Starting a business opens the door to new opportunities, but also comes with its share of obstacles. Choosing the right legal entity, structure, and organization is essential to setting your business on the path toward success. The first step is retaining knowledgeable legal counsel to advise you. Whether you’re an entrepreneur preparing to found your dream company or an established multinational corporation looking to set up a subsidiary, you have a trusted business formation ally in SederLaw.
Clients Our Business Formation Attorneys Represent
SederLaw is proud to serve Massachusetts businesses and corporations of all sizes and across an array of industries. We assist both individuals and companies in selecting the best legal entity for their new business, including:
- Sole proprietorship
- Partnership, including limited partnership (LP) and limited liability partnership (LLP)
- Limited liability company (LLC)
Each of these legal entities have distinct advantages and disadvantages. An attorney can help you choose the one that fits your objectives and can work with you to draft and execute the critical governance and organizational documents that will get your business off to a strong start.
Benefits And Drawbacks Of Different Entities
One of the first steps you will take in starting your new company is to select the best legal entity for it. These are some of the most common options, plus the main advantages and disadvantages of each:
Sole proprietorship. A sole proprietorship is a company that is owned and managed by a single individual. In Massachusetts, an individual is automatically considered a sole proprietor if he or she conducts business activities without registering as another type of business (such as an LLC).
- Easy to form, maintain, and dissolve
- Owner keeps all profits
- Owner makes all business decisions
- Simplifies taxes because business income is considered the owner’s income
- Owner is personally liable for all losses and liabilities
- Difficult to raise money because of inability to sell stock
- Banks are often hesitant to lend money to a sole proprietor
Partnership. This is the most basic structure for two or more individuals who want to start a business together. Two common types of partnerships are limited partnerships (LPs) and limited liability partnerships (LLPs).
An LP has one general partner with unlimited liability, and all other partners have limited liability (and, usually, limited control of the business). In an LLP, every owner has limited liability and each partner is not held responsible for the actions of other partners.
- Most partnerships are treated as pass-through entities for taxation purposes, so every partner pays taxes only for his or her share of the business
- Sharing responsibility for business decisions with other partners
- Sharing the financial burden of starting the business
- May be structured to limit your individual liability
- Lower individual profits due to sharing with other partners
- Potential for interpersonal conflict and conflicts of interest
- Depending on how the partnership is structured, you may be liable for the actions of other partners
Limited liability company (LLC). An LLC is a company owned by one or more individuals, known as members. It can be used to shield its members from personal liability for debts and other obligations. There are certain formalities that must be followed to establish and maintain an LLC.
- Personal assets are generally not at risk if your LLC is sued or goes bankrupt
- Pass-through taxation, so no need to file a corporate tax return
- Fewer formalities than a corporation
- LLCs can register an exclusive trade name
- LLC members are considered self-employed and must pay self-employment taxes
- Must keep LLC funds separate from personal funds to maintain liability protection
- Certain forms and filing fees are required
Corporation. Corporations are legal entities that are separate from their owners. A corporation can earn a profit, be taxed, and be sued. They offer the strongest protection from personal liability but also entail the most detailed record-keeping and reporting requirements.
- Operates independently of its shareholders, so the death or resignation of one usually does not affect the corporation’s operations
- Shields its owners from personal liability
- Can raise capital by selling stocks (shares)
- Some corporations (known as S corps) allow pass-through tax benefits
- Potential for double taxation (for C corps): of the corporation itself, and of individual shareholders when they are paid dividends
- Extensive record-keeping and reporting requirements
- Ongoing fees, such as annual report fees
These are not the only types of business entities, and the ones listed above have additional pros and cons. Discuss your goals and concerns with a qualified Massachusetts business formation attorney to learn more.
Structuring And Organizing Your New Business
After forming your business, your next concern will be its structure and organization. Generally, this includes two broad areas of interest: registration and corporate governance documents.
Most companies other than sole proprietorships will need to register their legal entities. This starts with obtaining an Employer Identification Number (EIN) from the IRS. Then you will file the necessary paperwork with the Massachusetts Secretary of the Commonwealth. These actions must be taken before your entity can conduct business in this state. Depending on your business, you may also need to obtain a permit or license. Some regulated professions are also required to meet additional criteria before they can begin operating.
The next major step, again for most companies other than sole proprietorships, is to adopt what are called corporate governance documents. These are important documents that create and organize the new business venture. A few of the most common governance documents are:
- Articles of incorporation
- Corporate bylaws and amendments
- Operating agreements
- Partnership agreements
- Stock purchase agreements
- Doing-business-as (DBA) certificates
Governance documents are important to ensure that your rights and interests as a business owner are clearly spelled out. SederLaw can help negotiate, draft, revise, and execute the necessary documents for your company.
Contact Our Business Formation Attorney
SederLaw is committed to helping entrepreneurs, professionals, and corporations succeed as they form their new enterprises. We serve our clients by thoroughly reviewing their options and then implementing a personalized plan to accomplish the most important business formation tasks. If you’re ready to get started or you still have questions, contact us today.
SederLaw helps clients with business formation law in Worcester from their primary office as well as clients throughout MetroWest from their Westborough office.