Why Mass why? Highest LLC formation and annual fee rate in the USA

Submitted by funkygrrl t3_117juhf in massachusetts

It seems like the definition of pennywise and pound foolish, doesn't it? $500 to form the LLC and $500 annual fee. Yes, more filing fee revenue coming in but I'm sure more revenue is lost from people forming LLC's in nearby states instead.

And here's the absolutely insane part. It's cheaper to file an S Corp in Mass. Costs $275 with a $125 annual report filing fee. This makes zero sense! LLC's are generally for small businesses and S Corp's are for big businesses. How did the state decide to go easy on big business and make it so hard for mom and pop businesses?

https://worldpopulationreview.com/state-rankings/llc-cost-by-state

https://preview.redd.it/h6w02f0ymeja1.png?width=1123&format=png&auto=webp&v=enabled&s=49577658c41f2594f5289fb0f7d19c0f947cc497

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modernhomeowner t1_j9c1ohe wrote

S-Corps are for small businesses, usually only one or two owners, but up to a limit of 100. And while youtubbers trying to seem smart preach LLCs, depending on your earnings, S-corps can be more favorable than an LLC for taxation, or even using both in conjunction with each other.

But, your other point, yes, I am not incorporating in MA regardless of entity type.

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funkygrrl OP t1_j9c2evl wrote

That isn't what I'm asking. Mass is the only state I've come across that makes forming and maintaining an LLC more expensive than an S Corp. Why?

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Able-Juggernaut-69 t1_j9dapx2 wrote

S Corp is not a type of entity, it’s a tax filing election. If you are trying to limit your personal liability and pay the least amount of money talk to an accountant. To your original question though… most likely there is no legitimate reason as to why LLC costs more than incorporating. It’s just MA being MA.

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modernhomeowner t1_j9c65z2 wrote

You live in MA, and you are asking why our legislature did something and expecting some rational reasoning??? How long have you lived here??? lol, I'm being sarcastic/not sarcastic of course, but we could name endless laws that don't make any sense.

LLCs to have the protection of a C-corp with some tax advantages, so I'm sure it's partially that MA wants their due, maybe encourage you to go with the S-Corp.

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Seaworthiness222 t1_j9c8h7v wrote

Jerks ruin it for everyone. People use LLCs to avoid child support and taxes of all sorts. Property buyers use DOZENS of LLCs to obscure their actions. Basically Mass makes the business owner pay for it and doesn't subsidize it.

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UncleCustard t1_j9culkj wrote

People do that in every state. So why does MA hate businesses? Cuz a small percentage of people abuse it? That seems highly......likely in MA.

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GarbageFile13 t1_j9c2o1l wrote

Yeah it's crazy. They should lower it substantially for any business making under a certain amount. Like $200k revenue or under and the annual fee is $25. MA is not friendly to small businesses.

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funkygrrl OP t1_j9c9pws wrote

I know Baker tried to get it lowered to $250 (which is still twice as other New England states) but legislature didn't vote for it. This was a couple years ago, but I don't remember hearing why.

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dogmom603 t1_j9c6wbm wrote

MA minimum tax for a Corps is $456 plus the annual report fee, so S Corps are actually more expensive in MA than LLC.

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funkygrrl OP t1_j9c8tj5 wrote

Ah, I figured there were some strings attached.

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Then_Ear t1_j9c6o5m wrote

I agree it is prohibitive to new businesses being started.

Having said that I think if $500 a year puts your business in the red it wasn’t viable to begin with and you were for some reason assuming first year profitability in a new business.

People should stop watching Tik toks about starting an LLC drop shipping company for eBay or Amazon. And get a degree or a job.

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t_11 t1_j9dqr8u wrote

So not every moron who watches TikTok clips all day can open an LLC because Grant Cardone told them. That’s why we have Delaware

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jpr_jpr t1_j9cnw9z wrote

Foreign entity filing, I believe, is the same. Changing where you incorporate, if you have an office in Massachusetts, doesn't matter.

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ConceptualEconomist t1_j9fcmpf wrote

Accountant here - there is some wrong information here in this thread about taxing of an LLC and S Corps. There are distinctions between these two things. An LLC is a legal structure that protects its partners from personal liability (there are exceptions to this, if the “corporate veil is pierced”). An S Corp is a tax-filing status where income flows through the entity to the person (S Corp v C Corp are the two types companies file for taxes, a lot of differences here but that’s another discussion).

LLCs require a higher fee because of the protection provided to LLCs by the state. People in this thread who say LLCs are taxed differently than S Corps or those who say MA is stupid and that’s why it’s a higher fee literally have zero clue what they’re talking about.

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funkygrrl OP t1_j9h2jd5 wrote

I don't know about taxes.

In Mass:
Cost of LLC formation is $500 plus annual fee of $500.
Cost of S Corp formation is $275 minimum plus annual fee of $125.

In nearby Connecticut:
Cost of LLC formation is $120 plus annual fee of $80.
Cost of S Corp formation is $250 minimum plus annual fee of $150.

Connecticut is typical of most states. The cost of forming a corporation is higher than an LLC.

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ConceptualEconomist t1_j9ib91d wrote

There’s a lot of reasons it could be higher, maybe MA has a lot more going on in terms of auditing businesses. Maybe MA wants to incentivize people to be general S Corps because they understand that there’s virtually little difference outside of the protections afforded to LLCs.

Regardless, it’s not really that important in the grand scheme of things. $500 should be a drop in the bucket for LLCs for MA.

If you want to point to other states, then you should take into account other parts of MA compared to that state (higher COL, other of the many indicators pointing to MA as being a top living destination state).

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Wizard01475 t1_j9ceof9 wrote

All those investment properties being owned by corporations.

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Cheap_Coffee t1_j9estlr wrote

What gave you the idea S corps are for big businesses? They're a simplified form of corporation for self-employed or small businesses.

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations

- formerly owned an S corp.

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wittgensteins-boat t1_j9f7uvy wrote

Fidelity Investments filed for Subchapter S tax status.

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Cheap_Coffee t1_j9l8bdq wrote

Hmm, I googled that and didn't get any hits. Can you point me to your source of info?

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wittgensteins-boat t1_j9m6g8o wrote

Boston Globe, around 2005 to 2010.

It was newsworthy, because Fidelity was buying out shareholders to get below 100 shareholders, and the state contemplated changing tax laws on big sub-S corporation taxation.
At some point the max number of shareholders went to 100, which made it possible for Fidelity to contemplate the change.

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Cheap_Coffee t1_j9nvknb wrote

Fair enough.

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wittgensteins-boat t1_j9of9uc wrote

Fidelity changes its corporate structure:
Conversion to LLC could save millions for firm, boost profits.
By Ross Kerber, Globe Staff
November 3, 2007.

http://archive.boston.com/business/markets/articles/2007/11/03/fidelity_changes_its_corporate_structure/

Boston mutual fund giant Fidelity Investments has changed its corporate structure, a move that could save it hundreds of millions of dollars in taxes and boost profits.

The umbrella company for Fidelity's holdings, a company previously known as FMR Corp., was converted into a limited liability company called FMR LLC, according to a company spokeswoman and recent securities filings.

Under state revenue law, most limited liability companies do not pay corporate taxes. Taxes on their profits are paid directly by the shareholders. In traditional corporations, taxes are paid both by the corporation and by individual shareholders.

Fidelity spokesman Vincent Loporchio wouldn't discuss the motives for the shift in detail except to say: "We believe the LLC is the most advantageous organizational structure from a legal point of view."

Fidelity is one of the state's largest companies, reporting $1.2 billion in profit last year on revenue of $12.8 billion. The company employs about 46,000 people worldwide and about 13,000 in Massachusetts.

The change in Fidelity's corporate structure was first reported yesterday by Bloomberg News. The Boston Globe reported in June the company was in the process of transforming itself into what is known as an "S corporation" organized under subchapter S of Internal Revenue Service rules, giving it a similar tax structure at both the state and federal levels. Like LLCs at the state level, S corporations avoid double taxation by eliminating most corporate tax payments.

Joseph Newpol, a Bentley College taxation professor, said converting the company to an LLC at the state level is a necessary step to becoming an S corporation.

The shift to S corporation status doesn't appear to have happened yet, however, Newpol said, based on an Oct. 15 filing to the Securities and Exchange Commission. It states the new company, FMR LLC, had 449 investors, well over the limit of 100 investors an S corporation may have.

Most S corporations in the United States are smaller companies, but large S corporations are not uncommon, according to specialists. Congress has steadily raised the ceiling on the number of shareholders a private company may have to qualify, with passage of the most recent increase, from 75 to 100, coming in 2004. The Tribune Co., which owns the Los Angeles Times, the Chicago Tribune, and the Chicago Cubs, converted recently.

Loporchio said under the new structure the Johnson family will still own 49 percent of the company, with the remainder in the hands of employees, the same as before. He declined to discuss the potential savings but said the change to an LLC won't have an impact on its mutual funds business, its relationship with clients, or its headquarters location.

Loporchio added, "It's important to note Fidelity intends to remain a private company. We're well capitalized and our liquidity is strong. We believe that being private provides us with the greatest flexibility to reinvest in the business."

The Oct. 15 filing lists the two best-known Johnson family members as holding 10 percent or more voting stock in FMR LLC - the company's 77-year-old chairman, Edward C. "Ned" Johnson III, and 45-year-old Abigail P. Johnson, his daughter and company vice chairwoman.

The new structure could save Fidelity hundreds of millions of dollars in tax payments a year, said Robert Willens, a Lehman Brothers tax specialist in New York. A confidential bond offering obtained by the Globe showed that in 2001, the company set aside $623 million to pay federal and state corporate taxes. Fidelity declined to discuss its payments.

Fidelity's plans have previously raised concerns about its tax contribution in Massachusetts, where S corporations pay a 4.5 percent state tax, compared to the usual 9.5 corporate tax. Anthony DeGregorio, chief counsel for the state Legislature's Joint Committee on Revenue, said the company's size means its effective rate might be higher under state rules that govern the largest S corporations. Most S corporations pay no federal corporate taxes on their profits.

The restructuring is only the latest change underway this year at Fidelity. Edward C. Johnson III has shuffled executives this year and brought in a surprise pick as president, Rodger Lawson. Lawson launched a broad reorganization in September and also has stressed cost controls. This week, the company sent layoff notices to about 200 people, though it has added more than 4,000 jobs worldwide this year.

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MassConsumer1984 t1_j9f6g7n wrote

Don’t forget the $20 inline fee to file! It’s really insane.

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mee__noi t1_j9fall7 wrote

Best place for LLC- where you live OR Delaware. There are very nuanced exceptions.

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bostonmacosx t1_j9gw33r wrote

Really you need to think about that? What is cheap in this state...nothing...

Most expensive Big Mac in America.... yup Massachusetts....

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Workhy t1_j9ofc6l wrote

That's why Delaware is the best place to set up an LLC! If you want to learn more about the benefits Delaware offers to small business owners and how you can form an LLC in this state, check this out. Delaware Company Formation

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life_is_liberal t1_j9c3e0z wrote

Probably because enlightened centrists who elect republicans and pat themselves on the back for it aren’t real progressives and are really just full of shit

One word: Puritanism

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