In addition to making a decision on what your business name will be, one of the most important decisions that any new entrepreneur must make is to decide their business entity type. It is very important to properly select the type of business entity structure that suits your business needs. By doing so, you will maximize the tax, liability, and other benefits that flow from each type of entity. It is, therefore, essential that you contact one of our Massachusetts business lawyers to provide legal guidance as to the best entity for your business.
The most commonly used types of business entities available in Massachusetts comprise the following:
Sole Proprietorship (D/B/A; personal name)
Also, frequently referred to as a D/B/A company, a sole proprietorship is the simplest form of a business entity. A sole proprietorship is an unincorporated business and does not offer the limited liability protections of a corporation or partnership. Some small business owners begin their business as a sole proprietorship and then seek to incorporate their business once they achieve success in their business. Sole proprietorships avoid the administrative requirements and fees associated with an incorporated business. However, due to the casual structure of the sole proprietorship and liability issues that a business owner can potentially face when problems arise, a sole proprietorship is not the best type of entity structure.
Corporation (Corp.; Inc.; Co.)
A Massachusetts Corporation is an independent business entity from the business owners (shareholders). The Corporation will provide a limited liability for the shareholders, and that entity will be responsible for the debts, expenses, and civil claims against the corporation. A Corporation can either taxed as either a C Corporation or S Corporation. A Corporation must abide by numerous procedural formalities and follow certain rules in order to maintain its legal status in Massachusetts.
Professional Corporation (P.C.)
A Professional Corporations is just like a Massachusetts Corporations, however, this type of entity structure is limited to a group licensed professionals only. This means that the shareholders must be licensed to practice some type of lawful professional in Massachusetts. These profession include, but are not limited to: attorneys, certified public accountants, dentists, engineers, physicians and surgeons, veterinarians, chiropractors, podiatrists, physical therapists, psychologists, optometrists, and registered nurses. The P.C. provides limited liability for the shareholders, however, the corporation will not protect a professional from being held liable for their own malpractice / negligence in performing services and their duties as a professional.
Limited Liability Company (LLC)
Massachusetts law provides for the use of the Limited Liability Company (LLC) type of entity. An LLC provides its members with the substantial benefits of limited liability for debts and claims against the LLC. The LLC also provides the passed through tax advantages to the business owners – in other words, the profits and losses are passed through to the owners, and taxation will not occur at both the entity and individual level. Many business owners prefer to establish an LLC due to these substantial benefit and also take advantage of the flexibility and ease of administering the entity.
Partnerships (Partnership; GP; LP; LLP)
In Massachusetts, the significant business law allows several types of partnership entities: A general partnership, a Limited Partnership; and Limited liability Partnership.
A general partnership is similar to a sole proprietorship, however, this unincorporated business involves at least two persons who own the business and share in its profits and losses. This type of business structure has the same disadvantages as the sole proprietorship and also can lead to a very acrimonious “business divorce” when the basic structure of the partnership is not established.
A Limited Partnership (LP) will involve at least one general partner and one limited partner. The general partner will make day to day and operational decisions. The limited partner will not participate in the day to day and operational decisions, and typically take the role as an investor in the business. The limited partner’s liability is limited to the amounts contributed (capital contribution) to the partnership as long as that partner does not exercise control over the business. The general partner, on the other hand, will assume full liability for the L.P.’s debts and other claims, provided, however, a Corporation or LLC can be a general partner of an L.P.
A Limited Liability Partnership (LLP) is a partnership and allows each partner to take limited liability for the other partner’s negligence, malpractice, errors or omissions. LLPs effectively function similar to a general partnership. An LLP is frequently used by (but not limited to) attorneys and accountants.
If you or a colleague have any questions about what type of business entity that would be best for a particular business, please contact your local Massachusetts business attorney, Stefan Cencarik, at 617-669-9780.