Its a cornerstone of the American Dream, the ability to think up an amazing product or a new service and turn that idea into a business. Reaching this goal takes hard work, a desire to always be on that hustle, and sometimes a little bit of luck. One of the considerations that many entrepreneurs don’t think about is how to structure their business. So you, dear reader, can count yourself among the group of entrepreneurs who prove to have more business acumen than many others by the simple fact that you are reading this blog post and have begun researching what to do. Congratulations, and I hope the basic information below will help you kick off your research. If you would like more information about Business Structures, a recommendation to meet your specific goals, or help with the paperwork to form a business in Massachusetts please feel free to contact us to speak with an attorney conveniently located in New Bedford, Massachusetts who serves the South Coast Communities of Fairhaven, Fall River, Dartmouth, and New Bedford, among others.
The Basics of Business Structures.
One common misconception among entrepreneurs is the idea that all businesses should form as a Limited Liability Corporation (LLC). This business structure became, and remains, a popular one which many adviser’s recommend. However, while this structure has a great deal of benefits to the small business owner, it also contains some pitfalls. The “cookie cutter” approach to Business Structure choice can result in the entrepreneur running into more issues when one of the other structures would be better suited for their goals. Below are the common forms of business entity and a quick look at how they differ regarding liability, taxation, and record-keeping which are three factors that could heavily sway your decision.
A Sole Proprietorship is the most common form of business organization. Formation of a Sole Proprietorship is easy and the entrepreneur retains complete managerial control. However, the entrepreneur is also personally liable for all financial obligations of the business. This liability means that creditors can look to the entrepreneurs personal assets such as her house, car, and bank accounts in order to recover for debts owed from the business.
A Partnership is much the same as a Sole Proprietorship, with the key difference being the involvement of two or more people who agree to share in the profits or losses of the business. The advantages of control and the ease of formation (sometimes too easy) remain in the Partnership structure. Additionally, as with the Sole Proprietorship where the profits and losses of the business pass to the individual and therefore are taxed at the individual level, the Partnership also passes those to the individual partners. Absent a Partnership Agreement the profits and losses pass in equal share, meaning for a partnership of 2 the pass rate is 50/50. The disadvantage, again, is that each partner is personally liable for the financial obligations of the business.
A Corporation is an entity that is created to conduct business and is a separate legal entity from those who founded it. A corporation, like a person, can be taxed and held liable for its actions and financial obligations. The main benefit of a Corporation is that the individuals who create, manage, and operate it can avoid personal liability for the debts that is incurs. The primary disadvantages of a Corporation is that forming one can be costly and involve a number of documents to be properly filed with the Secretary of State, extensive record-keeping requirements and annual filings, and a risk of losing the incorporation status if you don’t fully understand your paperwork and the provisions therein. Corporate taxation can be done in two different ways, as a C-Corp or S-Corp, and with the S-Corp the profits and losses are passed to the individual members of the Corporation similar to the Partnership.
Limited Liability Company (LLC)
The Limited Liability Company (LLC) is a hybrid form of a Partnership and, as discussed above, gained popularity to become a common entity suggestion for new business owners. The advantages of an LLC are that, like a partnership, the profits and losses can be passed through the owners without taxation of the business itself. Additionally the LLC provides the owners with protection from personal liability for the businesses debts. The disadvantages of the LLC are that, like a Corporation, forming an LLC requires documents to be filed with the Secretary of State, record-keeping, and annual filing requirements to maintain the incorporation. The costs for forming an LLC are can sometimes be more than the cost to form a Corporation, but typically there are less documents to maintain. Similar to the Corporation, however, if you are unfamiliar with the requirements or the specific articles of your incorporation you risk losing the incorporation which can result in a legal headache down the road.
When deciding what structure you want to give your business it is important to consider the factors of liability, taxation, and cost. Additionally, don’t buy in to the “cookie cutter” answer many receive that an LLC is always the best option. No two businesses are identical, every business has different needs and different goals. It is important to do your own assessment of your business to determine what it needs now and in the future. It is also a good idea to work with an attorney who is knowledgeable in business formation and operation who can help you reach your goals. If you are in the South Coast Communities of Massachusetts our attorneys at Hearth Law are happy to help you today.