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Attention
Sole Proprietors – Want Affordable
Liability Protection?
Single Member LLCs are now available in Massachusetts. Personal liability is always a concern for sole proprietors. Cost and complexity are also concerns and have deterred many from incorporating. Now, for $500 a year, the LLC annual fee in Massachusetts, a sole proprietor can obtain liability protection without the cost and complexity of the corporate structure. Under the new Massachusetts law (enacted in March 2003), a sole proprietor can become a single member LLC in Massachusetts and continue to file a Schedule C for tax purposes. This is a win-win. With the LLC structure, you are not personally obligated for the debts of the company. With the simplified tax treatment, you do not need to file additional tax returns. Under the old law, sole proprietors could limit their personal liability by establishing a corporate entity. Being a one-person corporation required registering with the Commonwealth of MA, filing federal and state tax returns and complying with a mountain of regulatory requirements. Previously, limited liability companies (LLCs) required at least two members in Massachusetts. To be an LLC, a sole proprietor had to file in a state that allowed single member LLCs (e.g., Delaware) and then register as a foreign LLC doing business in Massachusetts – again, complicated and expensive. What’s “limited liability”? A corporation or LLC is a separate legal entity in the eyes of the law, separate and distinct from the people who own it. Limited liability is important in our economy to encourage investment in high-risk ventures. Hence, only the assets of the corporation or LLC are at risk to settle the debts of the company, not the personal assets of the owners. Only under exceptional circumstances, such as fraud or blatant illegality, has a court “pierced the corporate veil” and held owners personally liable. According to the law, “… no member or manager of a limited liability company shall be personally liable, directly or indirectly, including without limitation, by way of indemnification, contribution, assessment or otherwise for any such debt, liability or obligation or liability of the limited liability company solely by reason of being a member or acting as a manager of a limited liability company.” You are still personally liable for payroll and sales taxes. If you have employees, Worker’s Compensation Insurance is mandatory. Here are the basic steps: 1. File Massachusetts LLC registration. 2. Obtain federal and state tax identification numbers. 3.
File IRS Form 8832 – to avoid taxation
as a separate entity. Cindy Sechrest, CPA (www.sechrestcpa.com) thinks a one person LLC is a good deal. According to Cindy, many of her clients who are sole proprietors hesitated to form a corporation because of the high cost of preparing corporate tax returns. “The new Massachusetts one member LLC is the ideal answer to this dilemma – the sole proprietor continues to file a Schedule C with his/her individual tax return and avoids the annual cost of a corporate or partnership return. The cost of forming an LLC is low and the annual fees of $500 offer affordable liability protection.” Of course, the law has some other provisions that may be of benefit to you. For example, single member Delaware LLCs can convert to Massachusetts LLCs without tax consequences. Corporations can use single member LLCs (in which the corporation is the sole member) to set up subsidiary operations in MA. A single member Massachusetts LLC can elect to be taxed as an S-corporation. LLCs are also useful for succession and estate planning. Please contact my office if you would like additional information about LLCs.
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