Wednesday, July 31, 2013

Massachusetts LLC costs are prohibitive

It's a rare day when I think conservatives are right about something, but their constant and incessant whining has produced a pretty good point - the cost of running a business in Massachusetts is prohibitively high.

As you can see, we're a big money operation.
My wife and I recently started selling posters at farmers markets and like shows. Sales have been good and more and more, we are receiving requests to do work for other people. We'd also like to expand the business. Many people recommended we file as a limited liability corporation (LLC) to separate ourselves from the business. I looked into it. It costs $500 a year in Massachusetts to start and then another $500 annually to file a report - one of the most expensive LLC filing fees in the United States.

Since I was a kid, I've been hearing complaints from Republicans and some Democrats that policies in this state hurt small business. I generally didn't care, as I wasn't a business owner, and thought that it would only benefit the rich. Now though, as I look into starting a business, I find my state has higher rents and other start-up costs than almost anywhere. Many of the start-up costs, particularly rents, are outside government control. I understand that - it's valuable real estate. But fees like the LLC fee just add to the overwhelming cost of starting a small business.

I'm not advocating that Massachusetts adopt Colorado's $10 annual fee, but perhaps the Bay State should consider a tiered approach more like New York's. There, if I understand it correctly, LLCs that make less than $100,000 annually pay only a $25 filing fee (this doesn't take taxes into account).

I certainly support moderate-to-high taxes on business profits, but doesn't it make more fiscal sense for the state to encourage businesses with lower start-up costs and then get the money out of them by taxing profits made? To a big company, $500 doesn't seem like much, but to folks trying to scratch a few grand together to pursue a letterpress business on the side, $500 as an annual cost is frankly a huge deterrent.

What do readers think? I don't know a lot about business law, so maybe I'm not seeing how this is reasonable.


Rebecca Peters said...

I am in the exact same position/ stand point on this matter. It is restrictive for small businesses just starting out. Not all of us took out enormous loans to begin our companies and have limited funds to follow our dreams. I was also advised to become an LLC company.
I have looked into trademarking and sales tax resale certificate also. Although they have no liability aspect to them.
Glad you posted this!

Matthew Wilding said...

Glad to hear I'm not alone here.

Anonymous said...

I actually formed an llc and ended up canceling it for this very reason and now am operating as a sole proprietor with the unnecessary risks attached.
It is ridiculous - and not to sound too paranoid but I seriously suspect big money interests are the reason behind this, because to a huge corporation $500 is a drop in the bucket but to a little company it is a big deal. It's an easy way for monopolies to maintain their dominance and our public officials have no spine. Massachusetts does this in so many other ways that I think our public officials are hopelessly corrupt.

Anonymous said...

Okay, so what are we going to do about this? I haven't heard any good suggestions yet, and I'm not currently in a position to suggest one myself, so I'll remain anonymous for now. But I'd like to know if anyone has a well-thought-out plan to bring this to the attention of the legislature in some leveraged way. If so, I'm in.

Anonymous said...

I contacted the Mass Sec'y of State and they said it was up to the Legislature. So I contacted both my rep and senator and they both said they would support pending legislation to reduce the fee.

That was one year ago. The fee is still $500.

Contact your representatives and tell them you're paying attention to this vote!

Carl Shubitowski said...

I agree. I am trying to start a business and was recommended to file as an LLC. I couldn't believe the fees. I just moved to this state from Michigan last year. So I looked up Michigan's filing fees. $25.

Anonymous said...

The fee for corporations to file an annual report is only $125. Not sure while LLC's are $500, but I ran into the same problem except that my business never got off the ground and they still make my pay $500 to file an annual report that basically says nothing on top of an additional $100 fee to close the business and they are saying additional taxes are due even though we never sold anything or made any profits. Talk about making small business impossible.

Anonymous said...

It is interesting that they have made is so much cheaper to be a corporation - since I guess if your a corporate machine you deserve a break but if your a small business wanting to form an llc you should have to pay the maximum?

There is a bill floating around the Massachusetts senate that aims to cut the llc fee in half:

The question is, will they ever pass it, and is it enough?

Anonymous said...

I wrote the previous comment and apparently my previous comment being critical of the corporation $125 filing fee was unfair since while they only have to pay $125 to file an annual report they also have to pay a $456 annual minimum tax.. so they are actually paying over $500 a year.

That said the LLC fees are way too high.
Unfortunately it looks like the senate voted to REJECT the reducing of the fee to $250 because the state could not afford to "lose revenue":

That vote was very small minded of our legislators - so what your killing future small businesses that could create future jobs.. because you don't want to hurt your government revenue source?
And why exactly can't Massachusetts make due with $250 revenue while other states only charge $10-50 for the same service?

Not to mention.. more people would register LLCs if it was actually affordable vs plenty of people now choosing to form sole proprietorships which provides no revenue to Massachusetts corporations division.

Does anyone know if the bill is now completely dead in the water or it still has potential?
I'm currently operating as a sole proprietor because of this fee even though I would rather not if they would be more reasonable. I could handle $250.

Jim Bullion said...

Even corporations have to pay a minimum "excise tax" of $456! This state does not believe in helping people take risks to start small businesses. Check out other state fees:

Anonymous said...

Dude, you are exactly right. I'm ticked off about how much it is to start my business. I'm poor...which is why I am starting a business!

That said, I would recommend you DO go the LLC route (I am not an attorney). It's not worth the risk of some malcontent taking your home, etc.

I'd be ALOT more partial to paying $500, if the annual fee wasn't.....$500. Come on Massachusetts.

It's just plain wrong.

Matthew Wilding said...

Thanks for the input, everyone! I hadn't checked back on this post in a while. Glad to see the discussion has been so active.

Anonymous said...

Agree this is out of control. Why is Massachusetts basically discouraging people from taking the risk of starting up their own business? Completely makes no sense why their fees are so much higher in comparison to the rest of the country.

Ross Leavitt said...

If you think carefully about what you've just said, you used to think businesses should have a substantial tax burden because you were not a business, and businesses were above you in the socioeconomic stratum. Then you became a business, and you didn't like the taxes, so you now advocate raising the bar. You still shouldn't have much of a tax burden, but those who are above you should. I predict that if you are successful and continue to rise, you will continue to think that only those richer than you, only those in higher classes than you, should have a significant tax burden.

Anonymous said...

In response to Ross above:
I actually have no problem paying fair share of taxes as profits increase.
The problem is Massachusetts is charging $500 for a service that other states charge $25-50, which is putting excessive burden on new businesses that have yet to make much if any profit and might even kill some small businesses before they even have a chance to get off the ground.

And for what, just so greedy Massachusetts legislators can have extra profit? (who themselves already make too much money in excessive salaries while the rest of the state economically struggles).

And we are supposed to be a "Commonwealth" which I guess means all our wealth is common in that it is all sent to the Massachusetts government?

Kevin Larrabee said...

Ugh, as someone coming from Colorado (and a dissolved LLC out there), I was *stunned* to see the absolutely prohibitive costs to file and maintain an LLC that will most likely fail and make $0. Anyone writing reps still about this?

Anonymous said...

You want a Democrat Party controlled State without the crippling regulations, high taxes and exorbitant fees? Good luck!

You don't like it, vote Republican a lot more....

Anonymous said...

Of course Massachusetts is highest in the nation for LLC filing fees -- What else did you expect in a state controlled at every level by Democrats? You didn't actually think Democrats care about helping small businesses or promoting free enterprise, did you??? Yeah, go ahead and complain to your MA State Rep. Why not go do something more useful instead like walking in a circle for 10 minutes.

Anonymous said...

Actually to the two last Anonymous comments - I don't consider lowering the LLC fees to be an anti democrat party stance.. since most LLC businesses are very small.
I have no problem paying $250 for a small business of say under 5 employees for LLC, and over 5 paying the full $500.

Personally the above would be a logically positive for a democrat to take - since you want to make it easier for small businesses to start while still taxing the large businesses that can afford it.

So I think your feedback that democrats can't vote to lower some taxes if it's in the interest of working people is a fail.

And FYI Massachusetts is not the highest - California is $800.

Anonymous said...

Holy hell, $500... cmon Massachusetts, wtf..

Anonymous said...

I am relieved to find these posts. I moved my LLC from CT, where it was $250 every few years to MA. I assumed it would be the same and am embarrassed to say that I didn't check pricing before I filed. I just received a letter from the state saying that $500 is due and was absolutely shocked. I run a four-day educational summer program once a year that never breaks even and this will kill all future plans. I'd already paid for insurance for the program and am trying to learn whether or not I'll lose the insurance if I switch to a dba. Then there's the problem of changing the bank account and printing new checks. I can't believe MA allows this to remain in effect. Whatever happened to helping small businesses?