Starting an IT consulting business in Massachusetts involves more than choosing a name and finding clients. If you want to operate as a corporation, you need to establish the entity properly, create the required corporate records, and keep up with ongoing compliance requirements.
For IT business professionals, the legal side of forming a corporation can feel unfamiliar. You may have the technical and business skills to build a successful consulting company, but state filings, corporate documents, and tax registrations involve a different set of requirements.
Attorney Mark Bross of Bross Law, LLC walks through the process of forming an IT consulting corporation in Massachusetts, from choosing a corporate name to maintaining the corporation after formation. Here are the key steps to understand before getting started.
1. Choose a Corporate Name That Meets Massachusetts Requirements
Your first step is choosing a name for your IT consulting corporation. Branding is important, but Massachusetts also has legal requirements for corporate names.
The corporate name must contain a designator such as “corporation,” “incorporated,” “company,” or “limited,” or an abbreviation of one of those terms. Names such as “Massachusetts IT Solutions, Inc.” and “Cybernetic Systems Corp.” meet this requirement.
The name also cannot be the same as or similar to another business entity already registered with the Massachusetts Secretary of the Commonwealth. This includes corporations, LLCs, limited partnerships, business trusts, and foreign entities registered to do business in Massachusetts.
The Massachusetts Division of Corporations provides an online search tool you can use to check whether a proposed name is already registered.
If you are not ready to form the corporation yet, you can reserve an available name for 60 days by filing an Application for Reservation of Name and paying a $30 fee. The reservation can be extended for another 60 days by paying an additional $30.
Your Corporation Name Does Not Have to Be Your Brand
Your legal corporation name and your customer-facing brand can be different.
As Mark explains, “the brand name is completely different from the corporation name.”
For example, you could form Will Smith Corp. and operate your IT consulting business under the name “SUNSET IT CONSULTING.” The corporation would then file a business certificate, also called a DBA certificate, with the municipality where it is located.
You should also check whether your intended brand is already being used elsewhere. That includes checking the domain name, searching Google and social media, and considering a trademark search through the United States Patent and Trademark Office.
2. Appoint a Registered Agent and Registered Office
After selecting your corporation’s name, you need to appoint a registered agent and choose a registered office.
The registered agent is authorized to receive official legal notices on behalf of the corporation, including a summons and complaint or other government notices.
The registered office must be a physical Massachusetts address. It cannot be a P.O. Box, although it can be the corporation’s principal business address if that is a physical Massachusetts location.
There is also a privacy issue to consider. The registered agent’s name and registered office address appear in the Articles of Organization and become public records.
If you operate your IT consulting business from home and use your home address as the registered office, that address will be publicly associated with the corporation. Some business owners choose to have a third party, such as an attorney, serve as the registered agent instead.
3. Identify and Appoint Officers and Directors
Massachusetts corporations have three required officer positions: president, secretary, and treasurer.
The president serves as the chief executive officer and generally presides over shareholder and board meetings when there is no chairperson. The treasurer handles the corporation’s financial affairs and records, while the secretary is responsible for corporate minutes and authenticating corporate records.
One person can hold all three positions.
That can simplify formation for a one-person IT consulting corporation. You do not need three different people simply because the corporation has three required offices.
The identities and addresses of the officers are public information, so founders should consider that issue when deciding what address to use.
The corporation also needs a board of directors. The board has corporate power and authority and is responsible for directing the corporation’s management and major decisions.
Smaller corporations often have directors who are also officers and participate in day-to-day operations. In larger corporations, directors are more likely to focus on major management policies and corporate decisions.
Generally, a Massachusetts corporation needs at least one director. When there is more than one shareholder, the number of directors can depend on the number of shareholders and what is stated in the Articles of Organization.
Like the officers, the names and addresses of the directors become public records.
4. Complete and File the Articles of Organization
The Articles of Organization are the foundational document that establishes the corporation.
As Mark puts it, “The Articles of Organization are the foundational charter document for your corporation.”
The Articles are filed with the Massachusetts Secretary of the Commonwealth. There are four filing methods: online, by fax, by mail, or in person.
Online or fax filing costs $265 for up to 275,000 authorized shares, while filing by mail or in person costs $275 for up to 275,000 shares. Additional shares cost $100 per additional 100,000 shares.
Because state filing fees can change, verify the current fee with the Massachusetts Secretary of the Commonwealth before filing.
The Articles contain eight articles, each covering a different aspect of the corporation.
Article I: Corporate Name. The first article identifies the corporation’s exact legal name.
Article II: Corporate Purpose. A Massachusetts corporation is generally formed to engage in any lawful business. For an IT consulting company, there is usually little reason to unnecessarily limit the corporation’s purpose at formation.
Article III: Authorized Shares and Stock Structure. This article establishes the number of authorized shares, whether they have par value, and whether the corporation will have multiple classes of shares.
Every corporation should authorize 275,000 shares, even a single-owner corporation. These authorized shares create a pool that can be issued to investors or employees in the future.
Authorizing 275,000 shares does not mean that all 275,000 need to be issued. Only a portion may be issued to the initial shareholders, leaving additional authorized shares available for future use.
Shares should be authorized without par value because the concept of par value no longer has the same meaning under current Massachusetts corporate law.
If the corporation has multiple classes of shares, Article III identifies those classes and the number of authorized shares belonging to each. Different classes can have different voting, dividend, or distribution rights.
Article IV: Rights of Share Classes. This article describes the rights associated with different classes of shares. For example, Class A shares could have voting rights while Class B shares do not.
If the corporation has only one class of shares, this article can generally remain blank.
Article V: Restrictions on Share Transfers. This article addresses restrictions on the sale or transfer of shares.
A small IT corporation may want restrictions that prevent a shareholder from transferring shares to someone the other owners do not want to enter into business with. A right of first refusal is one example. Other restrictions can require approval from the board or other shareholders before shares can be transferred.
These provisions can have a substantial effect on the ownership of the corporation, so legal guidance can be particularly useful when drafting them.
Article VI: Additional Corporate Provisions. This article allows a corporation to include additional lawful provisions that modify Massachusetts’ default corporate rules.
Some examples are provisions concerning the board of directors, limitations on director liability, and allowing shareholders to act by written consent instead of holding a meeting.
Article VII: Effective Date. The seventh article allows the corporation to establish a future effective date rather than becoming effective immediately upon filing.
For example, a business could file its Articles in November or December but choose January 1 as its effective date. The future effective date cannot be more than 90 days after filing.
Article VIII: Current Corporate Information. The eighth article contains information such as the registered agent, registered office, officers and directors, fiscal year, business description, principal address, and location of corporate records.
This information can generally be changed without amending the Articles of Organization, although some changes may require a separate filing or fee.
After completing the Articles, the incorporator signs and files them with the Secretary of the Commonwealth. The incorporator is the person responsible for signing and filing the Articles and paying the filing fees.
5. Hold the Organizational Meeting
Filing the Articles of Organization is only part of forming the corporation. The directors then need to take the actions necessary to establish the corporation as an operating business.
Those actions can be handled through an organizational meeting or, when permitted, unanimous written consent. Either way, the decisions need to be documented and stored with the corporation’s permanent records.
Adopt the bylaws. The directors need to adopt bylaws, which serve as the operating handbook for the corporation. They address matters such as shareholder and director meetings, officer and director duties, appointment and removal, shares and certificates, and indemnification.
Authorize an EIN. The directors should authorize the corporation to obtain a federal Employer Identification Number from the IRS. The EIN is needed for purposes such as opening a corporate bank account, paying taxes, hiring employees, and taking other official actions.
Approve stock certificates or uncertificated shares. The corporation should formally approve how its shares will be documented. If there are multiple classes of shares or restrictions on transfers, those details need to be reflected appropriately in the corporate records.
Authorize the initial share issuance. The directors need to authorize the issuance of shares to the founding shareholders and determine the consideration paid for those shares. The number of shares issued can be much smaller than the 275,000 shares authorized in the Articles.
Be careful about relying on “sweat equity” as the only compensation for shareholders because of potential Massachusetts Wage Act issues.
Authorize corporate bank accounts. The directors should authorize the corporation to establish its business bank account or accounts. Banks may request evidence that the directors approved the account.
The important point throughout the organizational process is documentation. The corporate decisions should be preserved through minutes or written consents in the corporation’s records.
6. Complete the Post-Formation Requirements
Once the organizational meeting is complete, the officers need to follow through on the actions approved by the directors.
That includes obtaining the EIN, opening corporate bank accounts, issuing stock, collecting the consideration from shareholders, and completing the corporation’s state registrations.
Register with the Massachusetts Department of Revenue. The corporation needs to register through MassTaxConnect for applicable state tax obligations, including corporate excise tax. Depending on the business, sales tax and employer withholding tax registrations may also be required.
Make the S corporation election on time. If you want the corporation to be taxed as an S corporation for its first tax year, Form 2553 generally needs to be filed within two months and 15 days of formation for the election to take effect for that year.
Late-election relief may be available if the deadline is missed, but additional steps are required.
Register with the Department of Unemployment Assistance. The corporation also needs to register with the Massachusetts DUA. This can apply even when the corporation has only one employee—the owner.
Once these actions have been completed, the basic corporation formation process is complete.
7. Maintain Ongoing Corporate Compliance
Forming the corporation is not the end of the process. Corporations have continuing requirements that need to be handled throughout the year.
File the Massachusetts Annual Report. The corporation must file its Annual Report with the Massachusetts Division of Corporations within the required period after the close of its fiscal year.
Hold annual meetings. Shareholders and directors should hold their annual meetings and preserve minutes or written consents in the corporate records. Shareholders elect directors, while directors elect officers.
File required tax returns. Corporate and excise tax filings need to be completed with the Massachusetts Department of Revenue.
Run payroll when required. An S corporation paying owner-employees wages needs to handle payroll appropriately.
Maintain corporate records. Important corporate decisions should continue to be documented through minutes or written consents and stored in the corporate minute book.
Keeping up with these requirements helps demonstrate that the corporation is operating as a separate legal entity.
8. Protect the IT Business With Practical Risk Management
Forming a corporation is only one part of protecting an IT consulting business.
IT consultants should also establish contracts and risk-management practices that address the specific risks associated with their work.
Engagement letters or contracts should clearly define the scope of work, establish payment terms, include appropriate liability limitations, and provide clear dispute-resolution procedures.
Professional liability insurance, also known as errors and omissions insurance, can provide another layer of protection.
Data security is also an important consideration for IT consultants. Depending on the services provided, appropriate risk-management measures can include nondisclosure agreements, encryption tools, and clear contractual data-security requirements.
These practices work alongside the corporate structure. Forming a corporation does not eliminate the need for sound contracts, insurance, and data-security procedures.
Final Thoughts
Starting an IT business as a corporation in Massachusetts requires more than filing paperwork with the state. You need to choose an appropriate corporate name, appoint a registered agent, identify officers and directors, complete the Articles of Organization, establish the corporation’s records, complete tax registrations, and maintain ongoing compliance.
For an IT consulting business, the formation process also provides an opportunity to address ownership, stock structure, contracts, insurance, confidentiality, and data security from the beginning.
The information above is not legal advice. If you are starting an IT business in Massachusetts and need help forming your corporation or addressing your ongoing legal requirements, contact Bross Law, LLC to discuss your business.
Resources Mentioned in the Video
- Massachusetts Business Entity Search
- Application for Reservation of Name
- Massachusetts Business Certificates
- Massachusetts Division of Corporations
- IRS EIN Application
- IRS Form 2553
- Massachusetts DOR MassTaxConnect
- Massachusetts DUA Registration
Watch the Video
How to Start a Corporation in Massachusetts for Your IT Consulting Business
