This, is an excellent question, and one that I get asked all the time. Filing an LLC with the Secretary of State in Massachusetts is simply a matter of logging in and providing the identifying members of the organization that are critical to its operation, and paying the required $500 fee. Because the process is so simple, it begs the question, why hire an attorney to file my LLC?
The answer to this question comes down to whether you are a sole proprietor, a single owner in an LLC, a manager managed LLC or a member managed LLC.
Being a Sole Proprietor
A sole proprietor is simply ‘you’ doing the work. You have no employees, no payroll, etc. A perfect example is a handyman or landscaper who is in business alone. Technically, a sole proprietor is someone who need not start an LLC. However, operating without some sort of recognized corporate structure opens up the sole proprietor to potentially massive liability.
Why is a Sole Proprietor Liable for any Activity Conducted by the Sole Proprietor?
A sole proprietor is liable for any errors or negligence from the operation of the business. For example, if you operate a landscaping business and while you are driving your mower you run over Mrs. Jones prize winning rose bushes which have a property value of $10,000. If Mrs. Jones chooses to sue you, you are personally liable for any damages that it a court may award.
What does it mean to be personally liable?
This means that your assets (your home, your car, your savings accounts, and business accounts could all be on the look for repaying Mrs. Jones should she secure a successful court victory. You might then ask, but what if I am already in debt or what if I have no assets? You may be correct in thinking that if you are in deep debt or have few assets, Mrs. Jones’s attorney may advise Mrs. Jones that it would be unwise to pursue you. After all, you can’t bleed a stone. But, if she does decide to proceed anyway and gets a judgment against you, such a judgment could be attached to your property or future earnings.
This potential problem could likely be avoided by simply operating your business as an LLC.
Single Member LLC
As the sole owner of an LLC, you are best advised to still set up your business as an LLC rather than as a sole proprietorship. This is because, if you do it correctly, you’re LLC will take the hit financially for any errors or negligence that may occur while you are operating the business. So, in the same example used above, it would likely be your business account (the account you use to accumulate earnings from your lawn mowing business) that would take the financial hit from a successful lawsuit by Mrs. Jones. This is because the law in Massachusetts views an LLC as a like a separate individual, a stand-alone entity. Think of an LLC as a shield which, if business is conducted properly within the LLC, protects you, the business owner, from severe financial risk or attachment of your personal assets.
Separating the Business from the Person
There are many considerations that you must adopt if you are operating your LLC as a single member LLC, or even a member managed or manager managed LLC. First and foremost, never mix personal funds with corporate funds. This is called commingling. Simply put, keep your business account and your personal account separate. Don’t allow yourself to use the company credit card for example to purchase a haircut once a week, or to get nails done weekly. While you might be able to get away with doing this occasionally if the purchases are for advertising or entertainment, if such activity establishes a regular pattern of using corporate funds as a personal bank account you open up your own personal bank account as well as the company funds to an attachment to a lawsuit.
Operating Your Business in Massachusetts As A Multiple Member LLC or Managed Member LLC
When you have more than one owner of an LLC (and it is even a good idea if you have only one person running a business in Massachusetts as an LLC) you need to have an operating agreement. While it is not a legal requirement to have an operating agreement, failure to have an operating agreement can provide fuel for business attorneys for the other side during a dispute between owners or members of the LLC or where a single owner is accused by a third party of acting outside of the role of owner/manager of the LLC.
An operating agreement is a detailed description of who owns what, what each member has contributed, how profits and losses are distributed, who is managing the business, voting rights, and much more. Having a tailored operating agreement is critically important, as I say, to avoid later disputes, because, if you are sued by a member of your LLC your defense may be as simple as pointing to the operating agreement which establishes your position.
An Ounce of Prevention Is Worth a Pound Of Cure
Because there are many complications that can arise after you’ve been running your business for some time; complications such as member disputes over money, over control of business capital, over other matters that affect the operation of the LLC, it is critically important that an LLC have an operating agreement. The operating agreement clearly dispels any confusion as to who is responsible for what in the business, what rights members have, etc. An LLC should use its operating agreement as a Bible, as a roadmap to precisely how to understand the relationships and power that each member of the LLC has. Even in a single member operated LLC, that is, a sole business owner who has decided to form an LLC, having an operating agreement can mean the difference between a court viewing the single owner personally responsible for some act of negligence or for the court viewing the corporation as solely responsible for the act.
And an Operating Agreement Doesn’t Need to Cost Much
Creating an operating agreement is best done with an attorney, and it need not be expensive. Most contracts such as this typically cost between 350 to $700 depending upon the circumstances involved.
Why Don’t I Just Get an Operating Agreement Online?
While there are many do it yourself websites that show you how or even create for you and operating agreement, using these sites is a fool’s errand. This is because, while these websites claim to use existing Massachusetts laws to create a document for you, what they don’t do is ask you the appropriate questions at the appropriate time because a software program cannot anticipate circumstances without first picking apart your situation. As an example, have you ever tried to use a completely online, question-based software to file your taxes? Typically, these programs offer questionable results because they will likely miss very important aspects of your unique tax situation.
While humans do make mistakes, a well-trained human can take into consideration aspects of your circumstances that are not necessarily black and white. This is the difference between hiring an attorney to write your operating agreement or using a free online service. You may not get the results you’re looking for and the time to find that out is not in court.
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