Choosing the Right Entity for Your Massachusetts Business: A Guide for Entreprenuers
One of the most important decisions you'll make when starting a business in Massachusetts is choosing the right entity. The entity you select will determine the way your business is taxed, your personal liability for business debts, and the way your business is managed. Here are some of the most common entity types and how to choose the right one for your business.
A sole proprietorship is the simplest and most common form of business entity. It's essentially an extension of the owner, and the owner is personally liable for all business debts. There are no separate tax returns for the business, as the income and expenses are reported on the owner's personal tax return.
A partnership is a business owned by two or more people who share the profits and losses. In the absence of a partnership agreement to the contrary, all partners are equally entitled to profits, and equally liable for debts. In a general partnership, all partners have unlimited liability for the business debts.
This is the default treatment whenever two people enter into business together and don't otherwise incorporate. However, you'll want to make sure you have a partnership agreement in place that outlines each partner's responsibilities, profits, and liabilities.
Limited Partnership (LP)
A limited partnership is a type of partnership where there are one or more general partners and one or more limited partners. The general partners have unlimited liability for the business debts, while the limited partners have limited liability and are only liable for the debts up to the amount of their investment in the partnership.
This may be a good choice if you have one or more investors who want to invest in your business but don't want to be personally liable for the business debts. The general partners are responsible for managing the business, while the limited partners are passive investors. The limited partnership is more complex to set up and maintain than a general partnership, but it offers more liability protection for the limited partners.
Limited Liability Company (LLC)
An LLC is a hybrid entity that combines the liability protection of a corporation with the tax benefits of a partnership. Owners of an LLC are called members, and they're not personally liable for the company's debts. The income and expenses of the LLC are reported on the members' personal tax returns.
This may be a good choice if you want liability protection but don't want to deal with the formalities of a corporation. An LLC is also flexible in terms of management, as it can be managed by the members or by a separate manager.
A corporation is a separate legal entity that's owned by shareholders. The corporation is responsible for its own debts, and shareholders are not personally liable. There are two types of corporations: C corporations and S corporations. A C corporation pays its own taxes on profits, while an S corporation passes through its income to the shareholders, who report it on their personal tax returns.
This may be a good choice if you plan on raising money from investors, if you want to protect your personal assets from business debts, and/or if you want the ability to issue different classes of stock (for a C corporation).
Choosing the right entity for your Massachusetts business depends on a variety of factors, including your business goals, the level of risk involved, and the tax implications. It's important to consult with a business planning lawyer who can help you make an informed decision and set up your entity correctly.