline for choosing among an Limited Liability Company, S Corporation, Limited Partnership and C Corporation.

  • Limited Liability
  • S Corporations and C Corporations
  • Owners of corporation (either S Corp or C Corp) are not liable for the obligations of corporation
  • Limited judicially-created exceptions
  • Personal negligence of owner
  • Court may "pierce the corporate veil" in limited situations
  • Limited Partnerships
  • General partner(s) of a limited partnership bear liability for the obligations of the partnership
  • Corporate general partner with limited capitalization may achieve the practical effect of limited liability for all partners
  • Limited partners of a limited partnership do enjoy limited liability, as long as their participation in the business is limited
  • Limited partner that actively participates in the business may be considered a general partner, without limited liability
  • LLCs
  • Owners and Managers of LLC have limited liability
  • Members who actively participate in the business do not lose their limited liability
  • Professionals
  • Professionals operating in an LLC cannot limit their personal liability for their own negligence
  • Protection of a member of an LLC is no more extensive than that of a member of a Professional Corporation
  • Availability of Pass-Through Tax Treatment
  • Pass-through treatment means that the business entity itself is not taxed but its owners are taxed as if items of income, loss, deduction and credit were earned or incurred directly by them
  • Pass-through treatment is desirable if the individual’s tax rate is lower than the corporate tax rate
  • Pass-through treatment means that income of the business is taxed only once
  • The choice of business entity should be reevaluated based on tax rate changes or changes in the treatment of capital gains
  • Investors, including foreign investor, may NOT want pass-through tax treatment – Unrelated Business Taxable Income
  • State tax treatment of pass-through entities is sometimes, but not always, the same as federal treatment
  • In Massachusetts, federal income tax classification of an LLC is also its classification for Massachusetts tax purposes
  • Generally, a partnership is taxed as a pass-through entity for Massachusetts tax purposes
  • Individual LLC members may have filing and compliance responsibilities in all states in which the LLC operates to the extent the state recognizes pass-through treatment
  • LLC responsible for explaining responsibilities, which range from nuisance level to major administrative efforts, to members
  • Other jurisdictions where LLC operate either treat LLC as pass-through entity or as separate entities subject to taxation
  • Limited partnership faces the same issues as LLC
  • C Corporation
  • Pass-through treatment not available
  • Income taxed to corporation as it is earned
  • Distributions to shareholders are taxed as dividends or are treated as a return of capital if there are no earnings and profits
  • LLC and Limited Partnership
  • Limited Partnership enjoys pass-through treatment
  • Distributions of money or property from the partnership to the partner are generally tax-free unless the distribution exceeds the partner’s adjusted basis in the partnership interest
  • LLC can elect to be taxed as a partnership or a corporation
  • Publicly traded partnerships and LLCs are treated as C corporations for tax purposes
  • S Corporation
  • Corporation that qualifies to be treated as an S corporation also offers pass-through treatment and tax-free distributions
  • Ownership Structure

C Corporation

  • C corporation requires only one owner and may have any numbers of owners
  • Owners may be individuals or other entities of any type

S Corporation

  • S corporation may have one owner
  • Maximum number of owners to qualify is 75
  • Owners may be individuals or other entities of any type

Limited Partnership

  • Must have at least two members
  • Must have two entities
  • General Partnership entity
  • Limited Partnership entity
  • General Partner(s) ordinarily Corporation, but can be LLC
  • Limited Partner(s) can have any number of owners of any type

LLC

  • In Massachusetts, LLC must have at least two members
  • Other state statutes permit one-member LLCs
  • Otherwise, LLC may have any number and type of owners
  • One-member LLC is treated as a sole proprietorship or branch or division of its owner for tax purposes
  • Capital Structure
  • C Corporation

1. C corporation may have any kind of capital structure necessary to meet the needs of its owners and its business

  • S Corporation
  • S corporation must have only one class of stock
  • Each shareholder must have the same proportionate interest in each item of income, loss, deduction and credit, and it the assets of the corporation
  • Debt of an S corporation must meet the safe harbor "straight debt" rules of IRC in order to avoid the risk that debt reclassified as equity, would be considered a second class of stock, terminating the S status
  • The one class of stock limitation and ownership limitation for an S corporation are the most significant differences between a S corporation and a C corporation
  • Limited Partnership and LLCs
  • Both have ability to allocate among the owners disproportionate amounts of losses and other tax benefits, if allocations meet "substantial economic effect" test
  • If allocations fail test, then allocation of losses and other tax benefits are made in accordance with ownership interest
  • Organizational Structure
  • C Corporation and S Corporation

1. Corporation structure may be flexible but must be run by the board of directors, which are elected by and responsible to the shareholders

  • LLCs
  • Management structure can be quite flexible
  • Manager-managed
  • Member-managed
  • Limited Partnership
  • Management structure can be flexible, although at least one general partner must manage the entity
  • Limited partners cannot actively participate
  • Ease of Formation
  • C Corporation and S Corporation
  • Requirements
  • Articles of Organization
  • Bylaws
  • Filing Fee of $200.00
  • Contributions of property in exchange for equity interest is generally tax-free to the transferor and the entity, as long as the transferors are in control of the entity immediately after transfer
  • LLCs
  • Requirements
  • Certificate of Organization
  • Operating Agreement
  • Filing Fee of $500.00
  • Contributions of property in exchange for interest is generally tax-free to the transferor and the entity, as long as the transferors are in control of the entity immediately after transfer
  • Tax-free contributions of property can be made at any time, not just at formation
  • Limited Partnership
  • Requirement
  • Certificate of Organization
  • Partnership Agreement
  • Filing Fee of $150.00
  • Contributions of property in exchange for interest is generally tax-free to the transferor and the entity, as long as the transferors are in control of the entity immediately after transfer
  • Tax-free contributions of property can be made at any time, not just at formation
  • Achieving Pass-Through Tax Status
  • C Corporation

1. C corporations do not achieve pass-through treatment

  • S Corporation
  • Must file an election to qualify for S corporation treatment
  • Election must be filed during the first town and one-half months of the taxable year, to be effective for that year
  • All shareholders must consent to election
  • New shareholders must accept the election, unless they have acquired more than 50% of the corporation’s stock
  • Limited Partnership and LLCs
  • Tax classification of unincorporated entities
  • Other Differences in Tax Treatment Between S Corporation and LLC
  • Entity-Level Taxes
  • S corporation, which started as C Corporation when S election was made, is subject to federal and state taxes on built-in capital gains within 10 years of election
  • If S corporation has net passive investment income and Subchapter C earnings and profits, it is subject to tax on the passive investment income
  • LLC would not be required to pay these taxes
  • Taxes
  • S corporation with total receipts of $6 million (Year 2000 figure) or more must pay 3 to 4.5 percent (depending on total receipts) Massachusetts corporate excise tax on net income at S corporation level
  • S corporation subject to non-income level measure of the corporate excise tax
  • S corporation pays the non-income level measure of corporate excise tax on property that is not subject to local taxation at a rate lower than local tax rates
  • LLC that qualifies as a partnership is not required to pay Massachusetts excise tax, no matter the amount of gross receipts
  • LLC must pay a $500.00 annual report filing fee
  • S corporation must pay a minimum tax of $456.00 in addition to an annual report filing fee of $85.00
  • LLC is subject to local tax on personal property without the benefit of exemptions available to C corporations and S corporations
  • Shareholder/Member Basis and Deducibility of Losses
  • Losses of both S corporation and LLC are deductible by the owners to the extent of each owner’s basis in the ownership interest, subject to the following restrictions
  • Liabilities of an S corporation do not increase a shareholder’s basis unless that shareholder directly loans to the corporation
  • LLC member may include in basis member’s allocable share of LLC’s liabilities
  • Allocable share is determined by whether debt is recourse or non-recourse
  • At-risk rules operate approximately the same for S corporations and LLCs
  • LLC member considered a general partner, member’s status under the material participation/passive activity loss rules roughly equivalent to S corporation shareholder
  • LLC member considered a limited partner, material participation standard more difficult standard to meet
  • Employment Taxes
  • S corporation shareholder employed by corporation considered an employee for employment tax purposes
  • Corporation liable for unemployment taxes and employer’s share of Social Security and Medicare taxes and withholding taxes
  • LLC member who is considered a general partner would be subject to self-employment tax on member’s distributive share of LLC income
  • LLC member who is considered a limited partner neither tax nor self-employment tax would apply
  • IRS treats LLC members who are considered limited partners for employment tax purposes under very limited circumstances
  • Employee Benefits
  • Most extensive employee benefits are available to C corporation owners
  • Benefits of qualified retirement plans are equally available to S corporation owners and LLC members
  • Certain fringe benefits are limited to S corporation owners and LLC members
  • Health insurance premiums paid by S corporation or partnership classified LLCs on behalf of owner will be included in owner’s income
  • 30% of the amount paid is tax-deductible to the corporation
  • Operational Limitations and Issues
  • Unexpected Termination of the Entity’s Existence
  • S Corporation and C Corporation

a. S corporations and C corporations run little risk of inadvertent termination

  • LLC
  • Risk of unexpected termination and difficulty of obtaining an agreement to continue is substantial if LLC relying on default provision of LLC statute

i. Default provision can be changed in the operation agreement

  • LLC becomes a one-member LLC then it would likely no longer qualify as LLC under Massachusetts law
  • Termination of entity does not mean business must end
  • Successor LLC may take over business but non-agreeing members may need to have interest bought out
  • Termination of entity terminates protection of limited liability until successor LLC takes over
  • Termination for tax purposes may occur inadvertently when there is a sale or exchange of 50% or more of the total interests within a 12 month period
  • Inter-member transfers may also trigger inadvertent termination
  • Termination of Pass-through Status
  • S Corporation
  • S corporation loses eligibility of pass-through treatment if it has more than 75 shareholders or an unqualified shareholder, more than one class of stock, or becomes a member of an affiliated group
  • Shareholder Agreements should prohibit such events
  • LLC and Limited Partnership

a. Classification as a C corporation or as a publicly traded partnership would trigger a LLC or limited partnership from losing eligibility of pass-through treatment

  • Operating Without Stock
  • Owning a LLC interest is not the same as ownership of stock
  • LLC cannot offer incentive stock option
  • Familiarity with the LLC Entity
  • LLC new entity, which lenders and others dealing with need to be educated about
  • No body of law concerning LLCs exist as compared to corporations and the limited body of law on partnerships
  • Exit Strategies
  • of Interest
  • LLC and Limited Partnership
  • of interest generally results in capital gain or loss to selling partner or member, except to the extent of unrealized receivables or substantially appreciated inventory
  • Entity itself generally not affected by the sale or exchange of the interest
  • In LLC, transferee may receive all the economic rights but may not become a member without the consent of the remaining members under the Operating Agreement of LLC
  • C Corporation and S Corporation
  • Shareholder generally recognizes capital gain or loss upon sale of stock
  • Shareholder Agreement may limit transferability
  • Going Public
  • C Corporation

a. Traditional vehicle for going public

  • S Corporation

a. Must revoke S corporation status, generally without tax consequences to the revocation

  • LLC and Limited Partnership
  • Either may go public as publicly-traded partnership, but may be smoother to proceed as C corporation
  • Incorporation not likely to cause a taxable event
  • LLC going public may raise significant securities law issues
  • Asset Sale and Liquidation
  • C Corporation

a. Taxed to the corporation and shareholders for total federal taxes of over 60% on the appreciation, plus state taxes

  • S Corporation, LLC and Limited Partnership

a. Subject to only one level of tax

  • Tax-Free Reorganization

1. Restricted to corporations

Advantages and Disadvantages of LLC Status for Certain Businesses

  • High Technology Companies

Advantages

Disadvantages

One level of tax and pass-through of R&D credits

All income taxable at member level even if needed to fund growth and therefore not distributed

Greater flexibility in defining interests of various equity owners and in allocating income and losses to those owners

No incentive stock options possible

Possibly stronger "veil piercing" protection because liability limitations are defined by statute

IRC § 1202 (small business stock) provision unavailable

Ability to avoid corporate statutory requirements for governance, voting, etc.

IRC § 1244 (small business stock loss) provision unavailable

Ability to take over existing businesses (e.g., garage start-up) with liabilities in excess of basis without incurring adverse tax consequences

Personal property subject to local taxation

No corporate housekeeping required; ability to turn around actions faster by centralizing decision making at managerial level

Purchases of machinery and materials used in research and development subject to Massachusetts sales and use tax

Ability to deduct redemption payments on buyout of departing members

Start-up losses (NOL) cannot be "sold" to a successor

Fiduciary obligations of majority may be fewer than those of majority stockholders

Must likely use the calendar year as tax year (if individual owners)

Can effectively consolidate with corporate owner via pass-through

Tax accounting for capital accounts in cumbersome

Ability to do tax-free "spinoffs" and disproportionate distributions without onerous tax limitations applicable to corporations

No possibility of Employee Stock Ownership Plan (ESOP) financing

Can generally convert tax-free to corporation, but cannot convert corporation tax-free to LLC

Inability to be acquired in a tax-free reorganization

Can provide equity compensation similar to incentive stock options without similar restrictions and without alternative minimum tax

Initial Public Offering (IPO) likely to require preliminary conversion to corporate form

Possibility of self-employment tax on all profits. Limitation on fringe benefits for 2% owners

May not qualify for treaty benefits with foreign countries

May be unacceptable when venture capital financing includes tax exempt or non-US investors

  • Real Estate Companies

Advantages

Disadvantages

All usual partnership tax advantages for real estate enterprises

Uncertainty as to application of passive activity loss rules, at-risk rules, etc.

Statutory liability protections greater than under common law

Some states do not recognize LLCs as pass-through entity. This may present problems for multistate LLCs

Member-manager, unlike limited partner, may play active role in management and still have liability protection

May be difficult to classify restructured debt as cancellation of debt (COD) income (with benefit of IRC § 108) rather than gain

No need for corporate general partner or multiple entities

Subject to default rules of statute if operating agreement does not override them

No need for minimum capital

More state-level annual filings

Conveyancing easier than for limited partnerships

Cannot have a single owner in some states

May be able to build in greater limitations on rights of non-manager members than limited partnership, thereby justifying greater minority discount on valuation

Unfamiliarity with costs to set up and operate

Members of multistate business may be subject to return filing requirements in several states

Widely owned businesses may be taxable as publicly traded partnership

  • Investment Companies

Advantages

Disadvantages

One level of tax

Unfamiliar form to investing public. If widely held, likely taxable as a corporation in any event (publicly-traded partnership rules)

No concern regarding personal holding company (PHC) status

Unrelated business income tax (UBIT) complications for some investors, eg pension funds

No concern regarding IRC § 531 tax

Uncertainty as to scope of partnership rules that apply

No concern about passive income limits or built-in gains provisions applicable to S corporations

Need to withhold income taxes on income allocated to foreign members, regardless of whether distributed

May be simpler than a limited partnership

Cannot have a single owner in some states

Ability to create multiple classes of ownership in operating agreement

Greater flexibility to convert to other types of entity without tax

  • Professional Practices

Advantages

Disadvantages

Although S corporation status available if practice has not more than 75 "partners", LLC has one level of tax, so there is no need for year-end bonuses in more than 75 "partner" firm

LLP simpler to form and perhaps to operate

Can have two or more classes of "partners", unlike S corporation

May not be eligible for cash method of accounting

Greater liability protection, subject to SJC rules

Prospective clients may be offended by attempt to limit liability

No need for corporate formalities and governance

Possibility of self-employment tax on all profits. Limitation on fringe benefits for 2% owners

No concern about built-in gains on liquidation

Mandatory retirement age may not be legal in a PC

 
INCORPORATION INFORMATION SHEET

A. General Corporate Information

1. Incorporator(s):

(a) Name: Mark L. Janos

(b) Address: 6 Harris Street, Newburyport, MA

(c) Date and time of First Meeting of Incorporator(s) (if meeting is to be held instead of taking action by written consent) (If our office is the Incorporator, then action will be taken by written consent):

2. Desired effective date of incorporation:

3. Name of Corporation:

4. Corporation’s Purpose:

A. (Please provide the specific business purpose of the corporation, i.e.: providing temporary skilled nursing services)

This language is standard:

B. To do and perform any act or business incidental thereto; and

C. To carry on any business or other activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to that referred to in the foregoing paragraphs.

4. Has name been reserved?

Name Reservation expires on what day?

5. Will the corporation do business under any other name?

(a) If so, what name or names?

6. Address of the corporation in Massachusetts:

7. Other places of business:

8. Telephone Number of the Corporation:

9. Officers and Director(s):

P. O. Box

(if different

Name Address from residence)

President:

Treasurer:

Clerk (must be MA Resident or must have Resident Agent):

Other:

Resident Agent: (or N/A)

Director(s) (for each officer (different person) there should be a director)

(there must be a minimum of two directors):

10. Fiscal year ends on: December 31 (generally but can be any date)

11. Date of Annual Meeting of Stockholder(s): March 15 (if Fiscal year end 12/31)

12. Date of Annual Meeting of Director(s): March 15 (if Fiscal year end 12/31)

B. Stock Information

3. Shares:

a. Par Value/Without Par Value:

b. Number of Shares Total (generally 1,000 issued):

c. Number of Common Shares from Total Shares:

d. Number of Preferred Shares from Total Shares:

12. Stock to be issued at time of organization:

Type & Social

Name Address No. of Shares Security Number

13. To be used if more than one class of stock is authorized

Article IV – "See Article 4A annexed hereto."

14. Restrictions:

"See Article 5A or 5B [pick one] annexed hereto."

5A Corporate Buy Back

5B Corporate and/or Shareholder Buyback

15. Other Lawful Provisions:

"See Article 6A annexed hereto."

16. Restrictions on Stock Certificates:

a. 1933 Act

b. Restrictions in the Articles

17. Restricted Stock Agreement:

a. Right of First Refusal

b. Deadlock Provisions

C. Miscellaneous Corporate Information

18. If there will be any debt initially, provide the name(s) and address(es) of the lender(s) and describe the terms of the loan(s):

19. Banking:

(a) Name of bank:

(b) Type of account(s):

(c) Signatures authorized and limitations, if any:

20. Name, address and telephone number of the corporation’s accounting firm:

21. Is there to be an election as an S Corporation under the United States Internal Revenue Code?

22. Federal taxpayer identification number:

(a) When will wages first be paid and what is anticipated to be the normal peak number of employees during the year?

Corporation Information Matrix

Corporation

FLD

INFORMATION TO BE ENTERED IN FIELD

ENTER EXACTLY WHAT SHOULD BE ENTERED IN FIELD

1

Corporation Name

2

Date of Organization (M/D/Y)

3

State of Organization

4

Address of Corporation (Street)

5

Address of Corporation (City,St,Zip)

6

President (Director? Yes/No)

7

Treasurer (Director? Yes/No)

8

Secretary (Director? Yes/No)

9

Nature of business/purpose

10

Date of Dissolution (if any)

11

No. of Shares – Stockholder 1

12

No. of Shares – Stockholder 2

13

No. of Shares – Stockholder 3

14

Capital Contribution – Stockholder 1

15

Capital Contribution – Stockholder 2

16

Capital Contribution – Stockholder 3

17

Name of Resident Agent

18

Address of Resident Agent

19

Telephone # of Corporation

20

SSN – Stockholder 1

21

SSN – Stockholder 2

22

SSN – Stockholder 3

23

Address of Stockholder 1

24

Address of Stockholder 2

25

Address of Stockholder 3

26

Address of President

27

Address of Treasurer

28

Address of Secretary

29

Address of Director(s) that are not Officers

30

Federal Identification Number

31

Accountant

Limited Liability Company Information Matrix

Limited Liability Company

FLD

INFORMATION TO BE ENTERED IN FLD

ENTER EXACTLY WHAT SHOULD BE ENTERED IN FIELD

1

LLC Name

2

Date of Organization (M/D/Y)

3

State of Organization

4

Address of LLC (Street)

5

Address of LLC (City,St,Zip)

6

Member 1 (Managing Member ? Yes/No)

7

Member 2 (Managing Member ? Yes/No)

8

Member 3 (Managing Member ? Yes/No)

9

Nature of business/purpose

10

Date of Dissolution (if any)

11

% Business Interest – Member 1

12

% Business Interest – Member 2

13

% Business Interest – Member 3

14

Capital Contribution – Member 1

15

Capital Contribution – Member 2

16

Capital Contribution – Member 3

17

Name of Resident Agent

18

Address of Resident Agent

19

Telephone # of LLC

20

SSN – Member 1

21

SSN – Member 2

22

SSN – Member 3

23

Address of Member 1

24

Address of Member 2

25

Address of Member 3

26

Federal Identification Number

27

Tax Matters Partner (Operating Agmt)

A Contemporary Law Firm with Traditional Values
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Law Office of Mark L. Janos, P.C.
6 Harris Street
Newburyport, MA 01950
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direct: 844-526-6752

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Law Office of Mark L. Janos, P.C. Attorneys Newburyport, Massachusetts