Last Updated: September MASSACHUSETTS FORMS OF ORGANIZATION 1 Foley Hoag LLP

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1 Last Updated: September 2013 MASSACHUSETTS FORMS OF ORGANIZATION 1 Foley Hoag LLP Table of Contents 1. Nonprofit Corporations 2. For-Profit Corporations (including Benefit Corporations) 3. Limited Liability Companies 4. Low Profit Limited Liability Companies 5. Joint Ventures 6. Partnerships and Limited Partnerships 7. Sole Proprietorships 8. New Forms of Hybrid Organizations The most common legal form of organization utilized by the social sector is the nonprofit corporation, although for-profit corporations, limited liability companies (LLCs), joint ventures and various kinds of partnerships, including limited partnerships, may be used typically to accommodate plans to earn revenues or access capital markets. Each of these forms of organization has advantages and disadvantages and sometimes, with the help of experienced counsel, they are used in combination to maximize strengths and minimize weaknesses of a particular form. Please note that this document merely provides a general overview of Massachusetts laws, including tax and corporate laws, applicable to a variety of organizations. Such laws are technical, complex and contain traps for the unwary. Any individual or entity contemplating forming (or operating) a business organization in Massachusetts should seek the advice of experienced legal counsel. 1 With contributions from the following attorneys at Foley Hoag LLP for Massachusetts laws: Gabrielle Bernstein, Roxanne Cartwright, Michelle Limaj, Sharon C. Lincoln, and Shirin Philipp. 1

2 Formation Management and Control Liability Tax Factors Capital and Loans Nonprofit 501(c)(3) Corporation File articles or certificate of incorporation (containing specific info required by IRS) with state and pay filing fee. File application on Form 1023 for tax-exempt status unless below gross receipts threshold. Recruit directors, draft bylaws and hold organizational meeting. Take steps to comply with license, tax and employment law/regs. Managed by directors who appoint officers to run day-to-day operations as specified Members, directors, officers and employees are generally not liable for debts and in bylaws. Some obligations of the nonprofit corporationscorporation, including have members (like shareholders) who elect directors. for unlawful acts of others involved in the affairs of the corporation. They can be held liable for injuries due to their own misconduct but some states provide limited immunity to such persons and also to volunteers. Generally exempt from federal and state taxes if receive 501(c)(3) exemption. Liable for tax on unrelated business income, and other taxes such as property and sales (unless local and state exemptions apply). Donors can deduct contributions Can accept charitable donations and grants. Eligible for program related investments (PRIs) by foundations. Can borrow money and issue debt instruments but cannot raise capital by issuing stock. For-Profit Corporation File articles or certificate of incorporation with state and pay filing fee. Decide on board of directors, draft bylaws, hold organizational meeting and issue stock. Take steps to comply with license, tax and employment laws/regs. Managed by directors that are elected by shareholders. Directors appoint officers to run dayto-day operations as specified in bylaws. Shareholders are generally not liable for debts and obligations of the corporation, including for unlawful acts of others involved in the business. Unless indemnified by the corporation, directors, officers and employees can be held liable for injuries caused by their own acts or failures to act. A C Corporation is subject to corporate tax on net income. If net income is paid to shareholders as dividends, the individual shareholders are taxed. If a corporation elects to be a S corporation and meets several criteria, it can receive pass through taxation. Can raise capital by issuing stock (equity) and by borrowing money through loans or other debt instruments. Corporation may be able to accept PRIs from foundations in the form of loans or equity. Benefit Corporation File articles or certificate of incorporation (containing specific info required by chapter 156E) with state and pay filing fee. Decide on board of directors, draft bylaws, hold organizational meeting and issue stock. Take steps to comply with Managed by directors that are elected by shareholders, including designated benefit director. Directors appoint officers to run dayto-day operations as specified in bylaws. Shareholders are generally not liable for debts and obligations of the corporation, including for unlawful acts of others involved in the business. Unless indemnified by the corporation, directors, officers and employees can be held liable for See For-Profit Corporation. See For-Profit Corporation. A Benefit Corporation may be in a better position to attract PRIs from foundations in the form of loans or equity. 2

3 Formation license, tax and employment laws/regulations. Management and Control Liability Tax Factors Capital and Loans injuries caused by their own acts or failures to act. Directors and officers are not personally liable for failure to pursue or create public benefit. LLC File certificate of formation with state and pay filing fee. Negotiate and execute operating agreement. Take steps to comply with license, tax and employment law/regs. Flexible structure like a partnership with management responsibilities specified in operating agreement (usually management committee or single manager). The duties and liabilities of the managers of an LLC may be shaped in large part by the terms of the LLC s operating agreement. Usually not taxed as an entity because most LLCs are pass through entities and the member/owners report their allocable shre of the LLC s profits and losses on personal tax returns. Tax-exempt member/owners treat their share of income as exempt or subject to unrelated business taxable income, depending on the character of the income. May raise capital through contributions by member/owner. May borrow money through loans or other debt instruments. L3C (lowprofit LLC) Similar to LLC but must be formed for a charitable or educational purpose. Only permitted to be formed in certain states (e.g., VT, IL, MI,UT,ME, WY) but may operate in Massachusetts. See LLC. See LLC. See LLC. May raise capital through contributions by member/owner. May borrow money through loans or other debt instruments. L3C enabling legislation is written to comply with PRI regulations and is thus specifically intended to attract equity or debt investments by foundations. Partnership No filing requirements unless limited partnership (LP) or Partners have equal, full control unless otherwise specified Partners are personally liable for the debts and obligations of the Generally not taxed as May raise capital an entity. Partners through contributions report profits and losses by partners and by 3

4 Formation Management and Control Liability Tax Factors Capital and Loans limited liability partnership (LLP), but partners should sign partnership agreement. Take steps to comply with name, license, tax and employment law/ regulations. in partnership agreement. partnership, including for unlawful acts of other partners and employees. Risk can be limited by creating an LP or LLP. on personal tax returns. borrowing money through loans or other debt instruments. Sole Proprietor No filing requirements. Has no legal existence apart from owner. Take steps to comply with d/b/a name, license, tax and employment law/regulations. Owner has full control. Owner is liable for all debts and obligations, including for unlawful acts of employees. Not taxed as an entity. Owner reports business profits and losses on personal tax return. Owner provides funds for capital investment and owner can borrow money through loans or other debt instruments. B Corp (a forprofit entity with a social mission that is licensed by the nonprofit B Lab to use the trade name B Corporation ) A B Corp designation may apply to any type of entity: corporation, benefit corporation, LLC, L3C or partnership. See relevant entity type for formation overview. The B Corp license requires the entity to incorporate specific socially beneficial performance standards into its governing documents and operating principles. See relevant entity type. See relevant entity type. See relevant entity type. See relevant entity type. A B Corp may be in a better position to attract PRIs from foundations in the form of loans or equity. 1. Nonprofit Corporations a. Overview Nonprofit corporations in Massachusetts are generally formed under Chapter 180 of the Massachusetts General Laws, which incorporates by reference numerous provisions of the Commonwealth s Business Corporation Act and governs the formation, operation and dissolution of nonprofit corporations in Massachusetts. For-profit corporations in Massachusetts operate under Chapter 156D. Chapter 156D superceded the older corporation statute, Chapter 156B, which is nevertheless maintained for the purpose of supporting references to Chapter 156B that appear throughout Chapter

5 In addition to being subject to these statutes, a charitable nonprofit corporation is subject to oversight by the Attorney General of the Commonwealth through the Nonprofit Organizations/Public Charities Division. A nonprofit corporation in Massachusetts is managed by its board of directors and operated by its officers and employees. A nonprofit corporation organized under Chapter 180 cannot have capital stock, but may have members, who enjoy voting rights that are somewhat similar to those of for-profit shareholders. No part of the income or surplus of a Massachusetts nonprofit corporation may be distributed to its members, directors or officers; however, reasonable compensation may be paid for services rendered to the nonprofit corporation. This section addresses Massachusetts state law corporate matters. It does not address federal law, including the distinctions between private foundations and publicly supported nonprofits; these distinctions can have an impact on operational matters. For example, there are special federal rules that apply to compensation paid by private foundations to insiders. Please refer to the section on Nonprofit Taxation for information about applicable federal rules. A nonprofit corporation has an existence of its own, independent of the terms of office or employment of members, directors or officers. It can sue or be sued in its own name and can own real estate in its own name. b. Advantages of Incorporation: pros and cons of nonprofit vs. for-profit The principal advantage of incorporation is that it protects the shareholders or members from personal liability for the obligations and liabilities of the corporation, including unlawful actions of officers, directors and staff acting on its behalf. In addition, incorporation establishes continuity; corporations (both nonprofit and for-profit) are subject to a body of statutes that provide very specific guidance as to their formation and operation; and incorporation brings stature to the organization and implies stability. Where profit is not a goal and the enterprise can be funded without the need for access to capital markets, the nonprofit corporation is the preferred vehicle for pursuing social objectives. Although nonprofit corporations are not prohibited from engaging in commercial activities (up to a certain point) or from engaging in activities that generate income, the directors of a nonprofit are duty-bound to devote primary attention to the promotion of the social mission of the corporation rather than the production of net income. On the other hand, if access to capital markets is needed, a for-profit corporation (or limited liability company, discussed below) is likely to be the preferred option because nonprofit corporations cannot issue capital stock. The directors of a for-profit corporation, however, owe strict duties to the shareholders to maximize profits and value. 5

6 Therefore, unless the directors and managers can tie the social mission of their for-profit corporation directly to its business purpose, they can be sued for breach of their duties to shareholders and for misuse of corporate assets if they focus too much on the social mission and forego profits. This problem can be avoided where all shareholders agree to pursue a social mission or devote a percentage of revenues to charitable causes but such agreements may be temporary because a change in control or a drop in earnings can lead to amendment or abrogation of shareholder agreements. c. Formation A nonprofit corporation attains its separate legal status through the filing and approval by the Secretary of the Commonwealth of Massachusetts of its articles of organization. This document is in essence a contract between the state and the nonprofit corporation in which Massachusetts grants individual legal status to the corporation in exchange for the corporation s commitment to follow its rules. Under Chapter 180, one or more persons over the age of 17 must act as the corporation s incorporators and adopt articles of organization, approve by-laws, and elect initial directors, a president, treasurer, and clerk of the corporation. Once adopted, the articles of organization must be signed by the incorporators and filed, along with a $35 filing fee, with the Secretary of the Commonwealth, Corporations Division, located at One Ashburton Place, 17th floor, Boston, MA The articles of organization must include the following information: (1) The name and mailing address for each incorporator. The incorporator does not need to be a resident of Massachusetts. (2) The name of the corporation, which must be sufficiently distinguishable from any other entity authorized to conduct business in the Commonwealth, include a term indicating that it is incorporated, and not be misleading as to its corporate purpose. (3) The purpose of the corporation. For Chapter 180 to apply, the corporation s purpose must fall within at least one of the categories described in Section 4 of the statute, which include charitable and educational purposes. (4) The initial fiscal year of the corporation. (5) The initial principal office of the corporation in Massachusetts. (6) The name, residence, and mailing address of each of the initial directors (of which there only needs to be one), president, treasurer, and clerk. None of these persons need to be residents of Massachusetts and one person may hold more than one (or all) of these positions. 6

7 (7) The name and business address of resident agent, if any. A resident agent is only required if the clerk is not a resident of Massachusetts. It is also recommended that the articles include provisions (1) granting the corporation power to act as a partner, and (2) allowing the corporation to hold meetings of the members (if any) outside of Massachusetts, but in the United States. Additional information and electronic versions of applicable forms are available on the Secretary of the Commonwealth s website at An electronic version of the template for articles of organization can be accessed at Note that incorporation as a nonprofit corporation under Chapter 180 does not in itself result in tax exemption for the corporation. In order to obtain such exemption, the entity must follow appropriate procedures at the federal and state level. State requirements are described in further detail in paragraph (g) below. Please refer to the section on Nonprofit Taxation for information about applicable federal rules. Although a nonprofit organization files for incorporation with the Secretary of the Commonwealth, and has reporting obligations to the Secretary, the nonprofit organization, if it is a charity organized or operating in Massachusetts, is also subject to the jurisdiction of the Attorney General. Under Massachusetts law, there is no statutory definition of a charity, but the Attorney General notes that as a general matter, a nonprofit organization having a primarily charitable purpose, that benefits an indefinite class or number of people, and that is exempt under section 501(a) of the Internal Revenue Code of 1986, as amended (the Code ) and described in section 501(c)(3) of the Code, is considered a charity by the Attorney General, and therefore subject to its oversight. See General FAQs about Charities, Relying on Attorney General v. Weymouth Agricultural and Industrial Society, 509 N.E.2d 1193 (Mass. 1987), the Attorney General has on occasion asserted its jurisdiction over organizations that do not squarely fit these criteria. Note that charity and charitable purpose includes educational and other activities. Massachusetts law grants the Attorney General the authority to enforce the due application of funds held and administered by charities within the Commonwealth. d. Management and Control A nonprofit corporation is governed by its board of directors, and if applicable, its statutory members. Massachusetts nonprofit corporations may be organized to have one or more classes of statutory members. Statutory members should be distinguished from 7

8 ordinary members who may pay an annual fee in exchange for certain benefits from the nonprofit corporation. In many ways, statutory members act in a similar manner as shareholders of a for-profit corporation. In a nonprofit corporation with statutory members, the statutory members elect the directors and vote on major corporate decisions, such as amendments to the articles of organization and in some cases the bylaws of the corporation, and thus have significant control over the nonprofit corporation. In a nonprofit corporation without statutory members, the directors act in place of the statutory members. Once the nonprofit corporation has been established, the initial board of directors should act (at a meeting in person or by unanimous written consent) to ratify the actions taken by the incorporators in connection with the initial formation of the corporation and to adopt bylaws which set forth the rules and procedures governing the decision-making process of the members (if any) and the board of directors as well as the general operation and management of the corporation consistent with the applicable statutes of Massachusetts and the articles of organization. Typically, the bylaws of a nonprofit corporation contain provisions governing member, director and officer qualifications, powers, and duties; voting; filling of vacancies; meetings; property holding and transfer; indemnification of directors and officers; committees; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment and dissolution procedures. e. Liability of Members, Directors and Officers In Massachusetts, directors, officers, and members (if any) of nonprofit corporations are, generally, not personally liable for contracts entered into by the corporation. Chapter 180 also allows a nonprofit corporation to indemnify any person affiliated with the corporation, as long as that person acts in good faith with the reasonable belief that her actions are in the best interests of the organization. Directors and officers owe a duty of care and a duty of loyalty to the corporation and are required by statute to act in good faith, to exercise the level of care expected of a reasonable, similarly-situated person, and to act in a manner reasonably believed to be in the best interests of the corporation. In discharging their duties, directors and officers are entitled to rely on information and opinions from retained professional advisors, officers or employees of the corporation who are reasonably believed to be reliable and competent, and may delegate certain decisions to committees of the board. Massachusetts law also provides certain limitations on liability for charities and their leadership. The cap on liability for charitable corporations is $20,000, excluding costs and interest, as long as the organization was engaging in activities that contribute directly to its charitable purposes and are non-commercial in nature. Officers and directors 8

9 serving charitable corporations as uncompensated volunteers are protected by statute from any personal liability for negligent acts or omissions taken in connection with the individual s corporate duties unless those acts or omissions were intentional or grossly negligent. Volunteers for charitable organizations are not given special protection under Massachusetts law, but the federal Volunteer Protection Act of 1997 (the VPA ) fills this gap by providing immunity to volunteers. It shields them from any claim arising from acts performed within the scope of the volunteer s responsibilities in the organization, provided the conduct was not of a particularly egregious variety. The VPA includes no specific limitation to claims in tort. However, to date, the VPA has been invoked in only one recorded case (not in Massachusetts), and it is only rarely cited in published commentaries. f. Mergers, Acquisitions and Dissolution Mergers Under Massachusetts law, any two or more corporations can merge by entering into a merger agreement; however, if one of the corporations is a Massachusetts charitable corporation, the surviving corporation must be a Massachusetts charitable corporation. Note that this means that if a Massachusetts nonprofit corporation merges with an out-ofstate corporation, the Massachusetts nonprofit corporation must be the surviving entity. The merger agreement must set forth the names of the merging entities and the name of the surviving corporation, the purposes of the surviving corporation, and the terms of the merger. If one of the corporations had capital stock, the merger agreement must detail the method of cancelling such stock. The merger agreement must then be adopted by two-thirds of the members qualified to vote for each corporation. Upon corporate approval, articles of merger must then be filed with the Secretary of the Commonwealth, Corporations Division, along with the filing fee of $35, for the merger to be effective. Transfers of Assets A Massachusetts charitable corporation must provide at least 30 days advance notice to the Attorney General s office of any sale, lease, exchange, or other disposition of substantially all of its assets if the transaction will result in a material change in the nature of the organization s activities. This is commonly referred to as Section 8A Notice and guidelines published by the Attorney General regarding this notice can be found at There are no established definitions of substantially all of a charitable corporation s assets and material change in this context; as a result, a corporation will need to consider whether the transaction requires notice to the Attorney General s office. 9

10 Charitable corporations can expect the Attorney General s office to pay particular attention to the value received by the charity in exchange for the assets, whether any of the charity s assets are being used for non-exempt purposes or are leaving the state, and whether the assets carry donor restrictions or other limitations on the use of the assets. The Attorney General may impose conditions on the transaction. If a charitable corporation intends to transfer a large part of its assets without receiving fair value (including as a gift or grant to another charitable organization not controlled by the charity transferring the assets), it may be necessary for the charity to file a petition with the Supreme Judicial Court (Single Justice Session for Suffolk County) with the assent of the Attorney General, following the principles articulated in Massachusetts Charitable Mechanic Ass n v. Beede et al., 320 Mass. 601 (1947). Sample petitions (which are commonly referred to as Beede petitions ) are available from the Division. Dissolution The process for dissolution of a Massachusetts nonprofit corporation depends on whether the corporation is charitable for purposes of Massachusetts law (see discussion under section 1(c) above). For those that are not charitable entities, a majority vote of members qualified to vote can authorize a petition for dissolution. Once it has been authorized, the petition must be filed with either the Supreme Judicial Court or a Superior Court detailing the grounds for the application. After a hearing, the court may decree dissolution. Charitable nonprofit corporations must obtain a majority vote of the board of directors, the petition must be approved by the Attorney General s office, and the petition must be filed with the Supreme Judicial Court of Massachusetts. Charitable corporations are well advised to consult with the Attorney General s office before submitting a petition to the Court. Further information from the Attorney General and sample packets for dissolving a charitable corporation in Massachusetts can be found athttp:// g. Recordkeeping, State Reports, and State Taxes Annual Report All Massachusetts nonprofit corporations must file an annual report with the Secretary of the Commonwealth, accompanied by a filing fee of $15 and must also notify the Secretary of the Commonwealth in writing of the occurrence of certain events (such as relocation of its principal office or changes in its registered agent, directors, or statutory officers). Failure to file the annual report for two successive years can result in the revocation of the nonprofit corporation s charter by the Secretary of the Commonwealth, 10

11 a penalty that was enforced in a sweeping manner in Charitable corporations are also required to register with the Attorney General s office before commencing operations or raising funds in Massachusetts and must file thereafter an annual report with the Attorney General s Nonprofit Organizations/Public Charities Division, located at One Ashburton Place Boston, MA 02l08 on the Form PC, accompanied by a filing fee that is determined based on the corporation s gross support and revenue for the most recent fiscal year (for more information see Nonprofit corporations must also observe the formalities of the corporate form, such as holding regular meetings (or taking action by written consent) of its directors (and members, if any), maintaining corporate minutes, properly accounting for the property of the corporation, and avoiding the commingling of funds of the corporation with those of its directors, officers, or members. Massachusetts Income Tax Exemption Massachusetts nonprofit corporations that are recognized by the Internal Revenue Service ( IRS ) as tax-exempt organizations under section 501(a) of the Code may apply for exemption from Massachusetts corporate excise (income) tax. To apply, the corporation must register with the Massachusetts Department of Revenue ( DOR ), either online at or by completing and submitting Form TA-1, and submit a copy of the following supplemental documents: (1) the IRS determination letter recognizing the corporation s tax-exempt status, (2) the Articles of Organization filed with the Massachusetts Secretary of State, and (3) the IRS Employer Federal Identification Number, if it is not stated on the determination letter. The application should be forwarded to the Bureau of Desk Audit, Nonprofit Corporations Unit, 200 Arlington St., Room 4300, Chelsea, MA or faxed to (617) If, however, a nonprofit corporation regularly engages in a business activity unrelated to the exempt purposes of the organization, any income stemming from such activity is considered unrelated and generally subject to taxation both at the federal and state levels. Massachusetts Sales Tax Exemption for Charities Massachusetts nonprofit corporations that are recognized by the IRS as tax-exempt organizations described in section 501(c)(3) of the Code may also apply for exemption from Massachusetts sales and use tax. The organization may apply online for the exemption at It may take up to three to four weeks to receive the Certificate of Exemption, Form ST-2. Once the certificate is received, the organization must save the original and make several copies of it. When the organization 11

12 purchases goods that will be used in service of its stated charitable purposes, it may present a copy of the Certificate of Exemption and avoid payment of sales tax on the goods. The vendor may ask for both a copy of the Certificate of Exemption and a Form ST-5, Sales Tax Exempt Purchaser Certificate. Form ST-5 can be downloaded from the following website and filled out in advance: Casual and Isolated Sales Exempt from Sales Tax Nonprofit corporations may also be exempt from the requirement to collect sales tax on sales of tangible personal property sold by the organization for fundraising purposes. Such sales are exempt as casual and isolated sales if: (1) the organization does not make sales of the same type of property in the regular course of business and (2) amounts derived from such sales are used to further the organization s exempt purpose. If these tests are met, the number of such sales made in a calendar year is immaterial. The Commissioner of Revenue generally presumes that amounts derived from the sale of tangible personal property purchased for fundraising activities are used to further the organization s exempt purpose. Real and Personal Property Tax Exemption Generally, all property real and personal is subject to taxation by cities and towns in Massachusetts; however, an exception to this tax is made in the case of certain charitable organizations, also referred to as qualifying nonprofits. Qualifying nonprofits are charitable corporations that are established for literary, benevolent, charitable, scientific or temperance purposes. A significant body of Massachusetts case law has established criteria for the determination of what qualifies as charitable in the context of the property tax exemption. Each such organization that claims relief from Massachusetts property tax must affirmatively prove that it was organized and in fact operates as an organization that meets the statutory definition of charitable as clarified by such case law. In addition, only charitable trusts or charitable corporations are eligible for the property tax exemption. Non-corporate entities such as LLCs that operate as charitable organizations are ineligible since LLCs do not qualify as corporations under Massachusetts law. Each charity seeking an exemption from property tax must file a State Tax Form 3ABC in each city or town in which the organization owns real or personal property. The form must be filed on or before March 1 each year. h. Insurance Nearly every type of activity by a nonprofit corporation can become the target of some kind of a claim by a firm or an individual that alleges damage or injury by the corporation 12

13 or individuals responsible for it (i.e., directors, officers or employees). Even if the claim is without merit, the costs of defending against the claim can be very substantial. To encourage qualified individuals to accept positions as directors and officers, many nonprofit corporations purchase insurance to cover director and officer (D&O) liability. In addition, most responsible nonprofit corporations purchase a basic comprehensive general liability policy that covers liability for accidents in the corporation s offices, at sponsored meetings and the like. Massachusetts law does provide for limitations on liability for uncompensated charitable directors and officers, as well as for charitable corporations, as described in Section 1(e) above. However, liability insurance for nonprofit corporations is often a very complicated matter. Consultation with an experienced and knowledgeable agent or consultant is essential in order to obtain the right coverage at the lowest premium. i. Resources Guide to Nonprofit Corporate Governance in the Wake of Sarbanes-Oxley (American Bar Association Section of Business Law, 2005). Guidebook for Directors of Nonprofit Corporations (American Bar Association Section of Business Law, 2d ed. 2002). Jacobs, Jerald A., Association Law Handbook (ASAE & The Center for Association Leadership, 4th ed. 2007). Nonprofit Corporation Information, Secretary of the Commonwealth, Nonprofit Governance and Management (American Bar Association and American Society of Corporate Secretaries, 3rd ed. 2011). Oleck and Stewart, Non-Profit Corporations, Organizations & Associations (Prentice- Hall, 1994, Supp. 2002). Public Charities or Not-for-Profits, Office of the Attorney General, 2. For-Profit Corporations a. Using For-Profit Corporations to Pursue Social Objectives The for-profit form of organization can be used as a vehicle for conducting a business that also has a social mission or objective. Although for-profit corporations are charged with maximizing profit for their shareholders, under Massachusetts law, the board of directors of a for-profit corporation may consider community and societal interests when making decisions on behalf of the company. This sort of stakeholder or other 13

14 constituency statute, like others intended to apply in hostile takeover situations, have not been tested in the ordinary course of business. And while the law might permit the corporation to consider social objectives, it would not require the corporation to do so only the shareholders/owners have this power. Unless all shareholders agree to pursue social aims, dissenters could sue the corporation s directors and managers for failing to operate the corporation in the best economic interests of the shareholders. A shareholders agreement may be one way to address the tension between economic and social objectives. Such an agreement, entered into by all shareholders and the corporation, would require the corporation to be managed and operated so as to pursue specified social objectives thereby overriding fiduciary duties and similar legal principles that govern normal behavior of for-profit corporations. No Massachusetts court has addressed such an agreement, so its enforceability in Massachusetts is unknown. But even the most skillfully drafted shareholders agreement is not a perfect solution because agreements can always be abrogated and amended and the owners of the shares can change via sale, gift or inheritance. Moreover, a tightly drafted shareholders agreement which makes it difficult to respond to business changes over time would tend to render the for-profit corporation much less attractive to investors (potential new shareholders). For these reasons, social entrepreneurs interested in effectively safeguarding a for-profit corporation s public benefit mission may consider organizing as a benefit corporation, discussed in more detail below. b. Formation The Massachusetts Business Corporations Act (the Act ) governs the formation, operation and dissolution of for-profit corporations in Massachusetts. To organize a corporation pursuant to the Act, at least one person must act as the corporation s incorporator and adopt articles of organization and elect initial directors. Once adopted, the articles of organization must be signed by the incorporator and filed with the Secretary of the Commonwealth, Corporations Division, located at One Ashburton Place, 17th floor, Boston, MA The $275 filing fee permits the corporation to authorize up to 275,000 shares of capital stock in its articles of organization. Each additional 100,000 shares (or fraction thereof) adds $100 to the filing fee. The articles of organization must include the following information: (1) The name and mailing address of each incorporator. The incorporator does not need to be a resident of Massachusetts. 14

15 (2) The name of the corporation, which must be sufficiently distinguishable from any other entity authorized to conduct business in the Commonwealth and must contain one of the following terms: corporation, incorporated, company, limited, corp., inc., or ltd. (3) The number of shares the corporation is authorized to issue and any additional details pertaining to classes and series of shares. (4) The initial registered office of the corporation in Massachusetts. (5) The name and address of each of the initial directors, president, treasurer, and secretary. None of these persons need to be residents of Massachusetts and one person may hold more than one (or all) of these positions. The required number of directors may be explicitly stated in the articles organization, but if the articles are silent, the Act requires that for a corporation where there is only one (1) shareholder, there must be at least one (1) director; for those where there are only two (2) shareholders, then there must be at least two (2) directors; and where there are more than two (2) shareholders, there must be at least three (3) directors. (6) The name of the initial registered agent at the corporation s registered office in Massachusetts. The registered agent may be an individual, including an officer of the corporation, a Massachusetts corporation, or a corporation qualified to do business in Massachusetts. (7) The initial fiscal year of the corporation. A corporation organized under the Act is not required to explicitly state a purpose in its articles of organization because, unless more limited purposes are provided in the articles of organization, every corporation organized under the Act has the purpose of engaging in any lawful business. Alternatively, a corporation may provide for specific purposes in the articles of organization without limiting the broad purposes automatically provided by the Act. Additional information and electronic versions of applicable forms are available on the Secretary of the Commonwealth s website at An electronic version of the template for articles of organization can be accessed at c. Management and Control A for-profit corporation is managed by or under the direction of a board of directors and its officers, although its shareholders vote on important corporate issues such as election of directors, mergers, sale of substantially all assets and dissolution. 15

16 Similar to a nonprofit corporation, once the for-profit corporation has been established, the initial board of directors should act (at a meeting in person or by unanimous written consent), to ratify the actions taken by the incorporator in connection with the initial formation of the corporation and to adopt bylaws which set forth the rules and procedures governing the decision-making process of the shareholders and the board of directors as well as the general operation and management of the corporation consistent with the applicable statutes of Massachusetts and the articles of organization. In general, the bylaws of a for-profit corporation contain provisions governing director and officer qualifications, powers and duties; voting; meetings of shareholders, directors and officers; filling of vacancies; committees; property holding and transfer; indemnification of directors and officers; bank accounts; fiscal year audits and financial reports; conflicts of interest; and amendment, merger and dissolution procedures. d. Duties and Liabilities of Shareholders, Directors and Officers The shareholders, directors and officers of a Massachusetts corporation are generally entitled to limited liability. Generally, a shareholder will only be liable to the corporation and its creditors to the extent of the cash or other consideration paid for her shares. In certain circumstances, such as where a shareholder does not observe corporate formalities, or allows commingling of the corporation s funds with her own funds, the corporate veil may be pierced and liability may be assessed on the shareholder. Directors and officers owe a duty of care and a duty of loyalty to the corporation and are required by statute to act in good faith, to exercise the level of care expected of a reasonable, similarly-situated person, and to act in a manner reasonably believed to be in the best interests of the corporation. In discharging their duties, directors and officers are entitled to rely on information and opinions from retained professional advisors, officers or employees of the corporation who are reasonably believed to be reliable and competent. They are also entitled to rely on a duly constituted committee of the board as to a matter properly delegated to that committee. A Massachusetts for-profit corporation is required to indemnify directors and officers against reasonable expenses when the director or officer is wholly successful in the defense of any legal action resulting from her role with the corporation. In addition to this required indemnification, a corporation may include in its articles of organization a provision limiting the personal liability of a director or an officer for damages for which they would otherwise be liable under law (such as a breach of fiduciary duty). The corporation cannot, however, limit the liability of a director or officer for any acts not taken in good faith or which involve intentional misconduct or a knowing violation of law. 16

17 e. Raising Capital For-profit corporations (and LLCs) offer the most options for raising capital. Corporations may issue various kinds of equity (common stock, preferred stock, options, warrants) as well as numerous types of debt instruments (convertible notes, subordinated notes, bonds, commercial paper). f. Recordkeeping and State Reports To maintain the limited liability of its shareholders, a Massachusetts corporation must observe the formalities of corporate form, such as holding regular meetings (or actions by written consent) of its shareholders and directors, maintaining corporate minutes and stock records, proper accounting for the property of the corporation, and avoiding commingling of funds of the corporation with those of its shareholders. A Massachusetts corporation must also file with the Secretary of the Commonwealth an annual report each year, accompanied by a filing fee of $125, and must also notify the Secretary of the Commonwealth in writing of the occurrence of certain events (such as relocation of its registered office or changes in its registered agent, directors, or statutory officers). Failure to file the annual report can result in imposition of fines, and if the failure continues for a period of time, can result in the involuntary dissolution of the corporation by the Secretary of the Commonwealth. g. Taxation The Massachusetts corporate tax is essentially an excise, or fee, for doing business in the state. It is calculated partially on the basis of property owned by a corporation and partially according to the corporation s net income, which is calculated on a net basis, regardless of whether such income is distributed to shareholders. Most corporations that conduct business both within and without Massachusetts are subject to the corporate excise only on the portion of their overall net income that is apportioned to Massachusetts under a statutory three-factor formula based on the corporation s sales, payroll, and property. The deductions allowable in computing net income for purposes of the corporate tax include ordinary and necessary business expenses as well as a myriad of special tax incentives, such as accelerated depreciation rules and an investment tax credit on purchases of depreciable property. Also, corporations that engage in certain lines of business, such as biotech, or that invest in certain renewable energy systems, may qualify for special tax incentives. Certain types of entities, such as financial institutions and security corporations, are subject to special regimes and different rate structures. Dividends received from any corporation by a Massachusetts taxpayer are subject to Massachusetts personal income tax (for an individual shareholder) or the net income of the Massachusetts corporate excise (for a corporate shareholder). 17

18 Any business entity that is classified as a corporation for United States federal income tax purposes is also classified as a corporation for Massachusetts tax purposes. In addition, any corporation that is treated for federal income tax purposes as an S corporation is also treated as such for Massachusetts income tax purposes. An S corporation is generally not subject to the net income measure of the corporate excise. Rather, as for federal income tax purposes, Massachusetts taxes each shareholder, including a nonresident individual or non-massachusetts corporation, on the shareholder s share of the S corporation s net income that is apportioned to Massachusetts. Despite this general treatment as a fiscally-transparent entity, an S corporation that has over $6 million of gross receipts in any year is subject to a sting tax equal to the net income measure of the corporate excise for that year, at a rate of three to 4.5 percent. Massachusetts law also provides for (i) unitary combined reporting for multi-state corporations and (ii) business entity classification rules that broadly conform to the federal check-the-box rules requiring companies to be classified as the same type of legal entity for state and federal tax purposes. For more information, see Massachusetts Technical Information Release 08/15/2008 No which is provided at: h. Resources Domestic Profit Corporations, Secretary of the Commonwealth, Corporations Division, 3. Benefit Corporations a. Using Benefit Corporations to Pursue Social Objectives Massachusetts benefit corporations, permitted by Chapter 156E (effective December 1, 2012), are a new kind of corporation that operate to create general public benefit and any specific public benefit identified by the corporation. (It is important to distinguish benefit corporations from B Corp status, which is a designation of no legal significance, conferred by B Lab, a nonprofit.) Benefit corporations are similar to traditional for-profit corporations in many respects, but the board of directors of a benefit corporation is expressly permitted to engage in socially responsible decision-making, rather than solely pursuing the interests of the corporation and financial returns to shareholders. Nineteen states, including California, Colorado, Delaware, Maryland and New York, have passed benefit corporation legislation. Washington, D.C. has enacted benefit corporation legislation as well. Benefit corporation legislation is currently pending in several other states. 18

19 b. Formation Massachusetts benefit corporations are formed in the same manner as traditional forprofit corporations, except that the articles of organization must specify that it is a benefit corporation. Similar to a traditional corporation, a benefit corporation may also be an S Corporation. Existing corporations may convert to benefit corporation status with approval of twothirds of each outstanding class of the corporation s securities. Dissenters rights apply in the context of a conversion to benefit corporation status. c. Management and Control In considering the best interests of a benefit corporation, directors must consider the effects of their corporate decision-making on: (1) the shareholders of the corporation; (2) the employees and workforce of the corporation; (3) the interest of customers or clients as beneficiaries of the general public benefit or specific public benefit purposes of the benefit corporation; (4) community and societal factors; (5) the local, regional and global environment; (6) the short-term and long-term interests of the benefit corporation; and (7) the ability of the benefit corporation to accomplish its general public benefit purpose and any specific public benefit purpose. The board of directors of a benefit corporation must include a designated benefit director who is tasked with providing an opinion in the corporation s annual report regarding whether the benefit corporation has acted in accordance with its public benefit purpose. A benefit corporation may also designate a benefit officer who is responsible for carrying out the duties relating to the corporation s public benefit purpose. d. Liability of Shareholders, Directors and Officers In addition to the limitations on liability applicable to traditional for-profit corporations, directors of a Massachusetts benefit corporation are not personally liable for failure of the benefit corporation to pursue or create general public benefit or a specific public benefit. However, directors or shareholders may institute benefit enforcement proceedings against 19