One of the most common mistakes new business owners make is choosing the wrong business entity for their goals, or worse: not choosing one at all. If you have not created a separate legal entity for your business, you are functioning as a sole proprietorship, which means that your personal property—even your retirement—is exposed to creditors and liability claims.
Snook Law Office Will Help You Choose the Proper Business Entity
Incorporating in Massachusetts brings many benefits, but it is important to select the right structure for your business. As a corporate lawyer, Attorney Douglas Snook brings the experience and knowledge you need to advise you on which structure your enterprise needs and also to ensure compliance with your corporate obligations and responsibilities.
If you are currently functioning as a sole proprietorship in Massachusetts, it is extremely important that you consider creating a business entity to protect your personal assets.
Corporations in Massachusetts
Corporations are separate legal entities that can enter into legal contracts, buy and sell assets, own properties, pay their own taxes, borrow funds, and sue individuals or other companies.
New businesses in Massachusetts have various corporation options, including:
Corporations have many advantages, but they are more complex than Limited Liability Companies (LLCs). Incorporating in Massachusetts involves filing appropriate forms, drafting articles of incorporation and bylaws, issuing stock certificates, among other tasks.
Incorporation Options in Massachusetts
C Corporations are the most common corporations. They can have an unlimited number of owners and various types of stock. This type of entity lends itself well to companies seeking venture capital and other funding. Owners are taxed individually for the company’s profits while all other taxes are paid separately by the corporate entity.
S Corporations are similar to C Corporations, however, they have more limitations. S Corporations can issue only one class of stock, have no more than 100 shareholders, and all shareholders must be US citizens or residents. In S Corporations, all taxes are paid by the shareholders. Because the corporation is not taxed separately, it is referred to as a pass-through tax entity.
Non-Profit Corporations are generally educational, religious, or charitable organizations. No shares are issued in non-profits and they are exempt from taxation. All funds are retained by the entity for its operations and expansion; however, salaries can be paid.
Pros and Cons to Incorporating in Massachusetts
Regulatory, reporting, and tax requirements vary depending on the type of corporation. Business owners considering incorporating in Massachusetts should be aware of the benefits and disadvantages of incorporating.
Benefits to Incorporating
Corporations serve several functions. Many business owners favor a corporate structure since it is a distinct or separate entity and offers certain advantages:
Creating a separate legal entity protects your personal assets.
Creating a separate legal entity separates you as an individual from the company, thereby limiting exposure to liability in the case of lawsuits.
Because interest can be transferred, the corporation enjoys an unlimited life span.
The death of shareholders, officers or directors, or members of the board of directors does not affect the continuity of the corporation. The corporation’s operations can continue indefinitely until the remaining members change the company’s charter
Stocks or shares are easy to sell, promoting growth.
If the corporation is publicly held, stocks or shares are easily transferred or sold without consent from other shareholders. This flexibility facilitates growth.
Corporations are managed by professionals.
In the case of a corporation, ownership and management are split. Shareholders do not participate in corporate operations. Instead, the corporation concentrates power in the board of directors and officers who can retain a professional management team to handle day-to-day operations.
Corporations create an easy source of capital.
Corporations can raise capital by selling shares or issuing bonds.
Disadvantages of Incorporating
Corporations are subject to double taxation from the corporate earnings and dividend payments to its shareholders.
Increased Record-keeping Responsibilities
Corporations must draft annual reports, file corporate tax returns, and maintain other records. Formalities and increased record-keeping requirements are time-consuming.
Limited Liability Companies in Massachusetts
Various differences exist between Limited Liability Companies (LLC) and corporations in terms of ownership, taxation, liability exposure, management structure, and reporting or compliance requirements.
You can form an LLC in much the same manner as a corporation. However, there are fewer management requirements for an LLC and your company also enjoys increased flexibility.
For instance, you can structure the operating agreement so that the company is member-managed (where company owners participate in the company’s operations) or managed by managers who do not own interest in the company. The latter limits shareholder functions and leaves most decisions to managers.